Management Information Systems
Case Study:
Uber and its Surcharge Policy
By: Dasha Varvarina, Binta Barry, Pho Phalla and Sophia Sule
1
Table of contents:
Introduction
p. 4
1. Brief History of Uber
p. 4
2. Emergence of the Shared Economy
p. 6
3. What is Uber and how does it work?
p. 6
3.1 The User Experience
p. 7
3.2 The Driver Experience
p. 8
4. Uber Goes Global
p. 9
4.1 Facing Competition in International Markets
p. 10
4.2 Obstacles in International Markets
p. 10
5. Uber Delivery Service: The Next Phase
p. 11
6. Uber’s Value Chain
p. 12
6.1 Porter’s Value Chain
p. 13
6.2 Uber’s Primary Activities
p. 14
6.3 Uber’s Support Activities
p. 15
7. Uber’s Business Information Chain
p. 17
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7.1 Uber’s Business Processes
p. 18
7.2 Uber’s Management Activities
p. 19
8. Uber Surcharging Policy
p. 21
8.1 Uber’s Management Information Systems Issue: Why is surcharging
p. 23
controversial?
8.2 Why Uber Implemented the Surcharging Policy
p. 25
8.3. Does Surcharging Even Work?
p. 27
9. Principles of Supply and Demand
p. 27
10. Surcharging: Potential Solutions: Account for states of Emergency
p. 29
10.1 Capping of the Maximum Surge Price
p. 29
10.2 Methodical Communication of Surcharge Benefits and Consequences
p. 30
10.3 Rebranding of the Surcharge Concept
p. 31
11. Conclusion
p. 32
12. References
p. 35
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Introduction
This essay will explore in detail the functionality and management of Uber Technologies Inc.
which will consequently allow one to assess and analyse a management information system issue
that Uber is currently facing­ that of its surcharge policy. Firstly, this article shall account for the
history of the company and its consequent evolution, so that one is able to contextualise and
comprehend the issue at hand. Here, we shall explore how the company operates; Uber’s sources
of revenue and the functionality of this ride­sharing service. Consequently, we shall demonstrate
and assess Uber’s value proposition by concentrating upon its value chain as well as Uber’s
business information value chain. Next, this article will explore the issue which is considered as
most challenging to Uber’s prosperity and popularity amongst users as well as the greatest source
of risk of dissatisfaction amongst clients­ surcharge pricing. Here, the concept and
implementation of Uber’s surcharge policy will be outlined and evaluated, and potential
solutions brought forward.
1. Brief History of Uber
Uber Technologies Inc., from here on out to be abbreviated to simply ‘Uber’, is a global digital
car dispatch company headquartered in San Francisco, California. Uber is constantly developing
its global market presence and as of May 28, 2015, the service was available in 58 countries and
300 cities worldwide1. The company operates the Uber mobile app, which allows consumers
with smartphones to submit a trip request (A to B) which is then routed to Uber drivers in the
1
European Young Bar Association: http://www.eyba.org/uber­top­or­flop/
4
near vicinity who typically use their own cars2 to pick and up drop off clients in the destinations
of their choice. In the United States of America, Uber operates under the ‘Transportation
Network Company’ label.
Uber was founded as "UberCab" by Travis Kalanick and Garrett Camp in 2009 and the app was
released the following June. Beginning in 2012, Uber expanded internationally and in 2014, it
experimented with carpooling features and made other updates. Klout ranked the San
Francisco­based company as the 48th­most powerful company in America in 2014. By late­2015,
Uber was estimated to be worth $62.5 billion.3
Uber was first launched in San Francisco, a city notorious for its highly regulated taxi industry
with steep prices and insufficient services. The idea, however, originated in Paris at the LeWeb
conference; a popular international event for Internet startups. There, Kalanick met Garrett
Camp, then owner of StumbleUpon, and discussed the possibility of a reliable and quickly
accessible black car service. During an evening of dining and drinking in
Paris, the two
gentleman half­jokingly discussed ideas for a limousine to transport them safely to their hotel
rooms. While limousines required pre­booking in advance, Uber would grow rapidly in use and
popularity because its smartphone application allowed users to access clean and stylish vehicles
at any moment and location. This early exchange between the founders would coin the original
Uber slogan: “Everyone’s Private Driver.”
2
There have been cases of associated companies who are working alongside Uber who for example create
E­learning in “Gig Economy” Business Model : UBER. Written By ​Asim Ahmed​;
http://blog.commlabindia.com/elearning­development/elearning­in­gig­economy#sthash.GBR4k9ek.dpuf
3
5
2. Emergence of the Shared Economy
Uber’s growth over the past five years is an example of a major success in the greater “shared
economy.” Largely a technology­enabled movement, where the general business model enables
companies to help consumers find ways to rent rather than own an expensive asset—the “sharing
economy” feeds on the preferences for “experience” over “ownership.” Online service
companies utilize big data and given algorithms to allow people to share expensive goods such
as cars, rooms, and other household appliances4 . While sharing among friends, family, and
community is nothing new, technology companies have formalized the practice to make it a
scalable and profitable business model.
