Wednesday, April 20, 2016

Surge Pricing by Uber Ola- My 2 cents

Surge Pricing tactic has been in news for past few days- Karnataka government has declared it illegal and has begun impounding vehicles which are violating it. In Delhi Ola and Uber have reportedly stopped surge pricing on CM's warning [NDTV news].

There are voices for and against it. While few feel surge pricing is day light robbery, others feel "it is a free market, why not, what's wrong..."
Those of you in support of surge pricing, answer this- what would happen if this idea is extended to other business:
  1. Suppose the paddy harvest is 50% of what farmer expected-are we fine to pay twice the amount for a kilo of rice?
  2. Suppose the milk supplier to your locality is having only 20 packets while 50 houses need milk- can he auction it? Can he say whoever pays 3x, 4x or 5x will only get the milk? (If you don't want to pay that much go to market and buy yourself)
  3. Say a software engineer (or any worker for that matter) is asked to work extra and share loads of his/her colleagues who are on leave- can he/she say "I need 3x salary this month to do this extra work"
  4. Why is it a crime when an auto driver demands "one and a half" if 5x surge pricing is acceptable?
  5. When you go to your favorite restaurant for dinner, manager says "Sir we have only 1 table free and 5 families waiting- if you are willing to pay 3x I will get you seated right away, else you need to wait" - Do you feel great?
  6. Imagine in summer, when electricity is in short supply, electricity board introducing surge pricing- whoever can pay more only will get power.
  7. Why do you think black marketing of movie tickets is banned? Some people had made it full time profession to buy tickets in bulk, create shortage and sell it for 2x, 3x or more. 
I hope you get the message. Imagine the chaos and approx increase in our monthly expenses if above are to happen. We need some predictability in our expenses and protection against exploitation or extortion. We need quality service at reasonable price. Some may call it demand-supply equilibrium but in almost all cases, vested business interests will manipulate the scenarios to suit their needs and exploit end consumer if given free hand. While Uber and Ola might have a scientific approach to their surge pricing, if the concept is accepted, there are several elements who are experts in creating artificial scarcity, increase price and pocket more money from desperate customers. Thus I feel some sort of governance/guidelines is required.

While you may be earning relatively more and feel "I can afford to pay 2x and get priority service", there is always someone else who is earning more and can afford to pay more than you. So you will feel the pain when surge reaches 5x or 7x way beyond your affordability. Some sort of social justice is essential.

Why not use technology to better balance demand-supply?
Uber's argument is that surge pricing helps more and more drivers be available at a location to cater to demand. Company is pretty secretive about how exactly it determines the surge related decisions (where, when, how much, how long etc) but following question arise
- Moment surge pricing is activated, drivers rush there from nearby locations, as a result availability increases in one locality but creates shortage in several nearby localities. It is not like 100 drivers will emerge from nowhere once surge is active- it only shifts availability and probably creates a shortage in nearby areas from where cabs moved to high demand area. 
- Cab aggregation companies have a huge database of potential customers (with their live locations), real time cab availability, historical booking trends and so on. With this, can't they better predict the demand and ensure good supply of cabs around. For example, at midnight/2 AM, demand will be high at the airport due to international arrivals and around pubs. At 6 AM, demand will be high near bus terminal and railway station as customers arrive from other cities, at 8 AM, demand will be high near residential areas as people need cabs to get to the office, if there is a large exhibition, fair etc demand will be high around that area, at 5PM, demand will be high near office complexes. Knowing this can't Uber/Ola advise drivers nearest localities that may have higher demand during the given time of the day? This can pre-empt shortage.

Points to note: Current rates at which Uber/Ola operate is well within the government limits (19.5 Rs per km for non ac and 22.5 INR per km for AC cars). Government rules doesn't differentiate between small car and sedan, doesn't mention per minute charges etc. Most hatchbacks and sedans operate at Rs 7 to 10 per km, so even with 2x to 3x surge pricing, it might still be within government prescribed limit.

Do you think cab service qualifies as 'Essential Service'? (like milk supply without which daily life will be very difficult). Transportation solution as a whole is very much essential for our living. Cab/Taxi service is part of this solution but may not be life critical on its own, if public transportation is strong enough.

