During rain, rush hour, and even hurricanes, Uber sometimes increases its rates for rides by, say, eight times the normal fare. A ride that would usually cost $65, in a snowstorm, suddenly costs $192. A 20-minute ride, on Halloween, will suddenly set you back $362. Uber doesn’t make these price hikes just to annoy customers, though the strategy certainly at times has had that effect. According to Uber, surge pricing is necessary to incentivize its drivers to get on the road during the busiest times.
“Higher prices are required in order to get cars on the road and keep them on the road during the busiest times,” Uber CEO Travis Kalanick once wrote on his Facebook page in response to a disgruntled customer who said surge pricing made him or her “OUTRAGED” and “DISGUSTED” (that’s not me–it was written in all caps). “This maximizes the number of trips and minimizes the number of people stranded. The drivers have other options as well. In short, without Surge Pricing, there would be no car available at all.” Lyft, a competing on-demand car app, has a similar system it calls “Prime Time.”
But when Gett, a similar app that launched in Israel in 2010, launched in New York last year, it send the opposite message: In September, it promised New Yorkers that any ride they took between Houston Street and 52nd Street would cost no more than $10 (plus tax and tip). This week, it extended that from to 72nd street, promising that no fare would ever exceed $15 (plus tax and tip). No surge pricing. Ever.
So then how does Gett incentivize its fleet of 2,000 black cars to get on the road when it needs them most?
The secret is that Gett does pay its drivers more during busy times. It just does so without changing the fare the customer pays.
Uber and Lyft take 20% of every fare: Increase the fare, and you increase the driver’s pay. Gett instead pays drivers by the minute. During dedicated peak times, like between 7 a.m. and 9 a.m. on weekdays, it increases the rate per minute but does not collect more money from the customer–the additional money that goes to the driver comes instead out of Gett’s cut.
Gett’s CEO, Shahar Waiser, says that the consistent pricing model grew out of the company’s corporate business, through which 2,500 companies pay for their employees’ rides. Those clients had more power than individuals trying to hail a cab in the rain, and they weren’t willing to put up with surge pricing. Instead, Gett mapped zones within which it promised set fares. Those fees most often cover the cost of paying the driver, but the profit margin fluctuates. Gett makes less money when it pays drivers more, but because of the incentive for drivers to work during that time, it can deliver more rides.
“On some rides we lose and on some rides we win,” Waiser says, “but we always keep commitments to both sides.”
Gett is not the only ride-hailing company that is rejecting the surge. Another startup called Via, for instance, offers on-demand black car service throughout Manhattan for a flat fee of $5 or $7, depending on whether you pay in advance. You share your ride with any other customers who happen to be traveling in the same direction.
Criticism around surge pricing has already led Uber to make some concessions, such as like snowstorms. During Hurricane Sandy, it temporarily paid drivers two times the normal rate even though, like Gett, it held fares for customers at a steady rate. At the time, Uber said that the strategy was unsustainable: “Footing the bill for higher driver costs came at a significant expense to Uber with over $100,000 in additional payments to drivers in a single day–something we can’t continue indefinitely without breaking the bank,” read a blog post on the company’s website. “The reality is that under this week’s extreme conditions, raising the price is the only sustainable way to maximize the number of rides and minimize the number of people stranded, by providing a meaningful incentive for drivers to come out in undesirable conditions.” When I ran Gett’s strategy by an Uber spokesperson, she sent me a statement that reiterated “ultimately, we think it’s better for a user to open the app, see dynamic pricing in place, and have a choice about whether to proceed than to open the app and see that there are no cars available.”
Competition from apps like Gett pushes on the “only way” aspect of the argument that surge pricing helps Uber rally the drivers that can meet demand. One recent analysis suggests that real-time, spontaneous surge incentives are less effective at actually getting new drivers on the road than in redistributing them to high-demand areas (Uber says, “based on the incredible amount of data we’re constantly analyzing,” that the Surge model does actually “motivate partners to help meet peek demand”).
It’s not just new entrants that have experimented with alternate incentives, either. Lyft offers its drivers bonuses for driving more than 30 hours in a week. Uber itself has promised drivers a certain rate during busy special events like SXSW in order to get more of them driving when demand is likely to be high. No surge required.