By Eric Newcomer.
The ride-hailing giant is using data science to engineer a more sustainable business model, but it’s cutting drivers out from some gains.
Uber drivers have been complaining that the gap between the fare a rider pays and what the driver receives is getting wider. After months of unsatisfying answers, Uber Technologies Inc. is providing an explanation: It’s charging some passengers more because it needs the extra cash.
The company detailed for the first time in an interview with Bloomberg a new pricing system that’s been in testing for months in certain cities. On Friday, Uber acknowledged to drivers the discrepancy between their compensation and what riders pay. The new fare system is called “route-based pricing,” and it charges customers based on what it predicts they’re willing to pay. It’s a break from the past, when Uber calculated fares using a combination of mileage, time and multipliers based on geographic demand.
Daniel Graf, Uber’s head of product, said the company applies machine-learning techniques to estimate how much groups of customers are willing to shell out for a ride. Uber calculates riders’ propensity for paying a higher price for a particular route at a certain time of day. For instance, 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, even if demand, traffic and distance are the same.
The change stems from a feature Uber introduced last year called upfront pricing. By guaranteeing customers a certain fare before they book, the company said it provides more transparency. But it hadn’t previously said how Uber was estimating those prices and continued paying drivers using the old model.
In an attempt to ease drivers’ concerns, Uber will start reporting the price a passenger pays on each ride, though it will stop breaking out the percentage Uber takes of the fare. The company will also send drivers an updated terms of service agreement reflecting the new fee system. Route-based pricing is currently limited to 14 U.S. cities where Uber offers its carpooling service.
The difference between the calculations of rider fares and driver pay could be the future of Uber’s business. The company said it pockets what’s leftover and could parlay this mathematical framework into moving closer to profitability.
Graf said Uber’s pricing techniques have grown incredibly sophisticated. He oversees a team called marketplace at headquarters in San Francisco that’s staffed with economists and statisticians. Graf, a former Google and Twitter Inc. executive, sees financial engineering as a competitive advantage, one way that Uber can stay ahead of Lyft Inc. and other ride-hailing operators. Uber said it began experimenting with route-based pricing late last year.
“Google search is very simple to do; it’s very complex what’s happening behind the scenes,” Graf said. “The same thing here. Taking a trip is easy. To make this all work in a whole market, and sustainable, is really, really hard.”
In the process, pricing became something of a black box for passengers and another source of tension with drivers. Drivers accused Uber of cutting them out of income they were entitled to and misleading them about what the company was up to.
During the last year, Uber had attributed price discrepancies to the uncertainty around estimating fares, even as it was experimenting with techniques designed to exploit the imbalance between what customers were willing to pay and what drivers would take. The Rideshare Guy, a popular blog among drivers, conducted a study in New York City published in May, finding widespread disparities between rider fares and driver pay. Workers weren’t happy. “It is immoral and unethical behavior,” said Chris Estrada, who drives for Uber in Riverside, California.
Uber has faced a torrent of scandals this year, including a trade secrets lawsuit, sexual harassment allegations, a brief boycott over its ties to the Trump administration and a video showing the chief executive officer arguing with a driver over falling fares. Two of the longest-running criticisms of the seven-year-old company are ones that are sometimes at odds: It loses too much money, and it pays drivers too little. The company told Bloomberg in April that it lost $2.8 billion in 2016, not including its China business.
In the case of upfront pricing, Uber may move closer to resolving investors’ concerns about losses but could alienate drivers along the way. “You know our numbers,” Graf said. “We do want to run and operate a sustainable business.”
Uber said it isn’t hoarding the additional revenue generated from route-based pricing. The company said it reinvests much of it into increasing the number of trips, subsidizing UberPool usage and paying bonuses to drivers. Christian Perea, who writes for the Rideshare Guy, said drivers will appreciate the added transparency around how much passengers are paying. “That is a big deal,” he said.
As Uber experiments with pricing models, complexity could introduce new problems. “Society is more willing to accept wealthy people paying higher fares,” said Chris Knittel, a business professor at the Massachusetts Institute of Technology. “But if the repercussion of lower fares in lower-income places is longer wait times, that’s probably what they want to keep an eye on.”
With such a dramatic change to pricing, it’s not just drivers Uber has to worry about upsetting. “They could really lose the trust of the riders,” said Glen Weyl, a senior researcher at Microsoft Corp. who is studying Uber with the company’s cooperation. Microsoft is an investor in Uber. “It’s a very dangerous moment for them, but there are good economic reasons to do it.”
Uber is a company filled with over-optimizers, who will continue to futz with prices and hope to find equilibrium. “If things are not balanced, we create levers to motivate people to make it balanced again,” Graf said. “There’s choices, right? Always. There’s never, ‘I have to use Uber.’”
For more on Uber and its relationship with its drivers, check out the Decrypted podcast: