What is surge pricing?
Surge pricing happens when a company raises its prices due to an increase in demand — and lowers them when demand weakens. It’s a dynamic strategy that adjusts pricing in real time based on the current market environment. Let’s explore two examples to understand where surge pricing works best and why some companies choose to adopt it.
Uber’s approach to surge pricing
Uber, the ride-hailing app, is one of the most well-known examples of surge pricing in action. During periods of high demand — like New Year’s Eve, bad weather, or public transport strikes — Uber increases its prices to encourage more drivers to get on the road. The company argues that without surges, supply would run out, and customers wouldn’t be able to get rides.
Uber is transparent with its customers about when surges are in effect. The app notifies users before they confirm their ride, providing an estimated fare so they can decide whether they want to proceed.
In a blog post, Uber’s CEO explained their reasoning:
“Uber is ALWAYS a reliable ride. Being unavailable is the opposite of Uber. Surge pricing ensures we stay ‘Always On’ and ‘Always Convenient.’“
On New Year’s Eve 2013, Uber’s prices in New York surged to about twice the normal rate, with some customers reporting increases of up to six times the standard fare. Critics argued that such price hikes might alienate customers, but from an economic perspective, Uber’s dynamic pricing model ensures that the service remains available when it’s needed most.
Price discrimination and surges
Surge pricing often gets labeled as price discrimination, which can be controversial. It feels unfair when the price of the same service varies dramatically based on demand. But research shows that price discrimination, in some cases, benefits both businesses and customers. By charging higher prices when demand is high, Uber incentivizes drivers to work when they’re needed most, ensuring a reliable service.
This dynamic is common in platform-based businesses like Uber, where success depends on matching supply with demand. Uber’s surges encourages more drivers to be available during peak times — a strategy that makes the service more reliable for customers who are willing to pay a premium for convenience.
OpenTable and premium pricing for restaurant reservations
OpenTable, an online reservation service, has introduced its own form of surge pricing, known as premium pricing, to help diners secure reservations at high-demand restaurants. For last-minute bookings during peak times — like Friday and Saturday nights — OpenTable offers customers the chance to pay a premium to get a table.
OpenTable markets this feature as a win-win: restaurants generate additional revenue, and diners who need a reservation at short notice have a better chance of getting one. In a blog post, the company highlighted the benefits for both sides:
“Giving guests the opportunity to be seated at peak times will delight those in need of your hospitality, while also generating more value for the restaurant.”
This model is similar to Uber’s where higher prices reflect increased demand and limited availability. For diners, it’s about convenience. For restaurants, it’s about maximizing revenue during their busiest times.
The pros and cons of surge pricing
Surge pricing can be highly effective when demand is immediate and supply is limited. It ensures that businesses can meet customer needs while maintaining profitability. However, it also has its downsides, particularly when customers perceive the price increases as unfair.
Some view surge pricing as a natural part of a free market — businesses responding to supply and demand. Others see it as price gouging, particularly when the price hikes are steep and sudden, like during natural disasters. The line between smart pricing and exploitation can be thin, and companies using surge pricing must tread carefully.
The future of surges
As the on-demand economy grows, so does the use of surge pricing. More companies are turning to this model to manage demand, from ride-sharing apps to restaurant reservation platforms, to surge pricing for ecommerce brands. Whether you see it as a necessary strategy or an exploitative practice, surge pricing is here to stay. Its success depends on transparency, customer trust, and the careful balancing of supply and demand.