3. What is Uber and how does it work?
With over 500 employees and growing, Uber is a technology company that offers a free software
platform available on mobile devices for those wishing to request a ride. At its core, Uber seeks
to match passengers to drivers. The platform is able to track a user’s GPS coordinates, even if the
user does not know where he or she is, and within minutes, an Uber driver will arrive. The user is
able to track the arrival of the ride, and receives a text message confirming when the Uber driver
has reached the pick up point. From the driver’s end, he is able to hit a button on his own app
that says “Arriving Now” which sends a text message. The driver is never given the user’s phone
4
Case in Point: the sharing of small household tasks: TaskRabbit; for high end luxury fashion: RentTheRunway. In lieu of hotel rooms globally­
AirBnB
6
number directly, but each is able to contact the other through a number scrumbling software
which allows for privacy. UberX typically costs less than a normal taxi in most markets.
However, in times of high demand, like New Year’s Eve and snowstorms, “surge pricing” kicks
in, and rates become anywhere from 1.5 – 9 times as high.
3.1 The User Experience
No cash is exchanged when using Uber since signing up for an account requires providing the
relevant credit card information, which is used to pay for the ride. After the ride, the user is
charged electronically and a receipt is immediately emailed, providing details of the trip,
inclusive of the route travelled on a map and the details of the driver, time of ride and cost
breakdown. The user can then rate the driver (and the driver can also rate the user) and verify the
map of the route taken.
According to Uber, the company “push[es] the limits of the transportation industry to create a
simple, more efficient, and more enjoyable car service experience. For drivers, Uber is a source
of additional income, allowing professional drivers to make more money by turning downtime
into profits.”5 Uber’s platform uses algorithms and “heat maps” to estimate how many potential
users may be in an area, which then matches with the number of drivers present in a city. Uber is
able to analyze important statistics like the number of times the smartphone application is opened
to gauge supply and demand for chauffeurs in the catchment area. As a result, there are shorter
wait times for clients, and drivers can be more efficient with the use of their time.
5
The sharing economy, Consumer Intelligence Services by PwC (PriceWaterhouseCoopers)
7
Depending on the city, there is usually a base fare (similar to a cab “flag” fee), and a price per
mile and minute. For example, in Boston, for an UberX, the base fare is $2.25 and then the user
is charged $0.28 per minute and $1.45 per mile. A tip is included in the fare for UberTaxi, which
the user can manage in her user settings on the web (0­20%). There are no tips included for
UberX or UberBLACK.6
Uber introduced surge pricing into their business model in 2012. Surge pricing works by using a
multiplier (x1.5, x2, x3 etc.) to the fare as an incentive to get more drivers on the road (increase
supply) in order to accommodate for the market demand, and maintain the convenience value of
Uber. For example, during a massive snowstorm that hit the East Coast of the U.S. in December
2013, users faced prices at more than 6 times the normal rate.
3.2 The Driver Experience
Unlike the taxi industry, Uber does not employ or license its drivers, but rather views them as
independent contractors. Hence, UberPop7 drivers do not have traditional liability insurance like
taxi drivers. There are no specific regulations that specify that Uber drivers cannot discriminate
against users. In fact, Uber drivers receive ratings of users and may receive their photographs
(users choose whether or not to upload a photograph of themselves to their account). However,
6
https://github.com/prasadtalasila/RadioTaxiProject/wiki/Case­study­­­Taxi­aggregator­businesses
UberPop drivers are non­licensed persons with a car who see Uber as an extra revenue stream. They typically use their own car which is not
licensed in the same way as UberX for example.
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8
where regulations exist against taxicab drivers discriminating against riders, they are frequently
flouted.
Drivers may choose to fill roles as UberX, UberBLACK, UberSUV, or UberTAXI depending on
(1) the city they are based in, (2) possession of a commercial driving license, and (3) the type of
vehicle owned.
4. Uber Goes Global
The unique experience provided by Uber enabled rapid growth and international expansion
centered on three main focal points: a commitment to on­demand service, an efficient supply of
luxurious rides, and the easy accessibility of its smartphone application.
After only 18 months of operation, Uber made its international debut in Paris in December of
2011. According to the Uber blog, “as we started expanding, it became clear that individual cities
were the unique factor in our launches. Each city is unique in its transportation pain points, its
density, its transportation alternatives, regulation, even its transportation culture. As we did more
research we found that there were “classes” of cities that were not based on country… this
realization meant that traditional thinking around domestic first, international second, just didn’t
apply. Furthermore, the advent of a sophisticated ‘cloning’ and copycat industry means you need
to move fast to stake your claim on the global stage.”8 Courtesy of a $258 million investment
from Google Ventures, Uber would concurrently make gains in international and domestic
8
‘We are going global with big funding’ by Uber: https://newsroom.uber.com/france/were­going­global­with­big­funding/
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expansion. The company began its expansion with Singapore in February of 2013 and then
extended its presence to Taipei and Seoul (two of the higher income cities of East Asia), before
entering other East Asian cities. In 2014, Uber began rapid expansion in select Latin American
and Middle Eastern cities.
