Surge pricing involves the use of algorithms to automate price increases on products and services in periods of high demand and limited supply and to lower prices when demand is weak.
For some surge pricing is a controversial subject, seen as a form of price gouging. Others believe it merely adheres to a basic principle of a free market economy, i.e. it helps ensure that the customers who really want what you are selling can find what they are looking for.
"Get used to it, consumers! Surge pricing is here to stay, and that’s a good thing in most circumstances. It is a more natural way for markets to operate, and smart retailers can learn a lot about the value of their customers and the value of their products/services) from it." So says Peter Fader, Professor of Marketing at The Wharton School of the Univ. of Pennsylvania.
An alternative point of view from the above however comes from Kenneth Leung, Retail and Customer Experience Expert. He says:
"Transportation and services business that you can justify short-term cost increase for increased capacity may be able to get away with it, but surge pricing for physical products is very hard to pull off."
The notion of “dynamic pricing” has long been familiar to anyone booking a train ticket, a hotel room or holiday (Expedia might offer thousands of price changes for an overnight stay in a particular location in a single day). We are becoming accustomed to prices fluctuating hour by hour, apparently according to availability. Like it or not, surge pricing is actually everywhere.
A look at Uber
Uber has received the most media attention for its use of surge pricing. The taxi-alternative company claims surge pricing helps to improve customer service levels.
According to its site, "At times of high demand, the number of drivers we can connect you with becomes limited. As a result, prices increase to encourage more drivers to become available."
They go on: "We take notifying you of the current pricing seriously. To that end, you’ll see a notification screen in your app whenever there is surge pricing. You’ll have to accept those higher rates before we connect you to a driver."
Critics of this pricing surge reckon that it alienates customers, thereby denting Uber’s business. Microeconomics however suggests that although Uber’s model does have flaws, its dynamic/surge pricing should be welcomed.
The convenience of hailing a cab from the comfort of your sofa has given Uber a loyal fan-base and most of Uber’s prices are slightly cheaper than a street-hailed cab. However, you just have to accept that when demand spikes, the surge prices kick in.
Uber has brought technological savvy and a slick user experience to the taxi market in many countries, and has consequently acquired a loyal following. Uber has real-time data on demand, nudges supply to meet it and makes it much easier for drivers and passengers to connect.
However, some are having trouble swallowing surge prices. An app called "Cut the Surge", claims to be able to predict Uber’s rate for the upcoming hour. If a warning of a surge comes up on the Uber app, "Cut the Surge" will tell you when you can expect rates to return to normal.
Another company, OpenTable, claims that surge pricing is the answer for diners looking for a table at the most popular restaurants where it is extremely difficult to get a reservation.
The table management company recently began testing its Premium Reservations service. According to the site, OpenTable diners have told the company that they are “willing to pay for last-minute, prime-time reservations at popular restaurants.”
OpenTable positions this premium option for restaurants as a way of generating additional revenue and as part of the company’s larger promise of helping make the entire dining experience more fulfilling for patrons and restaurants - and 100% of the proceeds go to the participating restaurant.
Theme parks use cheaper pricing to encourage people to visit when the park is less busy (for instance mid-week) rather than busy bank holiday weekends when premium surge prices are charged.
Cinemas use a variant of this when they charge more for a Saturday 8 p.m. showing than a 1 p.m. midweek showing. Whilst the perception of most cinema-goers is that a Saturday night film is the usual price and a Tuesday 1 p.m. show is a discounted matinee, this is not really the case. In fact, you pay more to go at prime times and less at off-peak times.
When demand for an event soars, prices surge sometimes to a multiple of the face value. In the US, Major League Baseball games have variable prices based on demand. Interestingly, their model actually saves customers money overall, since non-surge prices are lower than they would otherwise be.
Ever since data has been collected on customer purchases it has been possible to place shoppers into what analysts call “different consumer buckets”: those seeking bargains and those perfectly willing to pay the full price.
Online pricing policies are not only dependent on the availability of stock, but also, increasingly, on this data that has been stored and kept about your shopping history. If you are an impulse buyer, a full-price shopper or a bargain hunter, online retailers are increasingly likely to see you coming.
Not only that: there is evidence to suggest that calculations about what you will be prepared to pay for a given product are made from knowledge of your postcode, who your friends are, what your credit rating looks like and any of the thousands of other data points you have left behind as cookie crumbs in your browsing history.
Facebook has about 100 data points on each of its 2 billion users, generally including the value of your home, your regular outgoings and disposable income.
The algorithms employed by Amazon, with its ever-expanding user database and second-by-second sensitivity to demand, are becoming more attuned to our habits and desires. Websites such as camelcamelcamel.com allow you to monitor the way that best-buy prices on the site fluctuate markedly hour by hour.
What is so far less certain is whether those price changes are ever being made just for you. (Amazon insists its price changes are never attempted to gather data on customers’ spending habits, but rather to give shoppers the lowest price available.)
Until quite recently this facility to both monitor the market and give consumers "best" price offers
Electronic price tagging
Electronic price tags are a fact of life in most larger stores in France, Germany and Scandinavia and within a couple of years it is likely they will become the norm here too. That is certainly the view of Roy Horgan, chief executive of a company called Market Hub, which not only offers electronic shelf labels but also data analysis to keep prices competitive.
Horgan believes that British retailers are still a bit terrified that customers will be put off by changing prices – that they will notice one adjustment in the price of a loaf of bread, but don’t see the 50 changes of price for the dishwasher they are browsing on Amazon.
He believes that the electronic price tag system can benefit both consumers and retailers though, because it is all about getting the right deal. If you are heading home from a hard day's work won't you be willing to pay more for the chance to buy a decent fresh loaf of bread rather than the squashed, unappetising loaf that expires that day?
Highstreet retailers are all too aware of the habit of “showrooming”, by which customers look at products in stores before going home and browsing the best deals online.
An electronic price-tag system can not only track online prices, they can sometimes also display at
With the advent of electronic systems and the greater possibilities of using phone apps as a means of payment, it is probably only a matter of time before different customers are offered different prices for the same product at the same moment.
The Use of Surge Pricing is likely to increase
"If you have enough data you can get closer to the
what they want at the time they want it" says Roy Horgan, CEO of Market Hub
Surge pricing is the most efficient way to allocate fixed capacity because it maximizes your profits while ensuring that customers who value your product the most really get what they want.
It applies the basic economics of supply and demand to the product, service or experience that your company sells to find the right price for every customer and situation.
Regardless of whether you think it is fair to spike the price of goods, services or commodities when demand is high, the use of surge pricing appears likely to increase as a growing number of companies in the on-demand economy test its application.