Surge Pricing Followup

Phew! What a crazy 72 hours. As many of you might imagine, running a transportation technology company is no walk in the park on New Year’s Eve. It’s something else to see demand 20 times greater than any other time of the year across 7 cities and 4 time zones. Uber’s Surge Pricing was quite an experience and I thought I’d share slices of it with our customers, fans and the Internet at large.

Quick Recap on the Price Surge
Without a surge pricing mechanism, there is no way to clear the market. Fixed or capped pricing, and you have the taxi problem on NYE—no taxis available with people waiting hours to get a ride or left to stagger home through the streets on a long night out. By *raising* the price you *increase* the number of cars on the road and maximize the number of safe convenient rides. Nobody is required to take an Uber, but having a reliable option is what we’re shooting for. See my post on Surge Pricing here.

So we rolled out surge pricing for NYE. Communication was obviously key:

• There was the October email and blog post
• City specific emails the week before NYE to our entire user base
• Surge Pricing blog post
• Tweets (see here, here, here, and here, for example)

And there was the notification ANY time someone was about to order a car. We presented riders with the price multiplier AND we told them that if they wait for a bit, prices will get cheaper.

Inside the Bubble
The demand surge was nothing like we had ever seen. Up until midnight things would be relatively smooth but like clockwork, when the ball drops in any city’s timezone all bets are off. There were minutes where we saw more requests than we might see in a typical hour. The onslaught of demand reminded me of a tsunami that has a seemingly infinite amount of water behind it. The higher the price would go, the more people would choose not to use it, but there was an almost unlimited amount of demand to suck up the limited supply. At UberMissionControl, it felt like there was no sensitivity to price, but what was really going on was a massive torrent of desperate demand with a very small fraction (still huge # of people) willing to pay anything for a ride.

To our dismay, the pricing multiplier kept going up. The math was doing its job—you could start to see the utilization figures getting some slack, but then another wave of demand would hit, and continue the price surge. At some point the east coast cities started breaking 6x multipliers—we accepted defeat at that point—the unbending demand breaking our will. We would bring cities down to 3x, only to see conversion go up, supply go down, cars get saturated, and “zeroes” popping everywhere (zeroes is an internal term we use when an app opens and there are no available cars). The surge algorithms would bring the prices back up, and we would again take prices down again.  The numbers beared out what we were trying to accomplish. Uber provided 60% more rides than our biggest day ever with the average fare at 1.75x (75% greater) than normal.

The whole experience was at once exhilarating and a bit defeating. We knew to keep cars available, we had to let the price go where it needed to. But the higher the price, the more vulnerable we were to a customer support nightmare. The communications we sent in preparation were out there, (blogs, tweets, emails, etc.), the pricing notification was there, but people are simply not used to paying a lot of money for a reliable ride during a run on cars.

Some Fundamentals
There is a fundamental question that Uber has had to ask itself this New Year’s Eve. What do we stand for? Uber stands for many things, but this NYE we’re thinking about a couple:

Uber is ALWAYS a reliable ride. Being unavailable, inconvenient is the opposite of Uber.
This is a big part of why we do surge pricing. What good is it if we are as unavailable as a taxi system or an unreliable muni system on NYE? Being Uber means being “Always On” and “Always Convenient”

Uber will always MAXIMIZE the number of trips on its system.
This is also a big part of doing a Surge event. It’s not about gouging. Raising prices will dramatically increase the number of cars on the system. In SF, we got just under twice the number of cars out than a typical Saturday night. Twice as many cars means twice as many rides. More Uber rides means we’re that much closer to being a meaningful transportation alternative. If we do nothing on price, then we will have somewhere close to half the cars on than normal, and 1/4 the cars as we did on NYE. Drivers have alternatives to make a lot of money on this night, and if we do nothing, they’ll go elsewhere. [Note: Our driver ops guys worked their butts off the week before NYE trying to get as many drivers as humanly possible to take the Uber bet on NYE—it's a tough bet as one of their alternatives is selling their services for $1500 or more for the night.]

Dynamic Pricing, It’s Everywhere
Hotels do it.
Airlines do it.
Car Rental co’s do it.
Marketplaces all over the world do it because it makes for more efficient allocation of resources.

What about that club that charges $5 cover on a normal weekend that then charges $100 cover on New Year’s does it. 20x surge pricing. Should we even talk about NYE bottle service?

It’s Uber’s job to bring the world of car service into a more efficient place. A place where limited resources get better utilization, and where previously neglected markets and market participants (riders and drivers) can get services they want where none were possible before.

The Backlash
Seven decades of fixed pricing in car transportation is a lot to unwind in a night. That kind of change, that quickly, is a lot to swallow. Think about the changes in privacy and information that Google has had to get the world comfortable with. These changes are inevitable, but can be quite difficult to introduce to a customer base in a short period of time. Uber needs to be thoughtful about how we introduce this kind of change to the world, and we take some responsibility for making it as smooth a transition as possible.

What kind of backlash did we see? Well, there were a bunch of people who had some serious sticker shock.  At this point we’ve seen around two hundred inbound queries (email support and twitter).  Though I would make the argument that our notification was pretty clear, there are bloggers who make a fair argument that it could have been better. That doesn’t mean that we need to get in an argument with customers, but it does mean that all parties should own up to their part in it. One of our users claimed never to have seen the notification, but when we go into our logs we see that he actually requested a trip, saw the notice and cancelled, and then opened and cancelled 3 more times over a 10 minute period before finally deciding to okay it. When he accepted that notice, an agreement to pay that driver for his services was made.

Now there are always extenuating circumstances, and like I said I view it as Uber’s responsibility to make this transition as smooth as possible for our customers. In the end, we are open to making things right with customers. So let us know if you had an issue on NYE and our community support people will get on it in short order.

The Future
Surge Pricing will definitely become a mainstay for major holidays and big events in the cities we operate in. The big questions are around surging downward, and doing surges during other more moderate spikes in requests. In closing I want to thank all the riders who made their New Year’s Eve an Uber one, who appreciate the unprecedented availability, who take these big changes in stride, and even forgive us when we might not get everything right. Even the haters—we love you guys too! Expect more awesome, convenient, reliable, classy rides in your Uber future!

Travis Kalanick

Co-founder, CEO — Uber