How surge pricing affects long-term brand health
Following Uber's introduction of surge pricing during the tube strike last week, ZenithOptimedia's Richard Shotton looks at how consumers punish brands who transgress their notions of fairness.
The tube strike worked out well for some people. Tube drivers had a lie-in; boozers had an excuse to stay in the pub to avoid the chaos and we all had a chance for a good grumble.
However, anyone who travelled last week with Uber wasn't so sanguine. The spike in demand for their services meant they introduced surge pricing. Journeys priced at £10 the day before suddenly cost nearer £30.
To an economist Uber's actions are uncontroversial - it's simply a case of supply and demand in action. Uber are behaving as any rational business should. However, consumers are far more emotional than the rational caricature presumed by economists.
ZenithOptimedia surveyed 367 nationally representative consumers on the day of the tube strike about the fairness of the surge pricing. 83% thought the price increase was unfair. In fact, when we probed further they described the policy "disgusting", "taking advantage" and "profiteering".
Feeling a price rise is unfair is one thing but will consumers shun Uber in the long term? If they need to get home will they really let that sense of unfairness put them off?
Evidence from Werner Guth, a psychologist at the University of Cologne, suggests that consumers do punish brands who behave unfairly. He devised an experiment, called the Ultimatum Game, which involves a pair of people kept in separate rooms. The first person, the proposer, is given a sum of money, say £10. The proposer then decides how they split the cash between the two of them.
The other person, the receiver, is made a one-off offer - will they accept or refuse the money? No other communications between the two are allowed. The twist is that if the receiver refuses the offer neither party gets anything.
Most receivers reject offers of less than 30%. Receivers are prepared to make an economic sacrifice in order to punish those who transgress their notions of fairness. This is a cautionary tale for brands considering surge pricing.
An experiment by Lisa Cameron, a development economist from Princeton, proved that this still holds true when the stakes are raised. She ran an experiment in Indonesia where the pot was worth $100. Most receivers still rejected offers of $30 even though it represented two weeks' wages.
So what can brands learn? Firstly, that they will be punished if a price rise is considered unfair. Coke certainly learned this the hard way when they received a huge amount of negative publicity after they dabbled with the idea of vending machines which charged more on a hot day.
Finally, that all advertisers have to balance short term profit-making with long-term brand health. The best marketers are aware that sometimes short-term gains have to be foregone to ensure a healthy future.
It seems that during the tube strike Uber may have forgotten these points.
Richard Shotton is head of insight at ZenithOptimedia.