Startups

In an Economics Experiment, Uber Cuts Prices in 16 Cities


When Uber’s prices become news, it has generally been because the car service’s fares have gone way up during, say, a snowstorm, or those first blurry hours of a New Year. Now the company is headed the other way, announcing steep price decreases for its lower-cost UberX service in 16 of the 24 cities where the service exists.

Uber is cutting prices anywhere from just a few percent in some markets to 34 percent in others. The six markets that will see the deepest cuts are Chicago, San Francisco, Los Angeles, Phoenix, and Orange County, Calif. The largest discounts are designed to be temporary, while some of the more modest ones will likely be permanent, according to the company.

In Los Angeles, a ride from Beverly Hills to Santa Monica costs $15.83 with UberX, as opposed to $26.80 in a taxi, Uber says. With the changes, Uber’s base rates per mile and per minute are cheaper than those for competing ride-sharing service Lyft. (Lyft says Uber’s tendency to change prices constantly makes it an inherently raw deal.)

Uber even goes as far as to say that UberX is cheaper than the bus in some cases, if people split fares. The 704 bus to Beverly Hills costs $1.50, so for that example to be true, Uber would have to send a clown car. Then again, stranger things have happened.

In an interview, Uber Chief Executive Officer Travis Kalanick said the discounts were more of an economics experiment than an attempt to undercut a competitor. They serve the same purpose as the company’s controversial policy of “surge pricing” (Uber-ese for raising prices at times when more people need cars)—to maximize the number of rides Uber facilitates each hour by pulling the levers of supply and demand.

While Uber’s network of black cars is essentially a dispatch service for professional livery drivers, UberX drivers use their private vehicles to pick up rides. Uber has to constantly convince these drivers that picking up fares is the best use of their time. Lowering the prices means they make less money per ride, but Kalanick says it will also spur demand, meaning that drivers who previously could only find one fare per hour might now find two. “If you change the price, then people in the middle of day, they’re saying, ‘Hey, I can use this for lunch,’” Kalanick says. In San Francisco the average UberX driver’s income actually increased after a 26 percent price cut last June, he says.

But bringing in more income might not necessarily be worth it if it means working significantly more. At some point, UberX’s price reductions could dry up supply, in the same way that its most aggressive surge pricing dries up demand. The company knows it needs to keep drivers happy—it’s trying to get more cars on the road by doing things like helping drivers get better terms for auto loan financing in exchange for agreeing to drive for UberX. Kalanick says these incentives are still too new to have had any demonstrable impact.

In several markets, the company is the one taking the hit on the new discounts, reducing the commission it takes from drivers to encourage more riders without scaring away drivers. The new base fares will have no impact on surge pricing, so fares could still rise at any time a lot of people are looking for rides.

With 16 different markets getting new price structures, Uber has the potential to gather lots of data to feed through its pricing algorithms. Kalanick declined to discuss any factors that informed the pricing decisions in each city. When asked whether it would be easier for drivers to find higher numbers of lower-priced fares in denser cities, for instance, he demurred, citing competitive reasons. “It’s probably not good for me to tell you exactly how my business works, because then you’ll publish it,” he said.

Brustein is a writer for Businessweek.com in New York.

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