Thoughts on Uber’s Surge Pricing

A few weeks ago, the following tweet popped up in my timeline.

thanks @Uber_Mumbai for showing me what #daylightrobbery means!I know I have a choice not to use it! Please RT #psa pic.twitter.com/llyqsggIxT

— Swathi Rishi (@Swathirishi) June 15, 2015

By now, everyone is probably familiar with the mechanics of Uber’s ‘surge pricing’. When the demand for taxis increases, the price of a taxi ride spikes. The company claims that higher prices encourage more drivers to get on the road. It also rations taxi usage by ensuring that only those who really need the taxi immediately and are thus willing to pay higher prices, continue to use it while others wait for the demand and supply to balance each other out.

The economic principles behind surge pricing are widely accepted by economists, which begs the following question – why don’t more companies adopt this pricing model to boost revenue? The answer as Megan Mcardle points out is that raising prices during periods of high demand is usually very unpopular with consumers who feel like they are being exploited. This is reflected in the sentiment behind the tweet at the top of this post. This negatively impacts the reputation of the brand and thus companies will usually forgo the short term boost in revenue in order to prevent the long term loss of reputation. Uber itself has faced tremendous criticism when it has (automatically) raised prices during natural disasters or emergencies.

So why does Uber unabashedly continue to persist with its aggressive surge pricing algorithm? I believe that one of the reasons is that its business model enables it to use it as a competitive advantage. Uber is a platform business, with taxi drivers on one side of the platform and taxi riders on the other. Most businesses fight over customers, but platform businesses have to fight over the suppliers (taxi drivers) as well. As Ben Thompson points out in this brilliant article, the fight over drivers is much more consequential than the one over riders, as having more drivers will enable Uber to lower the average wait time for a rider, which will attract riders to the service. The wait time is of course directly related to the number of available taxis on the road, which explains the mad rush to sign up drivers.

So how do you get drivers to sign up, especially when they have a choice between competing services? Like most other humans, drivers too will choose the company that they think will enable them to earn the most. Now read the tweet at the top of this post one last time, but this time, put yourself in a taxi driver’s shoes. Would you prefer to work for a company that paid you a base rate that remained constant at all times or one that gets raised aggressively during periods of high demand? The choice should be apparent, which explains why Ola was forced to abandon its initial stable pricing model and introduce peak pricing earlier this year.

Advertising revenue on LinkedIn and other ‘meet’ platforms

Earlier this month, the professional networking site LinkedIn, released an impressive earnings report for the fourth quarter of 2014. Revenue for the quarter was $643 million, an increase of 44% from the fourth quarter of 2013. It wasn’t just the top line numbers that impressed, all segments of the business grew at a healthy pace.

• Talent Solutions – Revenue earned from recruiters who pay a fee to access the database of professionals on the site. This accounts for 57% of LinkedIn’s revenue.
• Marketing Solutions – Revenue earned from the advertising that is on the site. This accounts for 24% of total revenue.
• Premium Subscriptions – Revenue earned from premium subscriptions. Accounts for 19% of total revenue.

This post is going to focus on the second revenue stream i.e. Marketing Solutions. But first, a little background information is required. In my social networks class, Profession Piskorski divided social networks into either ‘friend’ platforms or ‘meet’ platforms. Friend platforms such as FaceBook help users develop closer relationships with their existing network. Meet platforms such as LinkedIn or dating sites help users broaden their networks by introducing them to new people.

From a business model perspective, there is one key difference between the two. If a friend platform is successful, you spend more time on it i.e if everyone you know is constantly on FaceBook updating their status or uploading pictures or messaging, the more interesting content there is for you to see hence and the more likely you are to visit the site. On ‘meet’ platforms, the more successful the platform is, the less likely you are to visit. For example, if you are successful in meeting someone on a dating site, you stop using the site. For this reason, ‘meet’ platforms typically derive their revenue from subscriptions whereas ‘friend’ platforms tend to rely on advertising.