4.1 Facing Competition in International Markets
Seen as a disruptor in the taxi and car hire industry, Uber is facing fierce localized competition
internationally, from both conventional taxi drivers and new similar competitors in the local
market. Sometimes such competition turns into hatred and violence. In January 2014, during a
Paris taxi­union protest, angry drivers attacked an Uber car transporting two passengers from
Charles de Gaulle Airport, causing more than 240 kilometers of traffic jams in the French
capital.9 In other markets such as China, Uber is forced to compete with car­sharing apps that are
dominated by Alibaba Group Holding Ltd. and Tencent Holdings Ltd—companies with the
added advantage of consumer trust among locals, effectively threatening Uber’s growth.
4.2 Obstacles in International Markets
The major obstacles for Uber in international markets are poor infrastructure, low credit card use,
and low smartphone penetration. Transportation infrastructure is lacking in many emerging
markets a challenge Uber did not face in the United States or Europe. Rates of adoption for more
advanced mobile and banking technologies also vary drastically by country. Taking India as an
9
http://fletcher.tufts.edu/~/media/Fletcher/MIB/pdfs/B236%20Student%20Case%20Studies/Uber%202014.pdf
10
example, according to the Reserve Bank of India, there are 19.6 million credit cards in
circulation approximately a 1.7% penetration rate. As Uber only takes credit cards, this
represents a huge challenge. Smartphone penetration in India is only 18%, creating further
obstacles to adoption.
5. Uber Delivery Service: The Next Phase
As Kalanick and his team navigated global expansion, they looked beyond simply exporting the
same model to new cities. Uber already had a solid logistics and transportation network in place,
hence it made sense to also enter into the transportation services sector.
Kalanick had publicly said that it is time for the company to move into ‘Phase Two’: becoming a
lifestyle and logistics company focused on delivering items to people, using its existing network,
“We need to stamp out an urban logistics fabric in every city in the world, then it’s figuring out
other things we can do with that fabric.”10 Uber will rely on dense urban networks to propel this
business model forward. The company has already been playing with this idea, and testing its
platform. On July 3rd, 2013 for example, helicopter trips were available to Southampton and
Montauk (exclusive areas in the Hamptons), from New York as a promotion. Other recent,
localized experience­based promotions include: ice cream truck requests, boat rides in
Amsterdam, and BBQ sandwiches in Austin, sky­writing on Valentine’s Day in New York City,
Christmas tree delivery in Seattle, and kitten delivery on National Cat Day.
10
‘Uber’s workforce is built to do more than chauffeur’, By Joshua Brustein,
http://www.bloomberg.com/bw/articles/2013­12­11/ubers­workforce­is­built­to­do­more­than­chauffeur
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Shervin Pishevar, a venture capitalist and close friend of Kalanick, explained Uber’s mandate:
"Uber is building a digital mesh — a grid that goes over the cities. Once you have that grid
running in everyone's pockets, there is a lot of potential for what you can build as a platform.
Uber is in the empire­building phase.”11
A convenient, seamless delivery system for goods and services would fit perfectly into Uber’s
new slogan ‘where lifestyle meets logistics.’ The recent $258 million capital infusion from
Google Ventures suggests that this could be a very real possibility. The relationship with Google
also points to the future potential for driverless cars.
6. Uber’s Value Chain
Prior to specifically focusing upon the problem at hand, that of Uber’s surcharge pricing model,
it is important to establish Uber’s value chain and its information and processing activities,
which themselves are further subdivided into business processes and management activities.
Porter’s value chain was created in order to understand how value is created within
organizations, hence how the business processes add value as a product or service moves from
being an inputs to being an outputs. This is vital to comprehend as it allows for the company
itself (as well as its competitor)s to understand why they were founded in the first place and what
11
Resistance is futile’ by Christine Lagordio­Chafkin,
http://www.inc.com/magazine/201307/christine­lagorio/uber­the­car­service­explosive­growth.html
12
they need to do to maintain their reputation and brand value in the eyes of the consumer. The
monetary difference between the value that is created and captured minus the cost of creating
said value is the margin. With an increased value aggregation, there is an increased competitive
advantage as the corporation provides their customers with more value than their rivals.
6.1 Porter’s Value Chain
The leading version of the value chain was created by Michael Porter, who ‘d​escribed a chain of
activities common to all businesses, and he divided them into primary and support activities, as
shown below.’
12
Taken From: Management Information Systems: Managing the Digital Firm, by Kenneth C. Laudon and Jane P
Laudon.
12
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6.2 Uber’s Primary Activities
Primary activities are defined as: inbound logistics, operations, outbound logistics, marketing
and sales and services. Primary activities therefore all relate directly to the physical production
or manufacturing, sale, maintenance and support of a product or service. Inbound logistics
speaks to the company’s ability to receive, store and distribute the necessary inputs for the
production process. In order to create value at this initial step a solid relationship with the
suppliers (or within company if vertically integrated) is important. With Uber, this primary
activity is the management information system, which allows for the interconnection between
clients and drivers, as based on GPS. Additionally, the means by which Uber attracts the drivers
so that they are available for the clients could also be considered as part of this primary activity.
Operations are quite self­evident, being the operational systems, which create the outputs from
the inputs, to be consequently sold onto consumers or tertiary distributors. For Uber the
operations are the computer­controlled systems, which track and monitor the location of drivers
and link them to customers. With outbound logistics, they account of the various activities and
schemes, which deliver the finished product or service to the clientele and is inclusive of
collection, storage and distribution. Subsequently to the Uber rider arriving at their final
destination, the information system allows for the client to sign off on payment and for the rider
and driver to rate each other, so that they can be bundled into the correct grouping. (For drivers
this being UberLux for example).