Will BAN solve everything?
Unfortunately our governments can't think of any solution other than banning. (If someone jumps off a hill and commits suicide, ban tourist entry to that hill, if someone uses a park for illegal purposes, ban entry to that park). If they can't solve a problem, then just BAN it, instead of entering into a dialogue with taxi companies and trying to come out with a mutually viable solution that gives taxi companies some room to earn and grow while ensuring that end consumer is not ripped off. But no, governments just BAN. (Read this related post More Ban Ideas to the Government )

Uber and such companies have worked worldwide and have their ways to work around the system or even outsmart it. When AirAsia started in India, fares were low but check-in baggage was charged extra. DGCA came down heavily and said Check-in bag should be free. AirAsia had to comply but to make up, it increased base fares. Now even if I don't have anything to check-in, I still have to pay higher than what I would have paid had DGCA not intervened.

Similarly, if surge pricing is banned, Uber & Ola might be forced to increase base price. Today, say you are paying Rs 100 during normal time and Rs 200 or Rs 300 during surge price, with an option NOT to use the service at all when price is high. If Surge is banned, standard fares (which are today way cheaper than govt set limits and heavily subsidized with investor funding) may go up and you will have to pay Rs 150 through out the day. This can eventually mean more spending for consumer every month, while the BAN was supposed to help him/her save some cash.

So what is the solution?
Step 1: Let Surge pricing stay for now, but put an upper cap- like Max 2.5x or 3x

Step 2: Encourage more car pooling, public transportation usage and ride sharing during peak hours to reduce dependency on cabs

Step 3: Demand more transparency in how cab aggregators decide to trigger surge and identify ways to better manage demand-supply so that the need for surge is minimized

What are your thoughts?

Also read: My 2014 Uber experience * Interstate tourist taxi permit mafia * TravelParkz Mysore * Self-Drive cars- Myles vs Zoom


Anonymous said...

Thanks for your post, I have kind of changed my perspective.

I have not extensively used cabs before the arrival of OLA/UBER/Fast track. (mostly autos/public transport).
These players have defined some clear rules, thereby it was very easy to book/cancel cabs.

Once they have established themselves, surge prices kicked in.
Initially I thought, as these Players are able to provide fares at a cheaper rate earlier, surge price seems OK.

But, as you said surge price becomes too much to bear that I skipped taking cabs unless it is very essential.

Now, the Govt. comes in and start completely banning surge pricing. As you said, Govt should negotiage with them
and allow surge only at specific time (like 1 and half charge for Autos in bangalore).

So, what we need is NOT complete ban, but rather clearly defined rules which sets surge pricing within permissible limits.

Benedict G said...

Uber and Ola has been such a boon for me. Unlike you I do not like driving but more than that the agony of finding a parking slot has kept me away from possessing a car for nearly 7 years. So I used a combination of public transport, auto rickshaws and hired cars my monthly bill used to come to around 15 k on a average and yet i went for meetings all sweaty and got back home tired. This affected my work too. I hesitated to go out and did all within my capacity to avoid travel.

Enter Uber every thing changed. Travel became a lot easy and my monthly budget on travel went up marginally to 18k but I was doing more work. Over 4 months I have found ways of handling the surge pricing. If its above 1.7 i just take a regular auto or bus. So why all this fuss I just cannot understand.

There is a facility available and its cheap most of the time use it and when you cannot afford it use something u can afford is all I can say .

Shrinidhi Hande said...

Glad you took effort to write a comment on by blog.

Agree, there is a service and there are people ready to pay for it and market will correct itself.

The concern is on 2 fronts- 1) is Govt right banning anything left and right? What are the alternatives?

2) Should there be some sort of social justice- should we allow every business owner to increase price at will if supply is less than demand?

Shrinidhi Hande said...

@Anon- Thanks for your comments.

Nisha said...

I loved this article. Well thought, well put.

I have not used these services extensively, just very few times. They are cheap most of the time but yes, I had to take it once at 11 PM from a place where there was no other alternative. It charged me a bomb but I think at that point my priority was to get out of that place.

I don't think every business owner should increase price at his will. There has to be some control & upper limit and transparency to the end user.

joshi daniel said...

explained so well and clearly :)

Shrinidhi Hande said...

Thanks Nisha and Joshi Daniel

Mridula said...

If there was a convenient metro to the airport I would take it. Now I am thinking of taking the inconvenient metro to T3 whenever I can! I was caught with surge pricing once and I am very careful now.

Shrinidhi Hande said...

@Mridula- what is convenient metro vs inconvenient metro? Explain a bit pls