As the startup scene continues to take the country by storm, Uber is at the forefront of innovation with their application that connects passengers with transportation providers. Uber doesn’t provide its own vehicles or operators; rather, it works with existing licensed drivers to provide a more efficient means of dispatching.  Recently valued at a modest $3.5 billion, Uber is in 26 countries and dozens of cities internationally.

While Uber seems to have nothing but great reviews across the board, one major objective that they constantly face is surge pricing.  This concept is a demand-pricing algorithm that increases fares based on the ratio of drivers available to active users.  These increases can be anywhere from 1.25-8% of the standard ride fare.   When the demand for Uber cars outpaces supply, you can quickly increase supply (and decrease demand) by adding more money to the equation.

If you look at surge pricing from 30,000 foot perspective, the model follows simple market based economics.  While these economics date back to the inception of bartering, they’re still used today with “collectors items” including rare art and jewelry, hotels, airlines and much more.  Pretty much any “desirable item” is exposed to market economics in one way or another – so why should the transportation sector be any different?

Much of this dissatisfaction of surge pricing can be attributed to the end user growing accustom to transportation’s fixed pricing model over the years.  When someone hails a cab during peak hours of transportation, they are actually getting below market fares.  While this sounds great in theory, it has allowed for the end user to cancel their service at any time creating a mess of a system full of inconsistency and long wait times.  With the introduction of dynamic pricing, customers know that they will be able to get a ride at any point in time regardless of demand.

The idea wasn’t originally intended to be a means for Uber to increase profits, rather increase reliability, which is the secret sauce to their success.  Instead of providing low fares accessible to everyone, Uber instead raises prices so that those who really need to use the service can have access.  When asked about the controversial issue, Uber’s stance is “surge pricing allows us to maximize the number of cars on the road and ultimately provide you with a reliable ride back home at the end of the night.  With more transparency and an improved UI, we aim to give you everything you need to make the right decision for you during these rare demand spikes.”

What most people don’t see is how surge pricing affects drivers.  Since peak hours traditionally occur during the least desirable hours to work (ie late at night, during poor weather and during holidays), Uber actually incentives its workers to be on the roads resulting in more supply and increasing the probability that a passenger will be able to link up with transportation.  When you really think about it, surge pricing is a way for Uber to encourage more drivers (supply) to be on the road to service more passengers (demand) thus resulting in less fare increases with the same reliability.

While brands preach that transparency is the key to building a loyal customer base, Uber, in this instance, actually in the short term suffers.  While Airlines and hotels provide users with market fares with no explanation of price increases, Uber on the other hand insists to teach their users the hard way by doing things like forcing the user to type in the amount the ride is being increased so they know what their rate is.  While this has been a hot topic in the transportation sector, it is starting to become ‘par for the course’ amongst ride-sharing services.  Even Uber’s largest rival Lyft recently began running “Prime Time Tips” which is their counter to surge pricing.  As Uber paves the way, and other ride sharing companies slowly catch on, one thing is for sure – dynamic pricing in the transportation sector is here for good.

This article was written by Johnny Sengelmann, COO and co-founder of Fresh Jets. Fresh Jets aggregates private jet schedule and pricing information in real-time matching inventory to the travel needs of businesses and individuals instantly.  Want to know what is so great about flying private?  Find out for yourself here.