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Consequently to the product being distributed for purchase it is important to ensure that there is a
support structure in place, which would entice the customer to buy it in the first place, thus,
marketing and sales. The fundamental value of the product or service needs to be adequately
presented so that clients will buy from the company as opposed to from the competitors.
Marketing and sales for Uber are not just inclusive of attracting clientele and the segmentation of
the car models and client experience but also the marketing to individuals who are interested in
joining the company. Finally, within the primary activities, post­purchase service is also
important, as it provides the customer with a peace of mind if there were to be issues with the
product later on; hence this activity is inclusive of a warranty. For Uber the post­purchase service
is that of location of missing items and the feedback that is given by rider after the service.
6.3 Uber’s Support Activities
Once the primary activities are fulfilled it is important to account for the support activities, which
assist the primary activities, whilst overlapping with all of them. These are: procurement
(purchasing), human resource management, technological development and infrastructure.
Procurements stand for the means by which an organization obtains the resources necessary to
operate, such as finding the vendors and the negotiation of prices. For Uber this is their
outstanding fleet of drivers, which vary from UberLux to UberPop. Human resources speaks to
the way in which the corporation finds, recruits, hires, trains and retains its employees, as
persons with extensive experience and connection are able to significantly add value to any
business. Human resources for Uber involves all the individuals tried up with the monitoring of
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Uber rides, we all as all those persons in corporate and the various associated and stakeholders of
Uber.
As for technological development, this is inclusive of the management and storage of
information as well as the corporate secrets that the company holds. In order to compete within
the marketplace it is important for the company to use all the latest technology available for their
disposal as well as minimizing the costs of said technology so that they can pass on the most
value possible to their consumers. Evidently, being a technologically innovative company, Uber
needs to be on top of the latest technological trends so that there is easy use of interface and
clients are consistently happy with the ease of service. As for infrastructure, these are the
company’s support systems and functions, which allow for typical quotidian undertakings, and
are the skeleton of the company’s operations, such as the legal department, administration
accounting and overall management.
Now that we have established the means by which Uber created value within the organization
and the ways by which this is passed onto consumers, it is important to breakdown the business
information value chain into its various components, as this will allow us to demonstrate exactly
where the surcharge issue takes place and the consequences to the value within the chain due to
it.
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7. Uber’s Business Information Chain
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So information processing activities for Uber is as follows:
1) Data collection and storage: For Uber this data on all clients, drivers, GPS locations, prices
points and surcharge times and areas.
2) Transformation into business systems: In Uber’s case the integrated app allows for the
collection of said data so that it can be disseminated.
3) Dissemination: into Business Processes and Management Activities.
Taken From: Management Information Systems: Managing the Digital Firm, by Kenneth C. Laudon and Jane P
Laudon.
13
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7.1 Uber’s Business Processes
The business processes themselves can be divided into supply chain management, enterprise
management, customer management and knowledge management. In relation to supply chain
management, Uber HQ is constantly ensuring that drivers are available in areas in which they are
needed and that clients are quickly picked up. Additionally, Uber needs to ensure that the job
itself is appealing to professional drivers or potential drivers through various incentives and
programs that they have in place, as if there were few drivers on the roads that would mean that
there were not enough completed trips and too many dissatisfied clients. One of the main way in
which Uber entices potential drivers is financially. Compared to the typical taxi service job, Uber
drivers are very well paid: the median annual salary for a San Francisco­based UberX driver
working at least forty hours a week is $74,191; in New York City it’s $90,766. The average Big
Apple taxi driver meanwhile makes just $30,000 a year.14
The second business process to be explored here is that of enterprise management. Uber
extensively advertises to have more drivers sign up to use Uber through offering leasing of
vehicles for a small fee taken upon reception of clients/successful trips or on an installment plans
in places like New York City. Additionally, Uber is constantly updating its software in order to
ensure that the GPS maps have the most updated information on location of venues and street
addresses.
14
http://www.businessinsider.com/uber­drivers­salary­90000­2014­5?IR=T
18
When it comes to customer management, Uber HQ is constantly tracking client’s complaints
through their application and website. If a client were to complain then Uber promises to address
the problem within 24 hours via e­mail. If there is a dispute concerning the fare, then Uber is
able to distribute vouchers or look into the problem directly and penalize the driver if need be.
As for lost items are quickly returned and replies are very prompt and polite.
Finally within business management, one has knowledge management. As Uber has been
constantly undermined and challenged by the local government, the local taxi industry and other
disillusioned (we believe backwards) critics, it is important for the company to defend its
business model and thus, to ensure its survival. Uber has managed to fight back through legal
battles, rallying up support through public campaigns and intense marketing techniques globally.
It has since expanded in an unprecedented manner.
7.2 Uber’s Management Activities
The other way as to which information processing activities can be disseminated is into
management activities, which include: planning, coordinating, controlling, modeling and
decision­making. Planning means that Uber divides areas of cities into those where there is high
demand that needs to be met and by which period of day. Uber uses heat mapping to indicate
where the demand is and within the headquarters, management is able to oversee the real time
aerial view of the movement of cars.
