- Thomson Reuters
In a controversial move, Uber has started to charge riders a premium based on where they’re traveling.
Uber generally determines pricing by taking into account a trip’s distance and duration as well as the level of demand in the area in which it originated. Now, though, it’s charging extra to certain customers who travel along particular high-demand routes.
After losing more than $2.8 billion last year – excluding what it lost in China – Uber is trying to increase its revenue and build a sustainable business, Daniel Graf, Uber’s head of product, told Business Insider in an interview at the company’s San Francisco headquarters Friday. The company is also trying to offer a better experience for customers and drivers, he said. Bloomberg first reported the changes.
The pricing move “creates more trips in the city,” Graf said. “More trips in the city means less wait times and shorter pickups time for riders and drivers.”
The change comes at a precarious time for the company as it tries to repair its image and rebuild customer trust. In January, more than 200,000 customers cancelled their accounts in just one weekend as part of a #DeleteUber campaign. The company has since been battling a wave of bad publicity, ranging from a lawsuit alleging it stole intellectual property from Google sister company Waymo, to accusations of sexual harassment and gender discrimination against female employees, to a widely viewed video of CEO Travis Kalanick getting into an argument with an Uber driver.
The launch of route-based pricing also follows – and helps explain – recent reports about drivers and passengers noticing pricing discrepancies when they compared receipts.
Uber has been quietly testing a new pricing model based on the routes users travel. In the process, the company discovered passengers are willing to pay a premium to travel some high-demand routes. So it’s now made the change official, increasing prices when people request trips along those routes. While Uber knows the routes on which it will charge premium pricing, it doesn’t alert drivers or passengers of the pricing change.
The company is only using route-based pricing to increase fares on its UberX service, and then only in cities that also have UberPool in the US.
Drivers won’t make any more money when they take people on these premium routes. Instead, Graf said Uber is re-directing the extra fares money to offering bigger subsidies to UberPool routes, paying for driver promotions, and increasing the number of trips across the city.
Customers are already complaining that the new pricing seems to target people who are well-off and already willing to pay pricier UberX fares. Those complaints were fueled by a Bloomberg report about the new pricing model earlier on Friday. As part of its description on how the overall changes would work, Bloomberg described the new pricing as sometimes coming into play when someone “traveling from a wealthy neighborhood to another tony spot might be asked to pay more than another person heading to a poorer part of town”.
Graf denied the new pricing model targets only wealthy customers.
“Absolutely not,” he said. “This is not personalized. This has nothing to do with the individual.”
Counterintuitively, the premium pricing actually is designed to make Uber’s overall service more affordable, Graf said.
“With this route-specific pricing, we can lower prices more,” he said. “That’s what it comes down to.”
Inside Uber’s Black Box of pricing
Uber isn’t attempting to sort its customers into rich ones and poor ones, Graf said. Instead, it groups them into “time-sensitive” UberX riders versus “price-sensitive” UberPool riders, he said. People who take an UberX are already opting to pay more to take a ride that is both private and takes a direct route. With route-based pricing, Uber will charge UberX riders an additional premium, one they’re likely to pay.
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Despite Graf’s denial that Uber is segregating rich and poor customers, its route-based pricing may in fact target individuals with more disposable income, because the prices only apply to UberX riders in cities with UberPool, a cheaper option. While some riders may be “time-sensitive” and eager to get to their destinations faster when they choose X, many of those same riders are also likely more price insensitive and willing to pay more since they’ve opted for a more expensive ride to begin with.
Graf stressed that Uber isn’t using any personal data from customers’ accounts or ride history to determine whether they get hit with the route-based premium. Anyone traveling the same route at the same time should get the same price, he said.
“The fares have to do with the demand you see on the route,” Graf said. “We don’t know what wealthier parts of towns are. We don’t take anything related to wealth or any other characteristics into account. All we look is what are the demands for our different products. That is all it is.”
Which specific routes will see the higher fare remains a mystery. Uber won’t tell passengers if they’re paying a little extra because they’re on one of those routes. Some people will simply pay more for their UberX ride because of where they’re standing and where they’re going.
Yet, Graf was adamant that Uber’s pricing is more transparent than ever since it gives riders an upfront price. It’s also, for the first time, breaking out in driver’s receipts how much they’re making versus and how much Uber itself is taking. Uber’s pricing is no longer the “black box” it was long accused of being, Graf said.
“If I buy a product and I have a dollar value, that’s not a black box. You know exactly from where you are to where you go exactly how long it takes, we give you an estimate, and how much you pay for it,” Graf said. “There’s no black box there. There’s absolutely not a black box there.”
Pocketing cash to pay drivers
While Uber is charging some passengers more to take certain routes, that money won’t directly end up in drivers’ hands.
Under route-pricing, Uber will continue to pay drivers based on the miles, distance, applicable surge pricing, and driver incentives. It’s only on the passenger end where route-based pricing will come into effect.
Uber will take the extra money from those route-based premiums and use it to paying for promotions such as dropping the price of an UberPool route from $10 to $8. Instead of drivers making less on the $8 fare cut, Uber will still pay them based on the $10 fare.
“What we want for drivers is consistent earnings,” Graf said. “If we don’t have reliable and consistent earnings, what are they going to do? They’re not going to drive for Uber.”
However, Uber still has to protect its own interest – and that includes building a sustainable business. The company needed to find a way to make more money to cover the promotions it needed to attract both riders and drivers.
“You’ve seen our financials,” Graf said. “We’re not a profitable business.”
By increasing these select UberX rides, Uber will in turn make money to help recoup the cost of promotions to bring both riders and drivers onto the platform.
“Pricing will always evolve,” Graf said. “Our goal is still the same: more trips, more affordable, more reliable on the rider’s side. On the driver’s side, we want to give you reliable earnings with context.”