Why Uber Needs Clearer Pricing

The way a company sets price is an integral component of its brand. Think about your favorite merchants – what associations of price do you have? Do you think of them as premium, middle-of-the-road, or a value player? Just as prices drive brand perceptions, pricing surprises can damage a company’s brand. Remember the uproar when Apple discounted its iPhone from $599 to $399 just 68 days after introduction?

Uber’s biggest challenge today is customers don’t understand – and have not accepted – the role of price in its brand. The fast growing ride share service varies its prices based on demand. Consumers love the regular prices, which typically are significantly lower than the relevant competition (taxis or car services offering sedan, luxury car, or SUV service). The backlash has been over the “surge” fares charged during peak demand periods – which can be as high as eight times the normal price. Uber has done a poor job of “spinning” these surge prices and hasn’t been clear about its pricing strategy.

I’m a pricing consultant and a frequent Uber user, and even I am confused by Uber’s conflicting messages:

  • Is it a low cost service? In Boston, for instance, its discount uberX service is marketed as being 30% cheaper than taxis. This release completely neglects to mention the real possibility of surge pricing (even going so far as to state “uberX is now an even more cost-effective ride – 24 hours a day”).
  • Is it a market-maker? In explaining its surge prices, Uber claims it uses higher prices during peak times simply to equate demand with supply. Premiums incent more drivers to provide service.
  • Does it charge what the market will bear, as most companies do? Uber recently admitted to deliberately restricting supply in San Diego on Valentine’s Day – leading to prolonged surge pricing. Uber explained it wanted drivers (and hence, the company) to earn more money.

This lack of clarity is frustrating customers, resulting in damaging publicity that is threatening growth.

So what should Uber do now?

One solution would be to follow rock musician Kid Rock’s concert ticket pricing strategy.

Last summer, Kid Rock announced a game-changing pricing strategy – all of his concert tickets were priced at $20 except for 1,000 of the best seats in the house. These “platinum seats” ranged in price from $60 – $350. This strategy was a great success and described as an “unbelievable money maker” by concert promoter Live Nation. He played, for instance, before 28,000 fans in Chicago (his previous appearance in the area sold 15,000 tickets). Just as important, this strategy bolstered Kid Rock’s image as a musician who is fair about ticket prices. What a winning trifecta: more profit, higher attendance, and a stronger brand.

What’s most fascinating is fans accepted the premium priced platinum seats. Rock music fans are notoriously sensitive to both high prices (quick to scream, “The man is ripping us off”) as well as the notion that only the well-heeled sit in the best seats (often opining, “True fans should be in the front rows”). Kid Rock was upfront about and did a masterful job of explaining that high priced seats cross-subsidize, thus make possible, $20 tickets for most.

When you think about it, Uber’s regular and surge prices are akin to Kid Rock’s $20 and platinum tickets. Surge pricing is very limited — Uber claims that during Valentine’s Day week, only 5.6 percent of trips were at surge prices. Uber needs to be both vocal and succinct about its value proposition: great service (as a regular rider, I can attest to this) with low prices most of the time. During peak periods, surge prices allow Uber to maintain service standards as well as cross-subsidize lower priced rides. “Cross-subsidize” is more consumer friendly than the cold-hearted economic rationale of “let the market rule.” Uber shouldn’t go into too much detail about the mechanics of surge prices. Explaining a pricing strategy is akin to a legal deposition – the more you explain, the more open you are to criticism. Keep it simple.

This explanation also keeps Uber nimble in case it needs to change its driver strategy. Currently, drivers don’t have a schedule and work whenever they want. This is likely to lead to what economists call “cream skimming” — some drivers will work only when prices are high. An uberX driver recently grumbled to me that it’s demoralizing to hustle for $5 fares. To keep its best drivers and maintain service, Uber may eventually opt to restrict the opportunity to reap high fares during surge price periods to drivers who also work during off-peak times (thus deliberately curb supply). It’s like being a waiter at a restaurant – you work the lousy shifts in order make big money on weekends.

Uber has a great pricing strategy that can truly transform the private car industry. Like most new companies, there’s always room to improve on its initial rollout. Justifying its surge pricing – which has been a public relations nightmare – should be its top priority.

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