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If there were to be increased demand due to an event or for other reasons this would ensure that
Uber is able to send enough drivers into the area so that there is no shortage. Thus, a typical
surcharge model which automatically detects situations of high demand and low supply and
adjusts price accordingly, depending on the level of shortage.
It is also important for Uber to coordinate their activities, and the app allows the driver and the
client to organize where they can meet and the client can physically see where the driver is and
when he is approaching the desired pick up spot. If the starting destination is different to where
the client indicated it is, they can always cancel the ride and input the correct meeting point, or
alternatively can contact the driver directly by calling them so that they can agree on a suitable
place for pick­up. The final destination can be altered at any point by the driver or client should
they so wish, which allows for greater flexibility. UberPool allows individuals in the same area
to share a car to their desired destination for a smaller fee.
The other aspect of managing activities is the control. The company has ensured that all business
activities and rides are overseen by the Uber team and the company has an internal ranking
system for drivers, meaning some drivers are able to advance to the more high­paying level of
being UberLux. All drivers have to have no points on their license and no criminal record of any
kind. The staff constantly optimizes algorithms powering a whole host of activities: determining
how many drivers the firm needs, identifying when and how to alert drivers of projected demand,
pointing a subset of drivers to locations to best meet demand, setting dynamic pricing, and more.
Additionally, Uber examines how many times the app is open as well as analyzing the accuracy
20
of demand forecasted to refine the prediction algorithm. Finally, it calculates probability of
accurate destinations and popular destinations15
When it comes to modeling and decision making Uber has to decide which cities are suitable for
its other levels of Uber from UberX, UberPool, UberXL, UberLux, UberHelicopter and UberJet.
Furthermore Uber has to decide which cities to expand to in the first place and which countries
will be unreceptive to the company and business model.16 So, cultural and local preferences must
be accounted for.
8. Uber Surcharging Policy
Uber uses microeconomics to ascertain the appropriate pricing for rides, as dictated by supply
and demand and their goal is to establish equilibrium for all parties, whilst being as profitable as
possible. Uber’s pricing algorithm automatically detects situations of high demand and low
supply and hikes the price in increments, depending on the scale of the shortage.
Surge pricing can be viewed as a tripartite agreement between three parties; the driver, the client
and Uber. All have to unanimously be in agreement for the transaction to take effect,
corresponding to the surge rates which are duly communicated via Uber application; giving the
potential client the option to weigh all their viable options prior to accepting the surge pricing.
http://blog.uber.com/passenger­destinations,
http://blog.uber.com/2012/11/12/uberdata­mapping­a­citys­flow­using­ubers­ridership­data/
16
(Case in point­ Saudi Arabia­ is the local population going to allow a woman to sit in a car with a stranger? Do the
people who can afford UberLux have their own driver anyways?)
15
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It is important to account for how surge pricing is set in the first place, as it is not done as
erratically, as typically alleged. Surge pricing accounts for approximately 10% of Uber's rides
and often takes place during peak requests such as Saturday night; Friday night; during a spell of
bad weather; special holidays; major sporting events; Valentine's Day, and most notably New
Year's Eve.
Surge pricing is predetermined by an algorithm that calculates the range of pick up time within
an area; the number of people opening the Uber application trying to use the service and the
number of drivers currently available in that vicinity. In other words, Uber’s pricing algorithm
automatically detects situations of perceived high demand by the number of users opening the
application (traffic on Uber application) at a particular time. Correspondingly, price increases
depends on the perceived scale of supply shortage based on the number of drivers available. The
higher price increment is supposed to entice drivers, hence putting more Uber cars on the road
when they’re most needed to satisfy the Uber status quo of making a ride available within 3­5
minutes within requests.
However, the number of rides requested should be the only fundamental determinant as viewers
and requesters are negatively correlated. Scenarios have shown views reaching 400% (in this
case representing potential demand) within a surge while requests where only pegged at 175%.
Logically Uber users will consider waiting and monitoring the situation for more favorable
pricing to be reached. Consequently, surge should only be calculated by request, which is
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confirmed demand. As dramatic surge induced pricing will result in potential customers to
explore other alternatives or transport substitutes to Uber. By offering more money to drivers,
they were able to increase on­the­road supply of drivers by 70­80%, and more importantly
eliminate two­thirds of the unfulfilled requests. Economists call this responsiveness to price
“elasticity.”
Surcharges should not be confused with tolls, airport surcharges and other fees, as these are also
applicable for certain trips. If your driver pays a toll during the journey or may need to pay a toll
to return after drop­off, then a charge for the toll may be added to the client’s fare upon
completion. The toll charge may not reflect the amount actually paid. For example, in some
cities, tolls are charged at commercial rates regardless of the amount actually paid while some
areas they charge a fee for pickups or drop­offs at the airport. A fee may also be charged by Uber
for other costs or inconveniences such as parking or to enter a venue or if your driver may have a
long return trip after drop­off.
8.1 Uber’s Management Information Systems Issue: Why is surcharging controversial?
Of all the issues that arise on the client’s side when they use Uber Technologies’ application
platform, price surcharging is by far the most divisive and controversial as from the point of
view of the user, Uber’s pricing algorithm is very unpredictable. The client has absolutely no
way of knowing what multiplier they are going to be subject to until they open the application.
