Price Gouging Is Everywhere; Don’t Hide It With “Surging”

This is a tale about a marketing department not paying attention to its own market.  In an uber attempt at transparency, Uber confesses that it is price gouging.  Oops!  Not price gouging, price surging.  Robert Wenzel breaks down the marketing mistake.

Uber’s Great Strategic Error

By Robert Wenzel

There really are a lot of dumb people in the world.One of the areas where cluelessness abounds is in the area of economics. Even at a very basic level when it comes to economics, the brain pistons just aren’t firing for most.

The best evidence of this is
the number of columnists who have attacked Uber for what is known as “surge pricing.”

These columnists simply don’t get basic supply and demand economics. The idea of supply and demand economics is that if you have a free market and prices are allowed to adjust, supply will meet demand. Uber gets supply and demand economics.

They understand that there will be periods because of weather, riots, whatever, that a lot of drivers won’t want to deal with the hassles–but that there might be many people during such a period who might want a ride badly. The free market solution to this type situation is to let the price of a ride climb, which means that during such periods drivers will earn more and it provides them with incentive to get out on the road, despite the hassles.

It’s a beautiful market solution. No one is forced to do anything, transactions occur only between those who are happy to transact at the prevailing price. Supply meets demand.

But the masses just don’t get this. To them, Uber’s surge pricing is some kind of price gouging. They don’t get the incentives the higher prices provide and at the very basic level, they don’t understand supply and demand and how prices are set on the free market.

But, in part, I blame Uber for this problem. They have made a great strategic error. Not because of the surge pricing system they have installed, but because they call the increasing of prices at tight supply periods surge pricing.

The masses will never get this, but “surge” pricing is a part of everyday life. There are many restaurants that offer “lunch” menus and “dinner” menus that contain most of the same items, but the prices are higher on the dinner menu. That’s surge pricing, but it is not called such.

Magazines  almost always offer “introductory rates,” once they have you hooked the regular price kicks in, that’s surge pricing of a sort.

Hotels offer “off season” prices which means, they charge higher prices at other times. That’s surge pricing.

Airlines tickets are highest at holiday periods, That’s surge pricing.

I could go on. “Surge” pricing is everywhere. It is basic supply and demand economics in action. It is just not called surge pricing and so the masses, and the columnists that write for them, miss this fact.

This is where Uber made its error. It actually called surge pricing, surge pricing. If you identify surge pricing as surge pricing, the dumb are going to have spasms.

What Uber should have done is, right out of the gate, made the “standard fare,” whatever they thought the highest price would be that they might have to charge at sometime, and then offer “discounts” off the “standard fare.” The masses love discounts. That’s why retail stores mark things up and then offer discounts.

Since the standard fare would be something that Uber would only have to charge once and awhile, Uber could offer massive “discounts” of that standard fare. Viola. Uber would no longer be implementing a surge price policy, they would be, most of the time, offering incredible discounts!

Since booking is done by cell phone, Uber could, perhaps, offer color coded discounts. Go to the Uber app and if a green dot shows up. it means Uber is in a 30% discount mode, a blue dot might mean a 50% discount, an awesome red dot period would mean a 70% discount off of the “standard fare.” The masses would love this and the columnists would move on and write about something else they don’t understand, perhaps the minimum wage or the business cycle.

Robert Wenzel is Editor & Publisher at EconomicPolicyJournal.com and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics
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