Uber's future may rely on predicting what you're willing to pay

Uber is using data science to engineer a sustainable model, but it's cutting drivers out. Photo / Andrew Harrer

Uber drivers have been complaining that the gap between the fare a rider pays and what the driver receives is getting wider. After months of unsatisfying answers, Uber Technologies is providing an explanation: It's charging some passengers more because it needs the extra cash.

The change stems from a feature introduced last year called upfront pricing. By guaranteeing a certain fare before customers book, Uber said, it provides more transparency. But it continued paying drivers using the old model, a combination of mileage, time and multipliers based on geographic demand. The difference between those two calculations could be the future of Uber's business.

Daniel Graf , Uber's head of product, said upfront pricing can't be summed up in a simple formula. Uber applies machine-learning techniques to estimate how much groups of customers are willing to shell out for a ride, calculating riders' propensity for paying a higher price for a particular route at a certain time of day, he said.

For instance, someone traveling from a wealthy neighbourhood 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. Uber calls this "route-based pricing."

On Friday, Uber will begin communicating the changes to drivers. It will start reporting the price a passenger pays on each ride, though it will stop breaking out its percentage of the fare.

It will also send an updated terms of service agreement reflecting the new fee system to drivers. Route-based pricing is now limited to 14 cities where Uber offers its carpooling service.

Graf said Uber's pricing techniques have grown incredibly sophisticated. He oversees a team called marketplace at headquarters in San Francisco that's staffed with economists and statisticians. Graf, a former Google and Twitter executive, sees financial engineering as a competitive advantage, one way that Uber can stay ahead of Lyft and other ride-hailing operators.

"Google search is very simple to do; it's very complex what's happening behind the scenes," Graf said. "The same thing here. Taking a trip is easy. To make this all work in a whole market, and sustainable, is really, really hard."

In the process, pricing became something of a black box for passengers and another source of tension with drivers. Drivers accused Uber of cutting them out of income they were entitled to and misleading them about its plans.

During the last year, Uber had attributed price discrepancies to the uncertainty around estimating fares, even as it was experimenting with techniques designed to exploit the imbalance between what customers were willing to pay and what drivers would take. The Rideshare Guy, a popular blog among drivers, conducted a study in New York City published in May, finding widespread disparities between rider fares and driver pay. Workers weren't happy.

"It is immoral and unethical behavior," said Chris Estrada, who drives for Uber.

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.

Chris Knittel, a business professor

Uber has faced a torrent of scandals this year, including a trade secrets lawsuit , sexual harassment allegations , a brief boycott over its ties to the Trump administration and a video showing the chief executive officer arguing with a driver over falling fares. Two of the longest-running criticisms of the seven-year-old company are ones that are sometimes at odds: It loses too much money, and it pays drivers too little. The company told Bloomberg in April that it lost $2.8 billion in 2016, excluding its China business.

In the case of upfront pricing, Uber may move closer to resolving investors' concerns about losses but could alienate drivers along the way. "You know our numbers," Graf said. "We do want to run and operate a sustainable business."

Uber said it isn't hoarding the additional revenue generated from route-based pricing but reinvesting much of it into increasing the number of trips, subsidising 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," he said.

As Uber experiments with pricing models, complexity could introduce 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."

With such a dramatic change to pricing, it's not just drivers Uber has to worry about upsetting. "They could really lose the trust of the riders," said Glen Weyl, a senior researcher at Microsoft who is studying Uber with the company's cooperation. Microsoft is an investor in Uber. "It's a very dangerous moment for them, but there are good economic reasons to do it."

Uber is a company filled with over-optimisers who will continue to tinker with prices in hopes of finding equilibrium. "If things are not balanced, we create levers to motivate people to make it balanced again," Graf said. "There's choices, right? Always. There's never, 'I have to use Uber.' "