Published July 09, 2014
As Uber continues its rapid expansion into new cities, more consumers are introduced to surge pricing: A model in which the cost of a trip rises and falls in line with supply and demand.
The strategy has drawn complaints from both rider and government officials. The most recent case-in-point happened this week when the popular ride-sharing service signed a deal Tuesday with New York Attorney General Eric Schneiderman agreeing to limit price increases during times of emergency.
But despite the complaints, surge pricing may well become the new normal as more industries look to take advantage of big data to drive profits. Last month, Uber raised a $1.2-billion funding round, boosting its valuation to around $17 billion.
San Francisco startup Duetto, for instance, announced Wednesday it raised $21 million in series B funding, led by Accel Partners, to help bring surge pricing to the hotel industry. According to CEO Patrick Bosworth, formerly of the Wynn hotel group, Duetto is on track to grow revenues by 1,200% this year, with clients including the Denihan Hospitality Group and Las Vegas’s El Cortez casino.
“The reality is that flexible pricing is not a new thing, but a lot of industries haven’t been sophisticated enough to price things up or discount, or been able to evolve with new Internet channels,” Accel’s Brian O’Malley said.
O’Malley further explains he sees the pricing model innovation coming soon to restaurants, sporting events and concerts.
“Look at the industries where you have some element of fixed inventory – hotels, airlines and restaurants, where you only have so many tables and servers per night, event venues and tickets – these are all situations where you have a relatively fixed cost to operate that particular event … so it’s in your best interest to fill seats at the best margin you can,” he said.
But with data-driven technological innovations, O’Malley said businesses will be able to use surge pricing to drive profits – perhaps hurting companies that operate in the secondary market, such as StubHub.
Is Surge Pricing Even Fair?
Uber’s prices in times of high demand often led outraged customers to take to social media.
While the company agreed to back off fare hikes during emergencies, economists say the business model makes a lot of sense and can also provide value to consumers.
“Prices are high during peak-demand periods, but they are also low during low-demand periods. That means you have fewer drivers on the road during those periods and people with low valuation can time their trips to take advantage of low prices. Drivers spend less time waiting for fares and riders with a high price elasticity (often poorer people) time their trips to pay less on average,” Robert Shimer, an economics professor at the University of Chicago said.
Though Uber CEO Travis Kalanick reportedly defended his price model even in times of emergency, economist Steven Kaplan, also of the University of Chicago, said the agreement with the New York attorney general made sense from both a public relations and business perspective.
“While they should be able to charge a higher price, the reality is if you ask people how they feel, they hate it and feel it’s unfair. There’s some evidence that we’re wired to hate it, because we’re wired to be cooperative,” said Kaplan.
But with that said, Kaplan agrees that surge pricing can help businesses serve the market better – and the policy will only grow more popular.
“Technology is the driver in this, in that you have better information about when to charge prices, and you have the ability to charge prices instantaneously,” said Kaplan.
Regardless of consumer sentiment, businesses could flock to surge-pricing tools like Duetto’s because of their bottom line. Bosworth said Denihan, which manages hotel brands like the Affinia and the James, grew revenue by 10% using surge pricing.
“At our first casino customer, they had greater than 70% revenue growth after about a year,” added Bosworth.