Earlier this month, Uber – a revolutionary ride-share program connecting riders to drivers through its apps, now servicing over 70 cities – announced dramatic prices cuts in dozen of its U.S. markets, causing quite the stir. The New York market has seen a 20 percent price cut for the company’s UberX services and the San Francisco and Los Angeles markets have seen an even larger price cut for service, amounting up to 25 percent.
With such a dramatic drop in prices, there was obviously going to be some concerns for UberX drivers. Uber, however, calmed these worries with a guarantee that even with these price cuts, drivers would still make a minimum of $1,000 per week, as long as they are online for 40 hours a week and accepted a minimum of 90 percent of trip requests, according to Business Insider.
With these price cuts, Uber is taking a loss on each transaction, according to the New York Times. So why did Uber decide to take this plunge?
By cutting prices, Uber believes they will capture more of the demand because the prices are now cheaper than most taxi and ridesharing services. Therefore, Uber’s revenues will increase, making it possible for Uber to pay drivers $1,000 per week even with a price cut.
Essentially, this all boils down to the elasticity of demand, which is how consumers react to a change in price. For example, a high elasticity of demand means that for a small change in price, a large shift in demand will occur. This is what Uber hopes to do as the company drops its prices and then, in return, be able to capture a larger share of demand.
Despite the economics, Uber’s chief executive, Travis Kalanick, told the New York Times that there is a bigger picture in mind. Kalanick stated, “The whole point of price cuts is to get UberX pricing below the cost of owning a car.”
Uber’s dynamic pricing is more than just staying competitive with taxis and other ridesharing options. It is about reinventing transportation, about redefining how people get from point A to point B. Uber is trying to differentiate itself from taxis by making itself an option for all transportation needs and even replacing the traditional car. Clearly, Uber is onto something here, as we have seen recent shifts transportation trends.
The company is facing a great deal of scrutiny from the taxi industry, though, getting push-back with lawsuits in various cities. Regardless, Uber is not letting that stop its quest for alternative modes of transportation at fair prices.
From a PR standpoint, Uber has an advantage from the long-standing distrust and dislike for taxis, particularly when it comes to pricing. Uber’s price cuts have also given the company easy and positive coverage, as well as positive responses from consumers. However, some question whether this will last for Uber, wondering if this is simply a short-term PR stunt. Regardless, it will be interesting to see how other ridesharing companies react, how the taxi industry rebuts, and whether Uber will be able to keep its current customer base.