Uber investor and board member Bill Gurley has a great defence for the on-demand car service’s surge pricing.
Surge pricing happens when there is a lot of demand, but not enough cars on the road. So Uber raises its fares to ensure it has reliable vehicles ready for those who actually need them.
These changes are driven by an algorithm when wait times are increasing dramatically, Gurley notes on his blog. But a lot of people seem to think Uber CEO Travis Kalanick just pulls a lever whenever it decides to rain.
The idea for surge pricing, Gurley writes, came about in early 2012, when the Uber Boston team noticed there were a lot of unfulfilled requests. That’s because drivers were clocking off the system to go home right before people were ready to go out at night.
So Uber started offering its Boston drivers more money to stay on the road longer. In just two weeks, Uber Boston increased the number of cars on the road by 70% to 80%.
A lot of people compare Uber’s pricing model to that of airlines, hotels and rental car companies. But Uber has a problem that those companies don’t have, Gurley says.
“At the exact time that riders want more availability — Friday and Saturday night, in a bad storm, on New Year’s Eve — drivers would rather not be driving,” Gurley writes. “You see, while hotel rooms are fixed, Uber’s supply actually shrinks at these times, because the drivers would prefer not to be working at those times, either.”
Here are some key stats from Gurley’s defence: