In a recent video titled "Pricing Psychology Ep 3: Uber's Surge Pricing," pricing expert Ajit Ghuman from the Monetizely channel breaks down the psychological principles behind surge pricing and how companies like Uber have successfully implemented this controversial yet effective pricing strategy. This analysis provides valuable insights for SaaS executives looking to optimize their own pricing models.
The Evolution from Dynamic to Surge Pricing
Dynamic pricing isn't new—it's been a cornerstone of the airline industry for decades. As Ghuman explains, "Dynamic pricing has been around in the airline industry for a long time. If you've booked tickets earlier on versus if you've booked tickets for a particular destination closer to the flying date, you will see that the price changes."
The concept makes intuitive sense: as supply decreases for a fixed number of airline seats, prices naturally increase. What Uber did differently was adapt this model into what we now know as surge pricing, implementing it in situations where consumers were most vulnerable.
Uber's Surge Pricing Implementation
About twelve years ago, Uber began implementing surge pricing specifically targeting people returning home late at night when fewer drivers were available. Customers were often shocked by the premium they paid—sometimes "two to four to even six times more than the regular price," according to Ghuman.
But what makes this pricing strategy particularly effective is the psychological foundation it's built upon.
The Three Psychological Pillars of Surge Pricing
1. Scarcity
The first principle is genuine scarcity. As Ghuman notes, "That's not even fake, right? That's true scarcity. There are fewer drivers around." This real shortage creates a legitimate reason for price increases that consumers can understand, even if reluctantly.
2. Urgency
The second principle is urgency, which operates on multiple levels:
"The later it gets at night, the more you want to use medium like Uber to go home," Ghuman explains. But Uber discovered something even more powerful: "The number one factor that Uber found why people will opt for a search pricing vehicle is battery."
This insight is brilliant in its simplicity. When your phone battery is low, you're far more likely to accept surge pricing rather than risk being stranded. Ghuman elaborates: "You don't want to take the risk or the uncertainty of figuring out some other way to go home. You want to book the Uber, even if it is more expensive."
3. Reference Pricing
The third psychological principle at work is reference pricing. Rather than simply stating that prices are 2x or 3x the normal rate, Uber uses precise multipliers like "2.2X" or "3.4X."
"This is not anything personal," Ghuman explains. "It's really an algorithm or a statistical model that is outputting this value based on factors, right? And you don't know what the factors are, so you're more likely to accept this."
This algorithmic approach cleverly distances the company from the pricing decision, making it seem more objective and data-driven rather than exploitative.
From Consumer Outrage to Acceptance
When surge pricing was first introduced, consumers strongly objected. They felt personally targeted, especially because companies could identify their specific circumstances.
"It's hard for companies to track you. You can go into Incognito mode in some browser and make your purchase," Ghuman points out. "However, here companies could identify your circumstances and that is what made customers feel worse."
What's fascinating is how this initial outrage has transformed over time: "After so many years, this is now part for the course. This is regular and pricing lexicon customers expect." Consumers have gradually accepted that their personal circumstances (like battery level) will factor into the pricing algorithm.
The Economic Impact of Surge Pricing
Despite the controversial nature of surge pricing, Ghuman highlights several positive economic outcomes:
"This has generated about 70% more revenue for drivers than it would have otherwise. And it has made 2x more drivers available during peak times than would have been, and it has driven billions of dollars of consumer surplus."
These benefits make it difficult to argue that surge pricing is entirely negative. The service fulfills a need, the market functions, and over time, what once seemed exploitative becomes normalized.
Applying Surge Pricing Principles to SaaS
For SaaS executives, there are valuable takeaways from Uber's pricing strategy. As Ghuman concludes: "Depending on the right circumstances, one can use these same principles for pricing their products and by the understanding that initially consumers may protest, but over time this thing can become more normalized if the right transparency and information about how the thing works is provided."
The key lesson is that pricing strategies that may initially seem too aggressive can gain acceptance over time if:
- They're based on genuine market dynamics
- They leverage natural consumer psychology around scarcity and urgency
- They're presented transparently as algorithmic rather than arbitrary
- They ultimately provide value despite the premium price
By understanding and applying these principles of pricing psychology, SaaS companies can develop more sophisticated, dynamic pricing models that maximize revenue while maintaining customer acceptance in the long run.