How to win enemies and influence no one: Uber’s latest surge pricing snafu

How to win enemies and influence no one: Uber’s latest surge pricing snafu

BY CARMEL DEAMICIS 
ON FEBRUARY 26, 2014

If Uber had a foot, it would be permanently lodged in its mouth at this point.

The company has — yet again — blundered into a terrible publicity disaster, one that it brought upon itself. In case you missed the news, The Verge reported that Uber has been doing “surge price fixing.”

The company artificially kept rates high on Valentine’s Day in San Diego by not onboarding new drivers. The information comes by way of an Uber passenger, who heard a message from the company read aloud by an Uber driver’s Ford Sync system. Here was the gist:

UberX is very close to SURGE. It’s Valentine’s Day! People will be out all night and we didn’t activate new drivers to make earnings even higher this weekend

A spokesperson from Uber was quick to attempt damage control. Uber told Pando:

The message was a poor choice of words by the local team but its clear purpose was to get more supply on the system, not less – to keep surge pricing down and the numbers speak to that. Only 3.1% of all Valentine’s Day trips in San Diego had surge pricing… In addition there were 306 drivers onboarded in the 2 weeks leading up to Valentine’s Day.

So basically the central Uber office claims a local office messed up, using misleading language to try to convince more drivers to get on the road during Valentine’s Day.

To get the obvious out of the way, on the surface this totally contradicts what Travis Kalanick has been saying all along. If surge pricing’s purpose is to get more drivers on the road, this action seems to show the opposite. The company is deliberately not hiring new drivers to keep its current drivers happy.

When anyone gets wind of that, their natural reading of the situation is: Hey, Uber’s evil and just wants to make more money which is why it’s fixing surge pricing.

I’d argue for once in Travis Kalanick’s life, this is actually not about money. At least near term money. Instead, rigging surge pricing by delaying new driver additions is totally about Uber’s mission to get more drivers on the road. It’s counterintuitive, but it actually makes sense.

Uber is trying to reward and retain the drivers it already has so they stay with the company and drive when times are going to be busy (e.g. Valentine’s Day). Retaining current drivers reduces the churn rate which means they don’t need as many coming in the funnel. That helps them not only get more drivers on the road but keep them driving for Uber.

By not hiring new drivers just long enough to give the old drivers a bonus, Uber retains existing drivers– and spreads the Uber-is-better-than-Lyft word of mouth. It’s increasingly common to see an Uber driver with a Lyft mustache in his trunk, trying both out at the same time.

But this also sets up a tricky catch-22 for Uber: Surge pricing helps keep drivers on the road, but if it achieves its stated goal of getting more drivers on the road, there are few of these bonus times to keep the existing drivers happy. That’s why surge pricing ultimately isn’t the full answer to the driver supply problem. And, oh yeah, it pisses off customers in the process.

Despite what many think, surge pricing isn’t principally about Uber maximizing profit, although unlike Lyft they do take a cut of the higher proceeds. It has a shit ton of venture in the bank and is bring in huge revenues and is expanding internationally like crazy. Extra money off surge pricing is comparatively pennies. Plus, the company has shown it has no reservations at plummeting its prices to beat out competitors.

This isn’t about money, as much as Kalanick loves his revenue graph. It’s about drivers. Drivers are the zero sum game in the ride-sharing war. They’re the scarce resource Uber has to monopolize if it’s winner-take-all playbook is going to work and it’s going to ever grow into that nosebleed $3 billion-plus valuation.

If the way to get more drivers on the road is through surge pricing incentives, then surge pricing has to keep happening. You can’t onboard a bunch of new drivers because that would stop surge pricing, and would keep drivers from getting on the road. Therein lies the contradiction.

Not to mention the fact that since they have to intervene to rig the system, it shows surge isn’t the “natural market answer” to the problem, the company’s free market religion aside.

It’s just a fucked up catch 22.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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