Decoding Surge Pricing: Will Customers Embrace or Reject It?

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Surge pricing is a form of dynamic pricing. However, sometimes customers don’t see it this way. Depending on your perspective, surge pricing can feel like price discrimination.

Surge Pricing takes advantage of peak demand. When demand spikes, the company raises prices to either quiet it or increase supply. From a rational economic standpoint, this strategy is great. However, from a consumer’s perspective, it is not so great.

Most people are familiar with surge pricing through ride-share services like Lyft and Uber. Suppose a big concert lets out downtown, and thousands of people suddenly spill out onto the streets looking for a ride. There’s this surge in demand.

So, Uber says, “Well, we need to get more cars out onto the road with more drivers willing to take these passengers.” So, Uber implements surge pricing, where a ride normally costs $10 will now be $50. That means the drivers get more money for going to the area, providing the motivation for the drivers to balance supply and demand.

It works the other way, too. Once there are many drivers in the area, the prices will come back down. From an economist’s standpoint, this solution is market-based and elegant.

However, as a customer of a ride-sharing service, surge pricing can be horrendous. I caught a ride-share in New York just after a rainstorm started and paid an excessive amount for a two-mile trip. My thoughts about this market-based solution did not include the word elegant.

I am not alone. The emotional response to people who experience surge pricing is very negative. People are not grateful to economists for coming up with this scheme.

The Significance of Dynamic Pricing

Dynamic pricing is a concept that has applications in many businesses. Pricing that can go up and down applies to products, services, and even food and beverage.

For instance, happy hours, when food and drinks are much cheaper during a specific time, are an example of dynamic pricing. The strategy is to get more people in a bar when it isn’t busy. This example brings the price down to increase demand for an abundant supply. By contrast, Surge Pricing raises the price to meet the demand for a dwindling supply.

Another example of dynamic pricing is airline prices. There are a few factors that affect pricing here. Depending on when you booked, you could have paid more or less for your seat than the person seated next to you. Another factor in airline pricing that affects what you pay is when you fly. If you fly on the weekend, your price tends to be lower. Dynamic pricing means the price goes up and down.

However, Surge Pricing is a bit different. It is characterized by a sudden demand spike that raises prices. Suppose Taylor Swift announces a new concert date in Jacksonville, FL, in a week. Using the airline business model, you can bet that all the airlines with routes to Jacksonville will raise their prices surrounding that event. That would be an example of Surge Pricing, a specific form of pricing dynamics.

The Emotional Side of Surge Pricing

I would be remiss if I didn’t mention the emotional component accompanying Surge Pricing. Specifically, the people who have to pay it feel like they are getting ripped off. It feels deeply unfair and generates a lot of negative emotions.

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Surge Pricing is not a customer-centric policy. It is an internally facing benefit, not an outwardly facing one. Sure, you can say that it is a supply-and-demand-driven solution, but can you argue that it isn’t also maximizing profitability?

Consider my cab fare in New York during the rain storm. Uber might have been equalling the number of drivers available to meet the rising demand because of the rain by implementing surge pricing, but I paid for it. Because of my fare and all the other ones during the surge, the rides later had a much more affordable one. Is that fair to me and the other surge-price-paying fares? It didn’t feel that way.

Wendy’s suffered the business end of a hissy fit from its customers regarding its dynamic pricing proposal earlier this year. The fast-food chain would leverage the digital pricing board to offer customers discounts during the slower times of the day. However, the assumption was that the price would increase in busy times. The article describes the hissy fit as “considerable public pushback.”

The Importance of Customer Communication

One of Wendy’s biggest problems was that somebody reporting on this story used the term “Surge Pricing.” What they were doing was the opposite, more like a Happy Hour discount. However, people associate a surge in pricing for a ride-share company with a sudden price hike when many people need a ride. So, customers assumed the price would go up when demand was high.

Fast food restaurants experience spikes in demand throughout the day. There are peak times at traditional meal times and quiet periods between them. It makes business sense to drop pricing in the quiet times to attract more customers. This creates a win-win for the restaurant and the customers.

However, the message got away from Wendy’s. As a result, this great deal for customers and restaurant owners became a hot mess. Their pricing strategy idea went from dynamic to exploitative, as if they were going to wring more money out of their customers.

This communication element is essential. Increasing demand by lowering prices to influence customer behavior means customers must know about the program. That’s how happy hours work. People know that the prices will be lower from time X to time Y, so patrons go during that time to take advantage of it.

But how could they change their behavior to take advantage of it if they didn’t know about it? Communicating the offer and the details is critical for influencing customer behavior.

Dynamic Pricing is a Powerful Tool, So Use It Properly

Remember, tools are neither good nor bad. To be good for your business, tools should serve some strategic purpose. Wendy’s message got away from them, and it didn’t serve them well.

If they had said, “We’re going to lower prices during off-peak hours,” that would have been great. Everybody would have been happy.

But instead, they focused the message on their fancy digital technology. What they proposed was misconstrued, and it sounded like they would leverage the technology to jack up prices during peak hours. Their dynamic pricing proposal turned into a situation that required some serious backpedaling.

If people are surprised by high or low prices, that will influence them. Combining dynamic pricing with understanding human emotions can be excellent for your experience. But fumbling the messaging could be the opposite.

Therefore, make sure you tie your dynamic pricing programs to strategic communications. Moreover, these programs must benefit customers. It could be shorter waiting times, more supply, or better pricing—whatever it is, communicate it. Without that strategic, customer-benefit-heavy communication, you turn your dynamic pricing game-changer tool into a deal breaker.

Colin has conducted numerous educational workshops, on how to improve your Customer Experience, to inspire and motivate your team. He prides himself on making this fun, humorous, and practical. Speak to Colin and find out more. Click here!

Republished with author's permission from original post.

Colin Shaw
Colin is an original pioneer of Customer Experience. LinkedIn has recognized Colin as one of the ‘World's Top 150 Business Influencers’ Colin is an official LinkedIn "Top Voice", with over 280,000 followers & 80,000 subscribed to his newsletter 'Why Customers Buy'. Colin's consulting company Beyond Philosophy, was recognized by the Financial Times as ‘one of the leading consultancies’. Colin is the co-host of the highly successful Intuitive Customer podcast, which is rated in the top 2% of podcasts.

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