Question

How does the pricing strategy at Uber (surge pricing) impact change on each stakeholder group?

Answer 1

In Uber's business world, there are primarily 4 stakeholders:

1) The company

2) The consumers

3) The drivers

4) The government

Each of the stakeholder is affected in a different manner.

The concept of surge pricing is a tool which Uber uses to manage demand supply match in times of high demand and limited supply in an area. Assume that you are in area X and due to dad weather, rush hour, and special events, for instance, there are unusually large number of people who want to take a cab in the same area at same time.

Now Uber applies a markup called surge fees on temporary basis to match the demand supply equation there.

There are consumers who feel the urge to pay the same and go and others wait for rates to come back to normal. For the consumer, while its an additional hit on the pocket, it also shows that for convenience in case of high demand low supply, people need to pay a premium. Uber ensures it informs the consumers in advance about it so that they make an informed choice. Consumers might even choose to wait which in turn brings demand back to normal levels thereby reducing rates.

For the drivers, it is additional revenue. Since Uber doesnt change its percentage fees charged on ride during surge, the surge premium is split in the same ratio between driver and Uber as it was before surge. Hence, for delivering services amidst the crunched high demand, low supply situation, drivers make a premium. This even gets more drivers to shift to that zone thereby reducing the demand supply gap.

For Uber, it is additional revenue during surge times as in absolute terms it earns more on each ride in a particular area during surge than without surge. It gets a premium for providing convenience through its platform in a low supply high demand situation. It also takes the responsibility of managing the crunched supply by routing drivers in the low supply area through its algorithm thereby ensuring that surge is a temporary phenomena and a balance of demand supply is maintained.

Finally, during surge time since the earning per ride has increased, the share of taxes for government also increases thereby increasing its earnings from it. Also, for public welfare, the system manages the demand supply mismatch on its own thereby reducing traffic chokes and maintaining sanity in the economy.

Thus, Uber's surge pricing is a self- fulfilling demand supply matching system which balances the system on its own.