Adding to this uncertainty is the ‘mysterious’ black­box nature of an Uber transaction. Users can
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only guess what a ride will cost prior to the start of the journey, and the cost is automatically
deducted before there is a chance to see the total cost. However, in cases of surcharges above
multiplier 1.5 and upwards, the client has to type out the multiplier in words and then accept
whatever charges are imposed at the end of the trip. Hence, it can be very difficult to plan ahead
with Uber. If one is on a budget or simply unwilling to pay eight times a ride’s base fare out of a
matter of principle, it’s hard to really rely on Uber for a ride home under those price surcharge
circumstances.
The most recent negative publicity that was created due to the surcharging model was in
December 2015, in the midst of a hostage crisis in Sydney, Australia.17 Uber riders in Sydney
started tweeting about price hikes shortly after an armed assailant burst into a city cafe and took
hostages, prompting a massive evacuation of offices and shops in the surrounding area. Fees
hiked upwards of four times their normal rate. Uber’s communication team, realizing the gravitas
of the situation, tried to calm the outrage by arguing it was charging riders in Sydney more
money to incentivize drivers to show up (which is how Uber has always explained its surge
pricing).
In fact the company’s surcharge policy is so precarious in the eyes of the public that alternative
applications have been created which account for this, such as Chauffeur Privé (in France), Gett
(in the US), Addison Lee (in the UK), amongst others. Gett in particular, is a new car­hailing app
that promises a drastically simpler pricing model. Instead of being charged by a virtual meter that
measures time and distance travelled, Gett uses a fixed neighborhood­to­neighborhood price
17
http://www.huffingtonpost.com/2014/12/15/uber­sydney­surge­pricing_n_6325026.html
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structure. For example, the base fare from Midtown East to Wall Street is always $23, while a
ride out to JFK airport goes for $63. Gett is still behind Uber in terms of the amount of cabs they
have available, making it more difficult to meet demand, but the fixed rate ride­sharing model
could prove to be more intense competition than Uber had anticipated previously.
8.2 Why Uber Implemented the Surcharging Policy
The nature of Uber’s business model is the reason as to why the company decided to implement
and keep implementing its surcharge policy. Uber caters to the transportation marketplace and all
Uber drivers are independent agents that are either self­employed or work for someone who
owns multiple cars. Uber does not have its own fleet nor do they employ their own drivers. Each
day, by the hour, these drivers decide whether or not to open the Uber application and accept
request for rides from Uber customers. These drivers are not bound by exclusivity and many of
them work on multiple services and some have regular customers that they engage off the Uber
platform.
The majority of Uber fares end up in the hand of these independent drivers, which sometimes
can go as high as 80% of gross fares. Also, of the percentage that is retained by Uber, a large
portion goes to cover variable expenses within the service. These expenses include payment
processing, payment fraud, refunds, customer service, dispute resolution, cellular handsets and
service fees for the drivers and local regulatory efforts. The bottom line is that this is a lower
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margin business ­ much more akin to Amazon than Google, as Uber wins out due to high
volume.
It has been suggested Uber is a “luxury brand.” On the contrary, Uber is also committed to being
a low price leader. This confusion is understandable, as Uber’s initial focus was on traditional
black­car services. However, since its launch of the low­priced UberPop and UberX brand as
well as the UberPool over 18 months ago, Uber has been laser­focused on leading at all price
points. This goal is to expose Uber’s amazing customer experience to a much broader base.
UberX is now the company’s most strategic and fastest growing offering, and has seen the
company’s largest expansion in many cities, passing UberLux in number of daily rides. The
company has also intentionally worked to lower price on UberX as often as it can (in some
markets it has already lowered price four times). UberPool focuses on giving even lower prices
at the expense of the customer’s privacy as you will have to share the cab with another client
going in the same direction. Despite this, some competitors still hold on to the (in our opinion)
convenient delusion that Uber is solely a high­end service.
It is also worthy of note that Uber’s dynamic pricing (“surge pricing”) affects only a minority of
all Uber rides; less than 10% of trips. Dynamic pricing is most common on peak times on Friday
and Saturday nights, on certain holidays, such as Halloween and New Year’s Eve, and during
particularly big events and bad weather conditions. All told, it’s a fraction of the time that Uber
drivers are operating. The vast majority of the time, Uber’s increasingly low basic rates (UberX
is often 40% cheaper than the local taxi alternative) are the primary price points for the service.
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8.3 Does Surcharging Even Work?
It is debatable if “surcharging” gets more drivers on the road. The basic principles of economics
would dictate it does — as would Uber’s experience. Surcharging is said to have been a success
since its inception in early 2012, according to a report by Bill Gurly. Uber’s Boston team first
tinkered with a price hike on weekend nights around 1 a.m., when drivers tended to clock out just
as the city’s public transit system approached closing time, a situation that created lots of
demand for Uber cars.
“In just two weeks they had a resounding answer,” Gurley writes. “By offering more money to
drivers, they were able to increase on­the­road supply of drivers by 70­80%, and more
importantly eliminate two­thirds of the unfulfilled requests.”18 Economists call this
responsiveness to price “elasticity.” Uber’s service does appear to be unusually elastic, given that
its fleet of drivers expands and contracts in real time.
