Delving in Uber’s ‘Dynamic Pricing’ Model:The Key to Win Customer Loyalty

The price is a key factor for conducting business covering both product selling and service provision as it is the key component of business that generates income.  Thus, setting the right prices of products/services can speak well for the brand image while at the same timeimplying the product/service quality.  In many instances, consumers determine the product/service image from its price on the assumption that, when a brand sets high prices of its products/services, consumers will expect that the quality of products/services of that brand is higher than those of other brands.  Simply put, nowhere in this world will you find quality products cheap, which leads to the big question inherent in each business: How can you be sure that the set price is a true reflection of the product/service?

In our previous article entitled “GrabTaxi and Uber Taxi: Examples of IT and Logistics Integration”, we touched on Uber’s marketplace business involving taxis and limousines via mobile application invading the market in many countries the world over.  Given a fierce competition affecting both public transportation and various private logistics service providers in each country, Uber has become the topic of an interesting case study involving pricing in businesses that do not have assets of their own.  How can they do it?!

Uber’s marketplace business has to cope with a series of restrictions ranging from having no taxis/limousines of its own to zero driver employment.  Uber drivers are independent of each other while some even work for other agencies.  They can freely decide at all times whether they are available for work or not.  Worse still, some also bypass Uber and have their own regular customers.  As Uber drivers, they receive 80% of the fare.  The rest is used by Uber to compensate for variable costs incurred in the service provision, e.g. payment process management fee, customer service management fee, individual local authority’s supervisory fee, among others.  In other words, Uber business generates very minimal profit, just like in the case of Amazon.  In addition, Uber has defined its mission as low-price leader while having been considered as a luxury brand given the fact that in its early days the focus was on the selling of black car service which later was shifted to the new service known as UberX as a means to expand its customer group at a cheaper price than that offered by other general service providers.  More importantly, Uber intends the customers to understand the service conditions and fees prior to actually using the service.  Thus, in setting the price it must also give a detailed explanation to ensure customers’ thorough understanding.  Nevertheless, these have posed not the slightest difficulty as regards its pricing strategy.
Uber has resorted to the dynamic pricing strategy only in the period of time when demand exceeds supply (as indicated by the longer waiting time as well as an increase in unfulfilled request).  As it happens, the emergence of price elasticity has clearly affected Uber in three aspects, namely a decline in demand as a result of a rise in service fee causing customers’demand for taxis to decline but the number of taxis, or demand, to increase.  At the same time, Uber’s service reliability increases (via a standing supply of taxis) – something Uber has also given top priority. (Please see ECONOMICS101: SUPPLY AND DEMAND CURVES.)
Instead of retaining the existing price and informing the customer through the message in the app “No Cars Available”, Uber chooses to adhere to its promise given in the mission of rendering reliability and availability service to the customer.  It believes that the customer dissatisfaction is caused more by non-availability of Uber cars rather than by higher prices (fares) at a certain period.  Another important reason lies in the fact that Uber fully understands humans’ basic needs as each and every Uber driver is a human being, just like the passenger.  As such, should he be willing to work harder or longer on Friday and Saturday nights or during special holidays for the same payment? Should he pay more attention to the customer than his own family?  Besides, Uber also fully understands its customers.  This is evident through the Surge Drop feature in the app which notifies the customer if surge pricing applying at a certain period ends so that he can decide whether to wait and use the service when a lower fare becomes available or he is willing to pay a higher fare due to surge pricing.  The feature has been designed to successfully achieve a balance between supply and demand which makes the company all the more confident of the final conclusion of the Dynamic Pricing model.

It is thus clear from the above-cited example of Uber that, besides having direct bearing on business in the monetary aspect, pricing also affects the sentiment ofcustomers who are the business target group with regard to both brand image and brand loyalty.  In Uber’s case, the Dynamic Pricing model has been effectively deployed thanks to the genuine autonomy and independence between demand and supply which leads to Uber’s success as well as big leap-forward in business growth in the past year.  In summary, a business that understands itself as well asits customers is definitely bound for a bright future.
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