Uber Pricing Model – Dynamic and Surge Price Strategies

Uber Pricing Structure and Strategies

What does the new Uber pricing model look like? Why is Uber accused of using a dynamic pricing model? What is the Uber surge pricing model per mile?

Uber Pricing Estimate and Algorithm

There have been a lot of misconceptions about Uber services and pricing strategies. A lot of people just know Uber as a rapidly growing transport company, but don’t know how the company is structured and its pricing model. In this article we are going to take a look at the structure of Uber and its pricing model in the following topics.

Uber is a Market Place with Independent Drivers

People see Uber as a very large company with a large number of cars but that conception is not incorrect. Uber is rather a market place where every driver is independent. Drivers only come to the uber platform and view ride requests by clients and decide if they want to offer a ride. So about 80% of the revenue generated goes to the drivers. As expected, a certain percentage goes to uber for providing that service.

Committed to Affordable and Competitive Rates

Uber is committed to providing premium quality services for a very competitive low rate. Some see uber as a luxury brand. Yes uber can be said to be the low price leader by providing clients with maximum utility for a price other brands cannot compete with.

Dynamic Pricing of Uber only limited to Less than 10% and Trips of a Small Minority

Dynamic pricing only comes into application on weekends and public holidays. Also this kind of pricing also affects big events and bad weather which is only a fraction of the time uber drivers spend on the road. On those kind of occasions there is a slight increase in price.

Economics of the Uber Pricing Model

As we know, demand and supply curve is a very critical tool for economic analysis. It drives the model for economic growth. In other words, demand and supply curve is the DNA for economic analysis. That is why pricing model for Uber is anchored on this. In Uber’s market place model, it has been researched that the demand and supply curve is highly elastic.

In an experiment conducted in Boston by Uber, the results have proven that the demand and supply curves are very elastic. It has been discovered that higher prices consequently drives higher supply and vise-versa. On the side of demand however, it has been realized that the price is highly elastic as demand fall with an increase in price and when the price decreases there is a corresponding increase in demand.

From the demand and supply theory, it can easily be understood that when demand surpasses supply, the dynamic pricing results. But however, if demand increases and price does not increase we will be experiencing what is termed in economics as “economic shortage”.  Normally the increase in price with increase in demand is only temporary as prices will surely revert back and balance the demand supply curve.

Uber Compared with Airlines, Hotels and Car Rental Companies

Hotels, car rental companies and airlines all use dynamic pricing. It is a norm in business economics. During weekend and special periods of the year such as public holidays or even during bad weather, Uber unlike these businesses has a peculiar problem. Which is a lot of drivers would not want to work on such days. This will cause a corresponding shrink in supply. Unlike the other businesses which have a fixed price in spite of shrinkage.

The Only Real Alternative to Dynamic Pricing is No Cars Available

Is there no alternative to dynamic pricing? Uber’s critics have criticized the Changes of prices on special occasions. The company cannot just starve itself because it cannot meet the demand at such occasions. The available drivers who choose to work at such periods need to be adequately compensated. This explains the change in price.

Furthermore, a higher price would induce more drivers to opt to work in such odd periods. But since each driver works independently and is beyond Uber’s control to direct them to work if they decide not to, the only alternative would be no cars available. This will leave passengers stranded and disappointed.

Independent Drivers of Uber are People

The drivers of uber are also people with family, individual programs and preferences. You cannot expect them to be exited working on special days such as Christmas, Saturday or Sunday evenings and so on. If doctors and nurses and be compensated by being paid 2-3x overtime pay, why should the drivers be any different?

People will Come to Understand with Time.

Uber’s believes her efforts at increasing awareness through the mass and social media will yield positive results with time. The company has recently announced a new feature on its app which was called surge drop. This is to notify users when the price normalizes so they could hop on a cheaper ride if they so wish.

Conclusion

As in other businesses, the demand and supply curves control the pricing model of Uber. For Uber, the demand and supply curves are highly elastic since uber is more of a market place with independent drivers. A lot of Uber users have not found dynamic pricing popular. For that reason the company is making efforts to make people understand the concept of dynamic pricing.

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