This is a challenge for sites such as LinkedIn that would like to get additional revenue from advertising. However, LinkedIn was initially seen as a place that you went only when you were looking for a job. Thus even though many users created profiles on the site, few visited regularly. This brilliant article details how LinkedIn addressed this issue by essentially turning itself into from a social network into a media platform. The entire article is worth reading but the key passage is the one below.

To get things started, the company launched LinkedIn Today in 2011 as a way of enticing professionals to log in every morning to catch up on industry news. The following year it signed up “influential thought leaders” to provide occasional commentary. Last year, the company bought Pulse, an app that focuses purely on content, and which the company would like professionals to check for a quick update on news relevant to them. And now, it runs a content behemoth that drives the internet’s manicured hordes to business publications around the web.

The strategy certainly seems to have paid off with advertising accounting for 24% of revenue in the most recent quarter as opposed to 22% a year ago. However, the company is not resting on its laurels. It plans to scale its B2B advertising revenue to one billion dollars by 2017 having acquired B2B marketing platform Bizio for 175 million USD last year. The company also recently launched its own ad network to allow companies to identify which LinkedIn user is visiting their site. If successful, this strategy could act as a template for other ‘meet’ platforms to make a play for a share of the lucrative online advertising pie.

What I Read

This post was inspired by the “What I Read” columns on The Wire, which asks public figures about their daily reading habits.

A few years ago, I read this blog post by Robert Bruner and realised that I was spending a lot of time reading on the internet, but I did not feel that I was learning much. I then spent a lot of time seeking out high quality web sites and bloggers. There is a lot of information online and I think the best way is to find one website/blogger that fits into this category and then figure out where they get their information from. Twitter is great for this purpose as you can follow these individuals/sites and look at what they follow or retweet.

As soon as I’m awake I go to my RSS feed on feedly which I switched to after the demise of Google Reader. I’m also on Twitter all day and it serves as my second RSS feed. If there is an popular article on a topic that I am in interested in, it invariably is retweeted by a person that I follow on Twitter and I will read it or save it to Pocket to read later. I do not visit news sites such as The New York Times or the Economist as I usually find their best articles through Twitter or one of the bloggers that I follow.

Economics/Business:

Marginal Revolution – Marginal revolution is a blog run by Tyler Cowen, a professor of economics at George Mason University. He is a prolific blogger (several posts a day) and covers an impressive range of topics from politics, business, economics to chess and food. This is my favourite website and a majority of the articles that I read are usually referred to from this site.

Megan Mcardle – Blog on business and politics from a libertarian/conservative view.

Matt Yglesias – Blog on business and politics from a liberal view.

Robert Bruner – Robert Bruner is the former Dean of the Darden School of Business at the University of Virginia. Does not post very frequently but the posts are usually of a very high quality.

Greg Mankiw – Former Bush economic advisor and currently the economics professor at Harvard. This blog is now fairly inactive as he has taken on a more senior role at Harvard.

The FT – I started reading the FT about a year ago, when I was granted free access to it as an Oxford MBA student and will continue to read it until my access runs out.

CNBC – Stock market and other business news.

Money Control – The Indian version of CNBC; it’s where I go to get news on the Indian stock market.

Rediff – Indian news site. Probably not the best one out there, but I have stuck to it largely out of habit.

Politics:

RealClearPolitics – An American political news aggregator site. Also aggregates the latest polls and political news videos. A good resource on election nights as well.

Hotair.com – Popular conservative news blog.

Vox.com – Recently launched liberal news and opinion site.

Technology:

Engadget – Technology and Gadget news and reviews.

The Verge – Similar to Engadget.

TechCrunch – Similar to The Verge and Engadget, but a lot more comprehensive. Also has a lot of information about the latest technology startups and apps.

Anandtech – Similar to the first two, but the reviews tend to be more detailed and higher in quality. The site’s founder recently departed to go work for Apple.

Macrumors – Latest Apple news and rumors.

Sports:

ESPN – I follow ESPN during the NFL (American football) season. I also follow college football on here.

Walter FootBall – Serious and often humorous take on the NFL (American football). It’s also where I follow the latest mock drafts.

Yahoo Sports UK – This is where I get my football (soccer) news from.