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Perfect Pricing is the Future, and Uber is its Vanguard

by cory on February 10th, 2014
Uber has, at times, faced plenty of criticism for its vague pricing policies. When I've explained the service to unknowing friends, a common sticking point is the surge pricing. You don't know how much it will cost ahead of time, they ask incredulously? And you even know that it will be some multiple of the normal price, but you don't even know what that is?

If you haven't taken an uber, this is how it works: Uber is a car service coupled with a smartphone app. You hail a car from the app on your phone and get to watch the car's position on nearby streets (like a real-life pac-man game) as it maneuvers its way to pick you up. You get in and tell the driver where you're going, and some time later you've arrived at your destination. You get out, say thanks, close the door, and walk off into the night. At no point do you ask how much it will cost, or take your credit card. As part of the sign-up process you've already connected your credit card, and shortly after your ride ends the app will show you the price that you have just been charged for the ride. Welcome to your destination, you've arrived in the future.

Admittedly it's almost always more expensive to take an Uber than a taxi or another car service, sometimes by a large amount. For the price sensitive the uncertainty over cost can be fairly uncomfortable. For regular users, Uber has built up enough trust capital that the rider will happily take the car, knowing they'll pay a bit of premium but still confident that they'll pay a fair price. Knowing exactly what it will cost ahead of time is not important. Uber's promise to its customer is that they'll charge you a fair rate given the current demand, plus their premium for the high-end service. When there's high demand the app will alert you that they are automatically raising rates to attract more of their drivers to the road. You, the rider, still don't get to know exactly what the price will be but you know it will be some multiple of normal. That's the surge pricing.

This demonstrates two of the key components of seamless transactions that we'll increasingly see in the future. First, Uber charges you without you having to do anything, all through your cell phone. This concept is coming to a store near you, fast. One day soon you'll be able to pay at a coffee shop only with your phone. In the first iteration you'll probably pull up, say, the Starbucks app, select the drink you want, and a few moment later you'll hear a barista calling out your name with that chai latte. As the technology improves you won't even need to pull the phone out of your pocket. You'll walk in and the store will have begun making your usual before you even need to order. You'll just take it off the counter and walk out.

As the friction involved gets smaller and smaller, the part of the transaction that forces you to confront the cost of the item will become an appropriately smaller piece of the exchange. Honestly, how often today do you focus on the specific cost of that cappuccino anyway? Most of the time you just hand over the credit card or $5 bill anyway, because you know Starbucks is going to give you their current price and they're trustworthy enough. Imagine how much less headspace that cost calculation takes up when the mechanism of payment (cash, credit, whatever) never even comes into play. When you're just walking in and taking what you want off the shelf, inserting the friction of a payment process into the exchange is going to be something no one wants. The consumer doesn't want to wait in a line, or deal with a teller. They just want their stuff. The stores will go nuts for this (assuming they can limit theft; and they can) because an impulsive customer is their ideal customer.

The second component of seamless transactions is the pricing, and it's dependent on the first component. Once everyone is comfortable paying transparently, it's much easier for a reputable company to do away with the concept of a fixed price anyway. There will be enough customer backlash to any store that tries to game the system that they'll be incentivized to offer fair pricing anyway. And as a customer with a wallet-ized smartphone, you'll trust that McDonald's, or that corner bodega, will charge you the fair price, and over time the concept of a fixed price itself will simply fade away. In the future you'll just take what you want, when you want it, and the company will exact their expense plus their markup.

At this point, in this future world of frictionless transactions, where the specific prices themselves have faded to the periphery, comes the next phase, which is perfect pricing. Starbucks will never sell as many cups of coffee at 3pm as they do at 9am, and they know it. So why are they selling the same cup for the same price at both those times of day? A cup of coffee at 9am is worth more to their customer than one at 3pm, so the price of the cup in the morning is either too cheap, or the afternoon cup is too expensive, or both. The price should be as fluid as the purchasing experience. Prices should peak in the morning and then decline over the day into the afternoon. Pricing should as perfectly as possible reflect the demand at that moment. This is what happy hour is; a bar wants to attract more customers earlier in the night so they drop their prices for an hour or two to pack the house. In reality the beer at the beginning of the happy hour should be cheaper than the beer at the end of the happy hour, with a smooth transition over that time. In today's world of nickels and dimes this is too complicated to feasibly do, but when your phone is sitting in your pocket doing the paying, and you're just grabbing the beers when you feel like it, the bar can set its beer price to automatically scale up over time.

In a world where no one's looking at the price tags, though, the thought of pricing actually driving customer behavior starts to get a bit vague. But that is a post for another time.

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