NRF 2017: Uber calls for retailers to consider surge pricing

Over the last seven years, Uber has revolutionised the transportation industry. But this revolution has not been the invention of the flying car, explained Garrett Van Ryzin, head of marketplace optimisation advanced development at Uber, instead it uses technology to create a marketplace for hire cars, 

Speaking at NRF 2017 in NYC, Van Ryzin said the development of this marketplace has allowed Uber to organise the pricing of the transportation industry much more efficiently than the incumbent taxi services.

He explained how a taxi with a flat pricing structure spends a lot of time waiting for jobs, and this lack of efficiency is made up by the high fares it charges. Uber, on the other hand, operates a surge pricing model, where the more demand on the service, the higher the fare becomes.

"Reliability is key to our service and dynamic pricing makes that possible," said Van Ryzin, who explains that during a surge caused following the end of a concert, some customers will accept the higher fare, while others will decide to have a beer with friends and wait until the price drops when there are more cars available. "It moderates how many people are requesting rides, while surge pricing also attracts more suppliers [drivers]."

He pointed to New Year's Eve 2015, when Uber witnessed an engineering failure and its surge pricing model went down shortly after midnight. While it normally operates a 90-100% customer competition rate – where customers successfully get a ride through the app – due to the lack of surge pricing this competition rate dropped to 25%.

"Surge pricing is not a super popular thing and it attracts all sorts of bad press," he said. "But it is essential for the service Uber is familiar with and the growth of the business."

Van Ryzin argued retailers should also introduce a dynamic pricing model.  

"It's all driven by technology, that's what makes marketplaces work. If you look at the largest companies in the world today – Apple, Google, Amazon, Microsoft, Facebook – they all have significant marketplaces. And it's a similar story in the private world," he said, pointing to Uber and Airbnb.

But Van Ryzin admitted retail is not the transportation market and has "quirky characteristics" that would make surge pricing difficult.

"No one needs a new dress in the next five minutes, for that reason retail has a longer decision-making cycle," he said. "And Uber has the luxury that when we crank up prices, it encourages drivers to come onto the platform, but with physical goods you have to commit to quantities and have limited flexibility."

This is where marketplaces like Amazon, eBay, and Etsy have more control over their pricing than high-street brands. But Van Ryzin argued retailers and brands need to arm themselves with data about their in-store shopper in order to introduce flexible pricing. "It's usually a one-off encounter, but retailers can use mobile technology to identify customers and keep track of them and marry that extra information with marketplace technology to drive more value."