All I Needed to Know About “Dynamic” Pricing [aka Price Discrimination] I Learned in Kindergarten
This year, Uber users who were out on New Years were price-gouged in one more way than usual. It’s been a few days since then, so the rage-filled Tweets have been chronicled and Tech Crunch has issued its analysis already. The gist? dynamic pricing is going to continue.
Uber, a logistics startup, put “surge pricing” into effect during the peak hours of drunken debauchery. As Felix Salmon said in a recent blog post on Reuters, “Uber loves to explain its surge pricing with fancy supply-and-demand curves, but you could call it a “rip off drunk people” strategy too.”
Uber is a startup that arranges car services for people in some major cities. On New Years Eve, it anticipated a surge in demand, and its blog explained that prices would be raised. Guaranteeing good services to so many people would be expensive, it said, and raising prices would increase the supply of cars, by encouraging car services to use Uber for the night. That’s a pleasant white lie, if I ever saw one.
The problem, as the widely tweeted Quora post says, is that demand can only drop if people have enough information to make other choices. The NYE beer goggles not only meant that some people didn’t make it to their own homes; it also meant they didn’t have the ability to turn back and look at other transportation options.
As so many of Uber’s users needed a cab between 10 PM and 2 AM on New Years, prices surged to more than 6.5 times the normal rate. It was doubtlessly great from a revenue standpoint, but the hangover has been unpleasant.
Price Discrimination Not New
The concept of dynamic pricing, or price discrimination, is far older than the Internet. The internet is merely making it more accessible to varying industries. Yet consumers are the same. They value services and products based on the “anchors” they have in their minds already. Those anchors are not based on supply, demand, or any other rational concepts. Anchors are simply what people usually pay for the same or a similar service. As Salmon says, people hate having to rethink those.
What Uber Must Do
If a company is going to price discriminate and violate people’s anchors, it needs to pre-emptively and transparently make people aware of this fact. Since Uber didn’t have the option of hiding such dramatic price fluctuations from its customers, as Victoria’s Secret has done with smaller price variations in its mail-order catalogs, it should’ve just treated dynamic pricing like any fun product “feature”. Explain it in a simple video that’s easy for anyone to understand and is somewhat playful. Add a cute notification that says, “You’re out on the best night of the year, and we have 3x as many people to pick up right now.”
Uber’s way of surprising people on New Years is a rookie move that shows immaturity and recklessness: two flip-sides of the archetypal entrepreneur’s personality.
Uber is planning to price-discriminate more, since it seemed to work for them over New Years, minus the whole pesky issue of consumer anger. If it’s going to gouge prices on weekends in the future, why not launch a tool that lets users see others’ demand and the local supply in a fun, interactive way? Uber should be transparent, funny, and open about it.
As for right now? Waiting a whole week to send a rueful email that belatedly tries to placate the consumer base, a la Airbnb this past summer, would be another mark of immaturity and recklessness. (Note to self: a week would be next Sunday or Monday. Let’s see if an email gets sent around then.)
Another option for Uber would be to let consumers decide in real-time if they are willing to wait a given amount of time, in exchange for a lower rate. This feature would satisfy the deep-set techie urge to use technology to get information about people, by letting them place a monetary value on their own time. It would also let Uber segment the market and see what variables influence price sensitivity on more ordinary Saturday nights, when the market is more elastic.
Dynamic Pricing Is The Future
In the end, the internet both facilitates and challenges dynamic pricing. The internet obviously makes it possible for services like Uber to exist, but the availability of information also means consumers have more access to price data.
The lesson we can learn from this silly episode? If a company wants to succeed while price discriminating, it must treat dynamic pricing as yet another tool in the marketing arsenal, leading the conversation surrounding this difficult topic. As Donald Draper said on Mad Men, “If you don’t like what’s being said, change the conversation.” For Uber, that may mean it’s time to hire a grown-up to take leadership over its communications.