Uber Using Data Science to Engineer a More Sustainable Biz Model

Uber drivers have been complaining that the gap between the fare a rider pays & what driver receives is widening. After months of unsatisfying answers, Uber Technologies Inc. explanation: It’s charging some passengers more because it needs extra cash.

The company detailed in an interview with Bloomberg a new pricing system that’s been in testing for months in certain cities. Recently, Uber acknowledged to drivers the discrepancy between their compensation and what riders pay. The new fare system is called “route-based pricing,” and it charges customers based on what it predicts they’re willing to pay. It’s a break from past, when Uber calculated fares using a combination of mileage, time & multipliers based on geographic demand.

Daniel Graf, Uber’s head of product, said the company applies machine-learning techniques to estimate how much groups of customers are willing to pay for a ride. Uber calculates riders’ propensity for paying a higher price for a particular route at a certain time of day. For instance, someone traveling from a wealthy neighborhood to another tony spot might be asked to pay more than another person heading to a poorer part of town, even if demand, traffic and distance are the same.

The change stems from a feature Uber introduced last year called upfront pricing. By guaranteeing customers a certain fare before they book, the company provides more transparency. But it hadn’t previously said how Uber was estimating those prices and continued paying drivers using the old model.

Last year, Uber had attributed price discrepancies to uncertainty around estimating fares, even as it was experimenting with techniques designed to exploit the imbalance between what customers were willing to pay & what drivers would take.

Uber said it isn’t hoarding the additional revenue generated from route-based pricing. The company said it reinvests much of it into increasing the number of trips, subsidizing UberPool usage and paying bonuses to drivers. Christian Perea, who writes for the Rideshare Guy, said drivers will appreciate the added transparency around how much passengers are paying. “That is a big deal,”.

As Uber experiments with pricing models, complexity could introduce new problems. “Society is more willing to accept wealthy people paying higher fares,” said Chris Knittel, a business professor at the Massachusetts Institute of Technology. “But if the repercussion of lower fares in lower-income places is longer wait times, that’s probably what they want to keep an eye on.”

‘Fusion Analytics World’ Analyst Viewpoint: “With such major change in pricing strategy from Uber, it is highly likely to impact the trust and belief customers have on the brand apart from dealing with unhappy drivers who do not have much clarity on the pay gap etc. We will keep an eye on their strategy and update our readers”.