Uber’s Surge Pricing Updated

A post of a certain amount of enduring popularity here at Sandor at the Zoo is “Uber’s Surge Pricing — What’s it For?

I hypothesized in that post that Uber’s public gloss on surge pricing, that it was there to increase driver supply, is basically not true, and instead that surge pricing is intended principally to maintain Uber’s profit margins.

That post is a product of its times, and at its time, I think it fits the evidence.  But the environment has changed.  When I wrote that post, UberX reliably got to fairly high surge multipliers (in San Francisco, at least) several times a week, and got to lower surge multipliers in the x1.5 range daily.  Also, I believe that Uber had reduced its take to 5% of UberX, not the 20% it started with.

Since then, a few things have happened:

  • Uber has drastically increased driver supply with increased recruiting.  In turn, this has made surge pricing, and especially high-multiplier surge pricing, much more rare.
  • Uber has cut fares further, and increased its take back up to 20%.
  • Uber got another cool billion dollars cash from investors.

The new status quo, then, is that Uber is probably making more money on non-surge rides, probably enough to stay afloat at least for a long time on their gigantic cushion of money.  Their customers are happier because the heavy surging was very unpopular.  But their drivers are getting a way, way, way worse deal and are starting to do things like strike against Uber and complain in the media about their fares.

I don’t think we’ve reached equilibrium here yet.  I don’t see a way for drivers (in San Francisco, at least) to maintain on the very low fares they’re receiving without somewhat frequent surge pricing.  I think that the bonuses that Uber is paying out to new drivers and other incentives are masking the full extent of the problem for now, but that we’ll see some kind of change in the relatively near future (next six months or so).  It’s possible that this change will be organic: maybe just customer demand will grow and driver supply will remain constant or shrink and surge pricing will once again become much more common.

Disclaimer:  I work for Flywheel, a competitor to Uber.  I am not a spokesperson for the company, and the opinions I express here are my own and not Flywheel’s.

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