Surge Pricing 101: The Good, The Bad, and The Savvy Consumer

When is enough enough?

Because, it seems that every day, a new idea to gauge the consumer is being pitched by some out-of-touch corporate upshot. And really, we all should have seen it coming, but it still hurt nonetheless.

Yes, I'm talking about Wendy's CEO, Kirk Tanner, and his announcement during an earnings call on February 15, 2024, that the popular fast-food chain plans on introducing surge pricing, a dynamic pricing model akin to what you've seen with Uber. This was due to start as early as 2025. However, after massive backlash from the general public, Wendy's has since publicly backtracked on its plan to gouge the public.

However, this pricing strategy, supposedly designed to balance demand and supply during peak times, often sparks debates about fairness and consumer rights.

But what exactly is surge pricing, and why does it invoke such controversy?

Understanding Surge Pricing

Surge pricing, sometimes called dynamic pricing, is a strategic approach whereby businesses adjust prices for products or services in real time based on current demand levels. This approach is commonly employed in sectors where demand can change significantly over short intervals, such as ridesharing, food delivery, and event ticketing.

The main goal of surge pricing is to maintain a balance between supply and demand, guaranteeing availability for customers prepared to pay a premium during peak hours and incentivising a rise in supply, such as more drivers hitting the road or more event tickets being made available, to satisfy this spike in demand.

Companies use surge pricing not just to increase sales during peak demand but also to improve customer service by cutting down on wait times and guaranteeing the availability of services. Surge pricing also helps with demand management by either signalling the market value of the service, which is vital information for understanding demand elasticity and refining pricing methods, or discouraging usage during surges by encouraging usage at less busy times.

Surge Pricing vs Dynamic Pricing

Although dynamic and surge pricing are complex pricing techniques intended to align prices with the demand levels at the time, they differ significantly in scope of use and operational emphasis.

Surge pricing is frequently observed in the transportation sector with companies like Uber and Lyft. This approach sees prices skyrocket during periods of high demand or when supply is scarce. For instance, rideshare fares may soar amidst a blizzard, incentivising more drivers to brave the conditions and balance the demand-supply equation.

On the other hand, dynamic pricing has a broader range of applications. It may be found in several industries, including e-commerce, hospitality, and airlines. This pricing technique carefully modifies real-time prices according to various criteria, such as inventory levels, rivals' prices, and customer trends.

The airline sector is a prominent example of dynamic pricing in action, as ticket costs are dynamic and regularly change in response to many criteria, such as trip dates, available seats, and purchase timings. Therefore, while dynamic pricing and surge pricing are reactions to demand fluctuations, dynamic pricing takes a more thorough, long-term approach to price optimisation across various market scenarios. In contrast, surge pricing usually operates over shorter timeframes and is closely linked to immediate supply-demand discrepancies.

Arguments For Surge Pricing

Surge pricing often sparks heated debates among consumers, especially during peak hours or in times of high demand. However, this dynamic pricing strategy is crucial in balancing supply and demand, ensuring availability, and enhancing the overall service quality in industries such as ridesharing and fast food.

Flexibility and Adaptability

In an industry as dynamic as fast food, the ability to pivot in response to market demands is invaluable. Surge pricing allows fast food chains to respond in real time to fluctuations in customer demand. This flexibility can be the difference between capitalising on a surge of patrons during a local event or losing out to competitors better equipped to handle unexpected demand.

Efficient Resource Allocation

Resource allocation goes beyond just ingredients and staff time; it's also about managing customer flow. Surge pricing discourages an influx of orders simultaneously, smoothing out daily demand. This strategic distribution prevents the wear and tear of a midday rush and the lull of off-peak hours, making operations more efficient and manageable.

Maximising Profits

During peak dining hours, the demand can far outweigh the supply. By implementing surge pricing, fast food chains can capitalise on these high-demand periods by adjusting prices to match. This strategy helps optimise revenue, ensuring that the business captures the total value of its offering when consumer willingness to pay is at its highest.

Provides Choice to Customers

Though customers may not always appreciate higher prices, the transparency of surge pricing allows them to make informed decisions. Users can see when prices are elevated due to high demand and decide whether to pay the premium, wait until the price drops, or seek alternative transportation or dining choices.

Supports Sustainability of the Service

Finally, surge pricing ensures that ridesharing and other similar services remain financially viable. By adjusting prices according to demand, these companies can better manage operational costs and invest in improving the service. This sustainability is crucial for providing convenient transportation options to the public.

Arguments Against Surge Pricing

On the flip side, surge pricing raises several significant concerns for consumers, highlighting issues of affordability, access, transparency, loyalty, and the accuracy of demand-supply dynamics.

