No One Likes Surge Pricing By Cabs, But Banning It Won’t Help Either

Posted on June 17, 2016 in Business and Economy

By Ishan Arora:

Surge pricing refers to the adjustment (mostly a hike) in price with respect to the demand. The greater the demand for a particular commodity, the higher will be its price set by the company so as to generate more profit. For example, consider the airlines industry. They follow the surge pricing method to fix their prices. The later you book your ticket, the more you have to pay to buy the same.

How Are Cab Aggregators Following Surge Pricing Model?

Cab aggregators like Ola and Uber are in a price war with each other and to cater to the mass market they are offering huge discounts to their customers. But then how are they generating profits? No, as of now they are not generating any profits. These cab aggregators are burning out the investments they are getting from venture capitalists in order to gain more market share. The surge pricing model is only helping them reduce this investment burning ratio.

According to government regulations, cab aggregators can charge around Rs. 19/km as fare. However, Ola and Uber are offering rides for as low as Rs. 11/km (during normal hours) which is less than an auto as well. But during peak hours when the demand is high and cabs are less they charge up to three times the normal fare and hence cater to the needs of their customers but at a higher price.

Why Government Wants To Ban Surge Pricing

Many people have complained that Ola and Uber charge more during the night than during the day. They believe it to be an unethical way of doing business since cab aggregators are taking undue advantage of their customers’ situation. As a result of all such complaints, the government announced that cab aggregators should not follow surge pricing model and should charge a fixed price under all circumstances.

Will The Ban On Surge Pricing Prove To Be A ‘Bane’ Or A ‘Boon’ For Users?

There can be two schools of thought:

Surge pricing should be banned as it takes undue advantage of our situation

Users might feel that cab aggregators are charging them extra fare when they are in dire need of cabs. This might lead to customers losing trust in the services provided by the cab aggregators. It will also hamper the loyalty of its customers towards the brand and hence the overall brand image.

Surge pricing is a good way to segregate its customers and why should we pay more for the services we don’t require

Imagine a situation where a customer uses cab services every morning to commute to his office. His office is 10 km from his home and every day he pays Rs. 60 as base fare (for four kilometres) + Rs. 11*6 = Rs. 126, which is very less when compared to an autorickshaw which would charge approximately Rs. 150 (15*10; as I have calculated it from my personal experience). Now, one fine day the government decides to put a ban on the surge pricing model. As a result, cab aggregators decide to increase the base fare to Rs. 80/4 km and charge Rs. 19/km after that. Now the same customer would have to pay Rs. 194 (80+6*19) which is much more than the fare paid for an auto, i.e., Rs. 150.

Such customers who don’t use cab facilities during peak hours (i.e., generally during night time) are likely to switch to the substitutes if the overall price is increased (as a result of the ban on surge pricing). These are price sensitive customers and they don’t believe in paying more for the services they don’t require.

Hence, if surge pricing is banned, all users will have to pay a fixed price which would be higher than the current price and hence the probability is high that cab aggregators might lose a huge chunk of customers to the cheaper substitutes available in the market.

Recommendations For Cab Aggregators:

Put a cap on surge pricing, it shouldn’t be too high

Charging three times the fare is not a good way of doing business. Customers might feel they are being looted, lose trust in the company and switch to the competitor. Hence, taking this into consideration, cab aggregators should maintain a cap on surge pricing which should not be too high but affordable.

Set the policies in place, the process should be transparent

Cab aggregators should have certain policies in place and communicate the same to their customers. A user should be aware of why is he being charged extra and what is the process behind it. Transparency in the system will ensure customers don’t feel cheated and stop availing services the company has to offer.

Special offers can be given to customers (during non-peak hours) who are availing cab services during surge pricing periods

If a customer is regularly availing cab services during peak hours and is paying an extra amount each time due to surge pricing, cab aggregators can identify such customers and can give them discounts or loyalty points to be redeemed during non-peak hours. By doing so the company would be able to communicate the message that ‘we care for our customers’ and, in turn, the customers are likely to trust the company more.

Conclusion:

Is the surge pricing model a boon or a bane? It’s still a mystery and is likely to remain so. For people who are happy with the services and prices offered by cab aggregators, it is definitely a boon. But for people who have to pay extra during peak hours, it is a bane since they are the ones paying extra to compensate for the losses faced by the company. However, the surge pricing model can be very useful for companies to segregate their customers and fulfil their requirements, provided it is used efficiently.

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