How Surge Pricing Works
Uber’s pricing algorithm automatically notices (for a specific locale) when there are situations of high passenger demand and low driver supply and hikes the regular price by a multiplier.
For example we analyzed the rates for Boston, Massachusetts as at March 15th, 2016, and show a sample scenario where the surge multiplier is at X5
- Base Fare: $2.00
- Per Minute: $0.20
- Per Mile: $1.24
- Base Fare: $2.00
- Per Minute: $1.00 (this is $0.20 X 5)
- Per Mile: $6.20 (this is $1.24 X 5)
In this scenario, as you can see above, the passenger will potentially pay 5 times more for this surge trip than normal (with a X5 multiplier). So a 10 mile ride that might cost about $15 would now cost about $75, all other things being equal.
For the curious, the maximum surge multiplier for any market is supposedly X50 (see http://www.businessinsider.com/ubers-highest-surge-price-ever-may-be-50x-2014-11); however, Uber has not confirmed this.
Uber claims that this policy was put in place to get more drivers on the road whenever there is an increase in demand. The policy seems to have been very effective since it came into play in 2012. One of the board members, Bill Gurley wrote about it when it was first tried out in Boston saying:
By offering more money to drivers, they were able to increase on-the-road supply of drivers by 70-80%, and more importantly eliminate two-thirds of the unfulfilled requests.
The surge in price is also constantly examined by Uber’s human staffers – who have it within their reach to use their discretion to lower prices (at rare times when they find it necessary).
Travis Kalanic, after a major surge on New Year Eve in 2012, simply wrote:
To our dismay the pricing multiplier kept going up. At some point the east coast cities started breaking 6x multipliers—we accepted defeat at that point—the unbending demand breaking our will. We would bring cities down to 3x, only to see conversion go up, supply go down, cars get saturated, and “zeroes” popping everywhere.
By zero here, he meant unfulfilled rides.
How Surge Pricing Affects Drivers
One thing new Uber drivers do is “chase the surge”. If you do not know what that means, here is a quick primer: “Chasing the surge” involves a couple of steps:
- An Uber driver first identifies an area (zip code maybe) that is currently experiencing a surge in prices. Typically this Uber driver would download the passenger app to determine where the price surge is presently
- The Uber driver will then drive to the surge area
- This driver will then turn on the Uber driver app, to start receiving requests in the surge area
The problem with “chasing the surge” is that more often than not, by the time you are at the surge location, the surge pricing is over.
Also, if you drive during the surge you have a higher chance of getting negatively reviewed by the unhappy passenger who is paying more than the normal passenger fare. Some drivers even hope that someday Uber temporarily disables the rating portion of the Uber ride process, for rides where surge pricing is more than 2X the normal rate.
Ultimately, the surge pricing is a double edged sword for Uber drivers: You potentially kill it on pay day because of exponential increases in fares; however you also risk getting kicked off the Uber platform, if you get enough bad reviews from unhappy Uber passengers.
How Surge Pricing Affects Passengers
We have come to understand that not all Uber riders can afford to order an Uber car when there is a surge in fares. In fact, some people who really intend using the high-end uber black service change their choice to the regular UberX service during surges, while some others choose to get notified when the surge pricing is over.
For new Uber passengers, one fact you might not know about surge pricing is: It does not last long. A post on the same topic on Policygenius described surge pricing as “more of a ‘rush minute’ than a ‘rush hour’”.
This means that if you are not in so much of a hurry, the surge rate is something you can simply wait-out. Relaxing a few minutes before trying again is typically all it takes to avoid a surge, In our experience a 15 minute wait is sometimes all the patience you need.
So what do you think about Uber’s surge pricing? Let us know in the comment section of this post.