Surge Pricing: Why it Makes Sense

Demand increases when supply is low. This is a fundamental aspect of all markets. However, when discussing surge pricing with friends and colleagues, opinions tend to fluctuate. More than once I was pulled into a conversation regarding surge pricing and discovered just how misunderstood it is.

Using Uber as an example, surge pricing makes a lot of sense. During peak business hours when individuals need a ride home from work or to run errands, the number of Uber cars available will likely be few and far between. Surge pricing, in this instance, encourages more Uber drivers to get on the road and take advantage of more income before the surge ends. It’s also important to note that when enough drivers are on the road to meet demand, surge prices instantly vanish. It’s important to differentiate this strategy for balancing supply and demand from price gouging, which only aims to increase profits not supply.

Uber isn’t the only company to utilize surge pricing concepts. The cost of buying tickets to the playoffs or filling up the car with gas will change according to a wide array of market trends. Even Disney has adjusted the price of entry into theme parks based on location and customer traffic. As time passes, more and more companies are exploring surge pricing to improve their business model and expand. As surge pricing continues to yield positive results for both businesses and consumers, this concept may expand into even more products or services.

Unlike price gouging, surge pricing doesn't intend to pass outrageously expensive invoices onto every customer possible. Instead, surge pricing works to stabilize supply in order to balance out demand, ultimately normalizing the cost of goods and services across the board. Of course, surge pricing does provide increased income for both the company and the person who works for them, but it isn’t permanent. Also, surge pricing provides incentives for service providers (Uber drivers) to work more often or suggest to a friend that they become an Uber driver as well.