If you've ever tried to take an Uber during a rainstorm or on a holiday, you know why surge pricing can be unpopular. Then again, if you've been picked up by that Uber while other people were still waiting for cabs, you know why it also makes sense and provides benefit to customers. Surge pricing which is another name for dynamic pricing, isn't just for ride sharing; and it is an excellent way to balance supply and demand for your company's products or services.
Dynamic pricing is a relatively simple concept. It is the principle that the price for a given item or service should vary with customer demand. This means that you can charge more for your product sometimes, but you should charge less other times. It also means that if you have the ability to increase capacity, you will probably provide more of that service when customers really want it, and take advantage of those higher prices. This helps to ensure that the customers who really want what you are selling can find it. It creates equilibrium.
Imagine looking for a cab on New Year's Eve. If you can find one, you'll wait a long time for it. Why is that? For cab drivers, the calculus is simple. They charge the same on New Year's Eve as on any other day and can't enjoy the holiday with family and friends. So why work harder? They don’t, so it is harder for you to find a cab.
If you hail an Uber, you'll probably pay a lot more than you would for a cab, but you almost certainly won't wait as long. Uber drivers know if they work that night, they will not only stay busy, but also get to charge a lot more for their services, so more people work. That's the power of dynamic pricing, which because of Uber is often called surge pricing.
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