For some, “surge pricing,” the use of algorithms to automate price increases on products and services in periods of high demand and limited supply, adheres to a basic principle of the free market economy. Others see it as a form of price gouging. Regardless of your point of view, the use of surge pricing appears likely to increase as a growing number of companies in the on-demand economy test its application.
Uber has received the most media attention for its use of surge pricing. The taxi alternative company claims the technique 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.”
But some are having trouble swallowing that rationale. 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 OPEN +%, claims that surge pricing may be the answer for diners looking for a table at restaurants where it is next to impossible 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.”
Many on the BrainTrust of industry insiders at RetailWire indicated in an online discussion last week that they see surge pricing catching on in other industries, but cautioned that the practice could do serious damage to customer loyalty.
“Judging by the bad feelings associated with Uber’s surge pricing and the amount of similar competitors who publicize their lack of surge pricing as an added benefit … I can’t see surge pricing becoming the new normal,” said Zel Bianco, president and CEO of Interactive Edge. “At the moment surge pricing just seems to drive your customers to the competition.”
“I think it’s definitely on the increase, but how effective it will be as it scales in popularity still remains to be seen,” said Ryan Mathews, CEO of Black Monk Consulting. “There is a point where even the most profligate consumer will balk at the idea of paying a ridiculous premium for the right to spend their money.”
“While surge pricing has the opportunity of generating more margin, it also has the opportunity of decreasing demand as consumers walk away when they are unwilling to pay the higher price,” said Camille Schuster, PhD., president of Global Collaborations, Inc. “If consumers walk away from your company to a competitor, they may not come back to you.”
Others speculate that the practice, distinct from gouging, may have unforeseen upsides.
“Get used to it, consumers!” wrote Peter Fader, professor of marketing at The University of Pennsylvania’s Wharton School. “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.”
“I’m sure people don’t like to pay more for a ride when there are few cars and lots of demand, like, for example, after a concert gets out,” said Nikki Baird, managing partner of RSR Research. “But there’s a big difference between that — acknowledging outsize demand against limited supply — and price gouging, which would be like trying to apply surge pricing to bottled water and bread and plywood when a hurricane is coming.”
“And as for the restaurants, I’ve been part of parties that got seated right away after slipping the hostess $100,” said Ms. Baird. “So, the OpenTable concept is just formalizing something that happens anyway — but now the cash goes into the restaurant’s pocket, instead of an individual’s. That’s okay by me.”