Thoughts on demand-based pricing

One of the largest shifts in the ground transportation industry since the advent of the “app-based competitors” – or “TNCs” – has been the proliferation of dynamic, demand-based pricing in the marketplace. While the ground transportation industry has always used hourly minimums, truly dynamic pricing – which was primarily the domain of airlines and hotels in the early 2000s – has now become a significant part of the pricing equation in ground transportation, shifting the supply and demand landscape in what are likely irreversible ways. While there are staunch advocates of both static and demand-based pricing models, there are certainly pros and cons, and the decision to use or avoid surge pricing can have material impacts on your business.

Pros of Demand-Based Pricing

  • Keeps drivers and affiliates happy and engaged, even when conditions such as traffic or weather make operating more difficult; if you use independent operators, this can be a very high priority
  • Enables higher revenue per ride and per vehicle during times when the cost of acquiring additional supply to service additional rides may be high
  • Allows companies to “stay open for business” at all times by better balancing supply and demand, driving brand loyalty and customer retention
  • Better matches pricing to customer needs, ensuring the highest-priority ground transportation needs are able to be served

Cons of Demand-Based Pricing

  • Can be difficult to pass through to corporate customers who have pre-negotiated rates and a long-term agreement or contract; static pricing may be a requirement to win a new account
  • It can be very difficult to find the “just right” price that balance supply and demand accurately
  • Operating a truly data-driven surge pricing strategy requires expensive human resources and data analytics tools
  • Risks alienating long-time customers who are accustomed to certain rates for certain routes

If your business is primarily driven by retail customers and/or if you are heavily reliant on independent contractors, demand-based pricing may be a great tool for your business. Conversely, if your business is heavily corporate or you own vehicles and employ drivers, it may be a less attractive option. Regardless, it’s a pricing model that’s likely here to stay, the decision of whether to use it should be deliberate and informed, and it may be worth revisiting quarterly or annually to review whether it’s right for you.