Uber has quickly become one of the hottest startups in the technology sector. The car service company just arranged low-cost financing to help add 100,000 cars to its fleet; revenues are growing by 20% monthly; and New York Magazine proclaimed the company may be – one day – more valuable than Facebook.

So what’s driving Uber’s success? Great service and an innovative pricing strategy.

Taxis are regulated by local governments in most cities. Operators have to purchase a medallion license and abide by a series of rules (including a rigid pricing structure) in return for the right to pick-up passengers who hail service from the street. This right to pick up passengers from the street is valuable. Medallions in New York, for instance, have recently sold for over $1M. While rival car services often exist, without a medallion customers have to pre-arrange the ride (call or book by the internet, for instance), so it’s far more convenient to take a taxi.

Technology is disrupting the taxi industry by making it easier to use medallion-less car services. Uber’s smartphone app, for instance, has made it almost effortless (and in many cases preferential) to pre-arrange a car service instead of hailing a taxi. Satellite technology allows riders to track the impending arrival of their car and the transaction is cashless. Customers have already provided their form of payment – a receipt is emailed to customers at the end of a trip (tip is included in the fare). Uber offers three primary transportation services: SUV, Black Car, and UberX (hybrids and mid-range cars). Drivers are independent contractors – they own their cars and pay roughly a 20% commission to Uber.

One of the first benefits I noticed when using Uber is its consistently great service. Drivers often welcome passengers with a bottle of water or even hard candy – a nice touch. Of course, drivers have an incentive to provide great service because at the end of each trip, passengers rate them on a scale of 1 – 5 (with 5 being the best). Uber drops drivers with low scores – market incentives tend to yield better service than the “who else are you going to use” attitude often associated with regulated monopolies such as taxis.

Aside from service, Uber’s dynamic pricing strategy is a key driver of its growth. In Boston, UberX claims to charge 30% less than taxis – a great way to get customers’ attention. This results in a strong value proposition: clean cars and great service at a significant discount.

The caveat (one that is not widely advertised) is that during busy times, Uber imposes a surcharge which can be as high as eight times its normal rate. To be clear, there’s no deception involved: riders are notified of and have to agree to this surcharge before requesting a car. Last New Year’s Eve, for instance, Uber warned customers that its pricing would not be for “the faint of heart.” Of course, some people complained – like the guy who paid $63 for a 0.73 mile trip. But that’s the value of convenience – customers always have the choice to fight crowds during peak times, take public transportation, or if feasible…perhaps even walk the 0.73 miles.

Uber surcharges aren’t limited to special events – they occur almost daily during peak periods.

Uber’s surcharge policy received flak recently when prices skyrocketed during the snow storm that hit the east coast. This “gouging” uproar will pass because (as I have written before) customers always have the right to walk away and not purchase.

Uber’s dynamic pricing strategy effectively turns taxis into sitting ducks. During high demand periods, taxis charge the same uniform fares as they pass by eager would-be passengers who would have paid more for a ride. And during times of low demand, taxis constrained by regulated prices desperately cruise the street seeking customers or idly sit at taxi stands.

Uber instead lets the market rule and drops prices. This discounting steals customers from taxis and, just as importantly, attracts new customers. This walk down the demand curve entices customers who otherwise might not have used a taxi or car service. This is the beauty of a smart pricing strategy – it captures value from customers who are willing to pay the most (reaping higher margins) as well as uses discounts to generate growth.

The big lesson that managers should take away from Uber is the importance of a robust pricing strategy to every business. While most companies don’t have their prices regulated, they often behave as if they do by setting one-size-fits-all prices. By being innovative with your pricing strategy, just like Uber is, you have the opportunity to make your competition sitting ducks.