Increased Consumer Costs During Peak Times

The most immediate and palpable drawback of surge pricing is its potential to lead to exorbitant consumer costs during peak hours or in high-demand situations.

For instance, during a storm, a terrorist attack, a New Year's Eve celebration, or in the aftermath of a concert, prices can skyrocket, sometimes without any ceiling. This situation is often perceived as unfair or exploitative, with consumers forced to pay significantly higher rates for the same level of service available at a lower cost during off-peak times.

Reduced Accessibility for Budget-Conscious Customers

Surge pricing can deter individuals operating on a tighter budget, especially if they require the service during peak demand times. The elasticity of demand varies among consumers, and for some, particularly those with limited economic flexibility, this pricing strategy may make certain services inaccessible when needed most. This alienates a section of the potential user base and raises ethical questions about equitable access to services.

Lack of Pricing Transparency and Predictability

One of the fundamental criticisms of surge pricing concerns the opacity surrounding how prices are determined and the unpredictability of these changes. While companies may claim algorithms calculate price increases based on demand and supply, the lack of detailed insight into these algorithms and real-time demand leaves consumers in the dark. This uncertainty can frustrate and dissuade potential users, who may opt for alternatives with more stable and predictable pricing models.

Erosion of Trust and Customer Satisfaction

Trust plays a significant role in customer loyalty and satisfaction. When consumers perceive surge pricing as a form of price gouging, it can severely damage the trust between them and the service provider. Over time, this can lead to decreased customer satisfaction, with users feeling penalised rather than valued, potentially driving them away from the service entirely.

Regulatory and Ethical Challenges

Surge pricing poses not only marketplace challenges but also ethical and legal conundrums. Regulators and lawmakers debate how this pricing model aligns with consumer protection laws and the principles of fair business practices. In different jurisdictions, surge pricing has been scrutinised, and, in some cases, movements have been made to restrict or regulate surge pricing to protect consumers from excessive rates and ensure market fairness.

What's The Verdict?

Surge pricing is a two-edged sword. Although it's an effective tool for controlling supply and encouraging demand, it also raises serious ethical and accessibility issues. Companies need to exercise caution while using surge pricing and strike a balance between consumer trust, social responsibility, and profitability.

Additionally, communicating transparently is imperative to lessen the unfavourable perceptions associated with surge pricing. Prioritising customer education regarding surge pricing's operation and purpose and enacting caps to avoid sharp price increases during emergencies or periods of high demand should be a top priority for businesses.

How Consumers Can Push Back

Consumers are not powerless in the face of surge pricing. Through education, advocacy, and collective action, it's possible to demand more equitable practices.

Plan Ahead and Utilise Apps

Anticipate when demand will be high, like during rush hours, school holidays, or significant local events, and try to schedule your needs outside these windows. Booking services in advance can also lock in lower rates before surge pricing kicks in.

Also, make sure to leverage technology to your advantage. Many apps and online tools can alert you when surge pricing will likely occur. Use these to plan your bookings or travel when prices are normalised.

Research and Compare Different Service Providers

Avoid sticking with one provider out of convenience. Different companies may implement surge pricing at varying times and rates. Shop around to find the best deals and consider less popular services at lower prices during peak times.

Take Advantage of Promotions and Loyalty Discounts

On the other hand, many companies offer promotions, coupons, rewards and discounts to their customers. Join loyalty programmes and watch for deals that can help offset the higher costs associated with surge pricing. Sometimes, being a loyal customer can mean significant savings.

Voice Your Concerns

Directly communicate your experiences and concerns with companies using social media, customer service channels, and emails. Publicly calling out unfair practices can pressure companies to rethink their strategies.

And for the companies engaging in this practice, you can use your voice to demand transparent, accessible information on how and when surge pricing is applied. Businesses should notify consumers when surge pricing is in effect and provide a clear explanation of the factors influencing the price increase.

Lobby for Regulation

Connect with consumer rights organisations and engage with policymakers to advocate for regulations protecting consumers from predatory surge pricing practices.

Use Your Consumer Power

Do not underestimate the collective power of consumers. Boycotting services and mobilising others to do the same can significantly impact a company's approach to surge pricing.

Conclusion

As businesses and industries evolve in the digital age, surge pricing will likely continue to be a topic of discussion and refinement. By understanding the implications, voicing concerns, advocating for transparency, exploring alternatives, pushing for regulation, and exercising consumer power, we can shift towards more equitable pricing practices. Together, we, as consumers, have a powerful voice.