May 232016
 

Surge Pricing In Ola & Uber Cabs | Calculation

Recently, a term ‘surge pricing’ related to cab services has cropped up in news. The rates of traveling offered by the cab companies like Ola & Uber have increased in the capital of India, New Delhi due to surge pricing induced by them. While these cabs services are defending the surging in price, the people, government and even the cab drivers are expressing their clear disapproval on the subject. To understand the present situation, it will be necessary to know what actually surge pricing is!

Here is a detailed explanation of surge pricing in Ola and Uber, divided into sub headings for clear understanding:

First of all, What Does Surge Pricing Mean?

Surge pricing refers to the increase in fares of cabs. Taxis, such as Ola and Uber have fixed base fare which is set by the cab aggregators. When a situation of increased demand arises while the availability of cabs in a particular area is not at par with the demand of cabs, then the surge in prices occur. In simple words, surge pricing happens when demand exceeds supply, i.e. when more people are availing for the cab service but enough cabs are not available on the road.

According to some cab services, surge pricing happens when there are lesser number of drivers as compared to the services availed by users. In such a scenario, surge pricing can help in plying of more number of taxis on roads, which will help in meeting the exceeded demand of taxis by customers.

Surge Pricing In Ola & Uber Cabs

How Does Surge Price Work?

Surge Pricing is a mechanism based on algorithms developed by the cab companies themselves. The algorithm measures the number of taxis available for service at any given time of day in any given area. Thus, the algorithm calculates the number of demands and the number of cabs available in accordance with the demands.

Further, the process of cab service and fare calculation is dynamic in function, i.e. they are not static and keep on changing as demand and availability increases or decreases.

Also, the higher the demand, the higher the surge in pricing will be. Sometimes, the surge is as high as four times the base fare. During surge, taxi drivers receive higher fare. In fact, a meticulous calculation has shown that earning of a driver can increase by 13% during surge period.

A calculated percent of fare earned by the driver for his service is given to the cab company. For eg- Uber charges 20% of the total fare a cab driver earns for his service. Thus, earning of the cab company sky rockets too during surge pricing!

Another point to be noted in surge is that it prioritizes travel. A person who requires going to a business meeting or airport to catch a flight takes the cab at surged price, while a person who wants to go to a party or for shopping waits till the surge decreases.

What Is The Cab Companies’ Take On The Working Of Surge Pricing?

The pricing mechanism begins when demand beats supply. The cab aggregators suggest that the increased fare act as an incentive for cab drivers and motivate them to stay on road. This helps in maintaining the demand supply ratio.

Also, according to Uber, “since the process is dynamic, it lasts for only a few minutes”, which means the price goes back to regular price once the demand matches availability. The companies also say that it helps in maintaining the equilibrium of demand-supply chain and brings out on the roads even those drivers who are at home, enjoying their off day.

How Are Prices Calculated During Surge & Do The Companies Have A Role In It?

The calculation of surge pricing in cabs is similar to the calculation of tickets bought for airplanes. Just like airlines increase or decrease the pricing of seats depending upon the date of booking, season and availability of seats, the cab companies induce surge depending upon the traffic and demand.

And as mentioned earlier, since the process is dynamic as well as is based on an algorithm, the pricing changes by minute. Also, the cab companies practice no control over supply.

What Brought Surge Pricing In News?

In April 2016, Delhi government rolled out Phase 2 of Odd-Even car driving formula in the capital of India, New Delhi. Naturally, the number of vehicles including cabs running on the roads was reduced. This led to a high demand in taxis while availability was quite less in comparison to it.

In order to balance out the demand-supply ratio, the cab companies like Ola and Uber introduced price surging. This increased the fare to a great extent, which resulted in agitation by the people.

Why The People & Government Opposed It?

Price surging might increase the supply of cabs on road but the surge was too high for people. In many cases the surge was 4.7 times higher than the base fare. As a result, the Delhi government has introduced a ban on price surging by cab companies in the capital. Earlier Karnataka government too had put a ban on surging.

How Much Surge Pricing Will Cost A Common Man?

Uber offers three cab options, depending upon the number of passengers availing the service. These are UberGo, UberX and UberXL. The cheapest of the three cabs is UberGo, which has a base fare of Rs 40. It charges Rs. 7 per km and Re.1 per minute.

Ola Mini is an equivalent of UberGo and charges Rs. 100 for first 4 kilometers of ride and Rs. 8 per km for subsequent distance. The ride time charge for Ola Mini is also Re. 1 per minute.

Now let us compare the price a consumer will have to pay with and without surge. For convenience, let us take travel distance as 20 kms and travel time as 1 hour.

Cab- UberGo Fare Rate (per km)
Without surge Rs. 240 Rs. 12
With surge (1.2 times) Rs. 288 Rs. 14.4
With Surge (2 times) Rs. 480 Rs. 24

 

Cab- Ola Fare Rate (per km)
Without surge Rs. 288 Rs. 14.4
With surge (1.2 times) Rs. 345 Rs. 17.2
With Surge (2 times) Rs. 576 Rs. 28.8

What’s The Take Of Drivers On Surge Pricing?

Ground reality is that even the drivers are against surge pricing. According to them, as the prices increase, the people refrain from taking cabs. This results in more cabs in an area and less demand, which ironically contradicts the idea of introducing price surging in the first place.

Learning Price Surging Through An Example

Suppose a driver makes 6 trips a day. Then cab aggregator makes a minimum business of Rs. 3000 (Average earning of the companies for 12-14 trips by driver is Rs. 7000).  Anyways, if those 6 trips fetch only Rs. 2500, the companies chip in Rs. 500 and take an overall commission of 20%, i.e. Rs. 600 on the whole earning. So in effect, the cab driver is shelling out Rs. 100 as commission.

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