From the Crowd

Commentary and analysis from outside voices in venture capital, hedge funds and economics

Uber NYC and the Sandy Surge

November 2, 2012: 11:37 AM ET

A popular startup's growing pains in the wake of Hurricane Sandy.

By Hunter Walk, contributor

FORTUNE -- While my hometown of New York City recovers from the aftermath of Hurricane Sandy, there's been a different verbal maelstrom here in Silicon Valley: The question of whether Uber NYC's "surge pricing" is gouging or simply an effort to balance supply and demand.

Uber's an algorithm-driven company which responds to emotion with facts. However, especially in times of distress, people want to hear empathy, not data. I don't believe Uber set out to maximize profits in the wake of a hurricane, but I do think there are several steps they should consider in future extraordinary situations.

There are aspects of Uber's culture which remind me of early Google (GOOG). Uber believes in data and algorithms. Its secret sauce, as CEO Travis Kalanick will note, are algorithms that attempt to minimize response time. It does this through routing (where should drivers be) and a pricing model that allows prices to "surge" during periods of intense demand such as holidays and weekend evenings.

The company's argument, which I believe to be valid, is that its drivers are free agents. If they can get better rates with their private clients they will seek to service that market and not Uber patrons. Uber effectively increases their take-home pay during surge moments in order to encourage a driver to work within the Uber pool, or even extend their already long day to pick up a few more passengers (think of it as the price of overtime). This is how supply and demand works, regardless of whether you've ever read Atlas Shrugged.

Uber is *not* a nonprofit public service. It is a company selling a premium service to customers who choose to pay. As such it will need to play within the evolving rules and regulations of the cities in which they operate. To date this has caused some issues in Boston, DC and Chicago. It's worthy of a separate post, but my general feeling is that some of the regulatory efforts are legitimate and aimed at passenger safety and a level playing field. Others are purely smokescreens from incumbent transport companies who have been able to get away with providing crappy services in the face of no competition.

So being a private company, of course, surge pricing is generally about getting more cars on the road for Uber customers. And Uber benefits from this directly (since they take a cut of fare) and indirectly (strengthening the general appeal of their service for drivers and riders). It's a two-sided value proposition that Uber needs to manage: Drivers need to feel like they're getting paid enough and passengers want enough comfort and speed for their dollars. If there's enough demand, Uber succeeds. If not, Uber fails. Personally I use Uber occasionally and mostly for city-to-airport travel in SF and NYC. But back to Sandy....

In the storm's wake, Uber NYC implemented a set of decisions meant to increase supply (drivers) to meet demand (passengers). Uber probably didn't have a "what to do in a human tragedy" playbook and instead ran its normal operating procedures. This included putting 2x surge pricing into effect. In response to public outcry over gauging, it continued to pay drivers the 2x but charge passengers 1x, costing the company $100k/day (effectively Uber was subsidizing the marketplace). Then it put the surge back in place, but said it wouldn't take their share of profits -- all money would go to the drivers.

In response to the criticism, Uber published lengthy posts explaining the dynamics of marketplaces. Right idea, but oh so wrong. While the logic was true, the humanity was missing. The average person just heard that Uber was charging New Yorkers more post-hurricane. I used to see Google make this mistake frequently in our communications on controversial topics. Data and logic told us we were correct and we'd just keep showing you more of it, or describing our thought process. We greeted emotion with facts. In the face of emotion, data can be a foreign language. It doesn't matter how loudly and slowly you say it, some people don't understand. In fact, all you're doing is pissing them off.

The people who are piling on Uber are largely doing it from (a) sunny West Coast and (b) imagining that some unethical CEO/Investors are pulling strings to exploit NYC. Knowing members of the Uber team I'm comfortable asserting that you basically have good folks, working under incredible circumstances, trying to make the right call for a startup that, no matter how much good press and fortune they've had, is still a small business growing and evolving its model.

Assume that coming out of this past week, the Uber team will write a "what to do in disasters" playbook. Here's what I bet it includes:

  • Local GMs can work with HQ to declare "emergency:" During this time, Uber won't collect money on a passenger fare, effectively helping to increase supply of drivers by giving back to the passenger community which supports the company during the 99.9% of the year which is normal.
  • App can show messages next to surge pricing info: Imagine how much clearer it would be if next to the "Surge Pricing in Effect 2x" it said "To those impacted by Sandy: We need to charge more to meet demand during this challenging time in order to get more Uber drivers on the road. Uber will not take any fees. All proceeds go to the drivers. We hope you are able to stay safe, dry and get to your destination quickly."
  • Public Communications Which Leave the Economic Theory for Later: It will have a set of FAQs and better responses which help to put a human face on Uber - not just employees but driver and passenger stories. Now it needs to be careful to do this without blaming the drivers (i.e., "don't look at us, these drivers want more money."
I saw some other interesting tweets about allowing the Uber community outside of impacted areas to subsidize surge pricing. And I wondered if sponsors would subsidize. But both of these are kinda red herrings - Uber is going to live and die by the algorithm.Contrast Uber's week with Airbnb, which immediately waived booking fees on tens of thousands of listings in impacted areas. Airbnb had its crisis moment a year ago when someone returned to a trashed apartment. Airbnb's initial response was fact-based (this happens to very few people). Its team soon realized that it wasn't okay to appear they were comfortable that this happens to ANY of their customers and put better messaging, customer support and other assurances in place.

Uber just had its trashed apartment moment. I could be wrong, but my guess is they'll do better next time.

Hunter Walk (@hunterwalk) is a director of product management at Google.

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