Uber, the app that connects drivers with passengers, caused some serious mental meltdowns this weekend when it boosted prices to seven or eight times normal fares during a snowstorm that blanketed the Northeast. The price-gouging, or "surge-pricing," as the company calls it, drew its fair share of complaints from customers.
@Uber Long been a fan of your service, but you engaged in price gouging tonight by anyone's definition. Not good.
— Lee Pacchia (@leepacchia) December 15, 2013
A $93 minimum fare is so absurd that it's likely to turn off a large swath of customers. But Uber's pricing model probably isn't going anywhere. It may in fact be the "future of business," says Rafi Mohammed at the Harvard Business Review.
For the uninitiated, Uber is a GPS-linked mobile app that allows users to check their smartphones for the closest car, and order a ride without ever picking up the phone. When prices spike, which they do daily during peak hours, Uber displays the price before the order is completed, allowing customer to accept or reject the fare.
For those who accept the ride, it's pretty painless from there. The customer's credit card info is already on file with Uber and tip is included, so when the car arrives at its destination, the transaction is complete.
The drivers — independent contractors who own their cars — pay about 20 percent in commission to Uber.
Most of the time, customers seem to feel pretty good about this model. For one, the customer service is usually top rate — a feature Uber helps facilitate. At the end of the trip, the customer rates the ride on a scale from one to five, and over time the company ditches drivers with bad scores, encouraging them to be friendly, clean, and sometimes even equip their cars with treats like fresh bottles of water.
The service is so popular that it's widely viewed as a threat to taxi businesses in the cities where it operates. In New York, it has already "upended the city's livery car market," said The Wall Street Journal in October. The city saw the black car segment of the for-hire industry rise 30 percent in just nine months this year, likely thanks to Uber.
The company defends the pricing model as a simple, efficient way to meet high demand. The idea is that higher prices give drivers a reason to work when conditions are sub-optimal, whether it's Saturday at 11pm, or in the middle of a snowstorm, or both, in the case of this weekend.
And as far as customers go, they still have the option of taking a subway, finding a yellow cab, or walking in the snow — all of which existed before Uber came to town. Mohammed argues this is just good business:
Uber’s dynamic pricing strategy effectively turns taxis into sitting ducks. During high demand periods, taxis charge the same uniform fares as they pass by eager would-be passengers who would have paid more for a ride. And during times of low demand, taxis constrained by regulated prices desperately cruise the street seeking customers or idly sit at taxi stands. [Harvard Business Review]
The fear, though, is that it will be such good business for Uber that more drivers will leave taxis to join the Uber fleet. As Valleywag's Sam Biddle says, that means taking a "step closer to cities where price gouging is the norm, where only the rich can get around, and where outrageous profiteering is the base fare."