9. Principles of Supply and Demand
“This theory explains the interaction between the supply of a resource and the demand for that
resource. The​ ​law of supply and demand defines the effect that the availability of a particular
product and the desire (or demand) for that product has on price. Generally, if there is a low
18
http://www.forbes.com/sites/johngoodman/2015/02/03/what­uber­can­teach­us­about­health­care/
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supply and a high demand​,​ the price will be high. In contrast, the greater the supply and the
lower the demand, the lower the price will be.” Alfred Marshall 177619
There are a few things to note about Uber’s marketplace and the supply­demand curve. First,
Uber’s analysis and research has shown that both the supply curve and the demand curve are
highly elastic.
On the demand side, the company has confirmed price­elasticity in two different areas. First,
when prices surge, there is an immediate reduction in open­to­order ratios. As expected, higher
prices do indeed reduce demand. Basically, Uber’s marketplace is highly efficient, and operates
in the exact way that your economics professor would expect. When you consider that both sides
of the model – Uber’s riders and drivers – are both large groups of fragmented independent
agents, this is no surprise. The market should and does operate efficiently.
Using the supply and demand curve as a model, Uber’s dynamic pricing model is rather
straightforward. When demand outstrips supply, dynamic pricing algorithms increase prices to
help the market reach equilibrium. Of course, these situations are always temporary, eventually
supply outstrips demand, and the price falls back to normal. If demand were to spike with no
resulting price increase, you would have what is known as an economic shortage. Without a
price increase, Uber’s unfulfilled rate would skyrocket, and most customers would be left
19
http://www.investopedia.com/terms/l/law­of­supply­demand.asp
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without a ride. With dynamic pricing however, more rides are fulfilled precisely because supply
increases.
10. Surcharging: Potential Solutions: Account for states of Emergency
Having accounted for the various issues surrounding Uber’s surcharge policy it is important to
give solutions to it. Primarily, Uber should alter the algorithm that sets maximum surge pricing
levels during states of emergency globally. Hence, when disaster strikes, Uber should cap fares
at a decent price; for example, one that matches the area’s fourth highest price over the preceding
two months. This has been discussed in Uber HQ recently, as well as Uber donating its 20%
commission on rides during emergencies to the American Red Cross (or any charity of their
choice) as surging has a negative PR connotation. Another option is for Uber to forego at least
50% of its surge commission which would correspond to a 10% commission, which is still fair as
reported by Uber only 10% of Uber rides attract surges charges. Consequently, the remaining
90% of their rides will gain them full 20% commission. Uber could still make money from its
other ventures such as the Fleet Partnership Program and Uber Marketplace, whereby Uber acts
as a mediator between car rentals.
10.1 Capping of the Maximum Surge Price
Secondly, Uber should cap the maximum surge price potentially at three times the normal price
[x3], whilst still paying drivers whatever rates it needs to get them to come out onto the roads.
Three times the normal rate is a sufficient motivation for drivers to be willing to offer their
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services at that particular moment. This in effect provides efficient confirmation that drivers will
be aware of a specific rate “the highest possible rate”, hence Uber and the drivers will be in
agreement on a specific capping price. This would mean that Uber would lose money a few
nights a year, but Uber should think of these nights as loss leaders. If fares were capped at
something resembling a normal rate, Uber riders would be able to get cars, even on busy nights,
and come to trust Uber as a reliable, semi­affordable transportation grid. However, three or four
years from now, when everyone is used to the idea of dynamic pricing, Uber can relaunch a well
anticipated surge pricing campaign and could begin letting rates float back up to market prices. If
it is too difficult to integrate the altered algorithm with the capped surcharge policy then we
would look into outsourcing programs external to the company or competitors that have already
developed such technology. Evidently, the capping of the surcharge would have to allow for the
profit and flourishing of the firm in the long run.
10.2 Methodical Communication of Surcharge Benefits and Consequences
Thirdly,​ ​Uber needs to methodically communicate and market the benefits and consequences of
surge pricing to riders. Many riders only see the high price they are paying, hence failing to
account for the significant benefits received in exchange. Uber pricing has been described by
critics as highly volatile, consequently, price­focused decision calculations need to be effectively
provided by Uber to adequately explain and address the volatility complaints. Complaints have
been made that certain areas are more expensive and the pricing can change drastically within
minutes. Evidently, this is true but can be attributed to the supply of drivers available in specific
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locations; for instance, hotels and airports are easier targets for drivers; as a result, it is easier to
find them around those areas. Uber riders have vociferously complained that surge prices
fluctuate wildly from one moment to the next. Delaying a ride by only five minutes could result
in paying either twice as much or a fraction of the amount. One study reported that surge prices
changed every three to five minutes; additionally, others have pointed out that surge prices are
highly location­specific. Prices may be several times higher in one neighborhood than an
adjoining one a few blocks away and this is largely attributable to drivers discriminating on
location (less likely to be stationed around poor neighborhoods). Therefore, all these factors need
to be taken into consideration within the communication agency of Uber’s headquarters.
10.3 Rebranding of the Surcharge Concept
Our final recommendation will be to rebrand the surge pricing concept.​ ​The phrase “surge
pricing” is descriptive and accurate, but it originates from economic thinking rather than a
marketer’s imagination. The Merriam­Webster dictionary defines surge as “to suddenly increase
to an unusually high level”20 . Where customers are concerned, this is unpalatable. Therefore, it is
not surprising that most people associate surge pricing with price gouging. Price surging has
been practiced for many years in a wide variety of sectors without raising any alarms; for
instance the hotel and travel industry where price surging policies almost lead to a point of
complete exploitation and these industry giants are not typically hounded for it. Furthermore,
Uber needs to bring to light the involvement of the drivers who are also key stakeholders and
20
http://www.merriam­webster.com/dictionary/surge
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capitalize on the driver's sacrifices and opportunity costs on working on surge occasions. For
instance, a typical scenario would be drivers being on the road on New Year's Eve rather than
being with their families and this action should be adequately rewarded. As a result, the concept
of overtime needs to be adequately justified, in this case most services pay a premium for
overtime and driving should not be an exception. Extrapolating further on this: doctors and
nurses are paid double or triple their rates of normal wages during overtime hence the suggestion
to cap surge rate at three times normal rate which would be deemed more acceptable by the
public as fair and justified. In addition, Uber should invest in better mechanisms to help drivers
take advantage of algorithmic pricing by buying independent Uber surge estimators (i.e.
www.uberestimate.com) for which premium services are available for a fee) or incorporating
such algorithms in their Uber platform would enable more driver and client friendly experience.
11. Conclusion
In conclusion, this essay has investigated the functionality and management of Uber
Technologies Inc. and ascertained that the major management information system issue that the
company is currently facing is that of its surcharge pricing policy. Firstly, this article accounted
for the brief history and business model of Uber. Subsequently, we went on to discuss Uber’s
value and business information chain, which allowed us to assess how Uber aggregates value to
pass onto consumers and why its surcharge policy is a threat for its evolution in the marketplace.
Consequently, this essay went on to discuss the surcharge policy­ hence where Uber’s rates
increase to ensure reliability when demand cannot be met by the number of drivers on the road.
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At times of high demand, the number of drivers Uber can connect clients with becomes limited;
as a result, prices increase sporadically to encourage more drivers to become available. Demand
surges are also monitored by Uber’s human staffers, who have on rare occasions used their
discretion to lower prices, however there have been a number of cases where the surcharge has
been viewed as excessive and unjustifiable in the eyes of the public, due to a state of emergency
or an act of terrorism, such as the Sydney incident.
Uber’s algorithm which dictates the surcharge pricing focuses upon the fluctuations in supply
and demand:​ ​“Through these two mechanisms, the company is able to [where necessary] (a)
increases supply, (b) assure reliability, a key tenet of the company, and (c) maximize the number
of completed rides.”21 – Bill Gurley. The key concept is to offer wider margins, which will
incentivize enough drivers to render their services with higher returns and customers to be
satisfied with pricing and not feel that they were taken advantage of. Uber is mainly used by
customers to satisfy a current and pertinent need whereby Uber at that precise moment has a
better offer than the competition, such as other forms of private transportation like taxis.
Consequently, surge rates is a means for Uber to ensure efficiently and reliability when demand
cannot be met by the number of drivers on the road, so that in a catchment area with an increased
demand, clients are still able to get a ride within 3­5 minutes, albeit with a surcharge.
Subsequently, this article analyzed Uber’s surcharge model within the context of the laws of
demand and supply. In effect, higher prices reduce demand and research has shown that both the
21
http://fr.slideshare.net/funk97/ubers­business­model
33
supply curve and the demand curve are highly elastic. On the demand side, the company has
confirmed price­elasticity in two different areas. First, when prices surge, they see an immediate
reduction in open­to­order ratios. As expected, higher prices do indeed reduce demand.
From then, we went on to discuss the various solutions to the surcharge policy and within this
thesis it has been recommended that Uber: accounts for states of emergency, by increasing more
manpower to monitor global occurrences; caps the maximum surcharge to x3; methodically
communicate the surcharge benefits and consequence; and finally rebrands the surcharge
concept.
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References
1. The Medium:
https://medium.com/the­wtf­economy/improving­uber­s­surge­pricing­3fd2fe108bd6#.5b
vyuwpq8
2. Harvard Business Review: ‘Everyone Hates Uber’s Surge Pricing – Here’s How To fix
It’ by Utpal M. Dholakia
3. https://www.uber.com
4. http://support.uber.com/home
5. https://en.wikipedia.org/wiki/Uber_%28company%29
6. http://blog.uber.com/2012/01/03/surge­pricing­followup/
7. https://www.pwc.com/us/en/technology/publications/assets/pwc­consumer­intelligence­s
eries­the­sharing­economy.pdf
8. Forbes magazine, ‘Tired Of Uber's Unpredictable Surge Pricing? This Car­Hailing App
Hopes You'll Switch’ by Seth Porges.
9. Time magazine, ​This Is How Uber’s ‘Surge Pricing’ Works by Dan Kedmey
10. http://www.cnet.com/news/detest­ubers­surge­pricing­some­drivers­dont­like­it­either/
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