# Uber’s new pricing structure

So Uber has changed its pricing structure in Bangalore. Earlier they nominally charged Rs. 50 fixed, Rs. 15 per kilometer and Rs. 1 per minute, and then slapped a 35% discount on the whole amount. From today onwards the new fare structure is Rs. 30 fixed, Rs. 8 per kilometer and Rs. 1 per minute, without any further discounts. They’re marketing it using the Rs. 8 per kilometre number.

I took a ride this afternoon under the new fare structure, and the bill was Rs. 152, about the same as it would have been under the old fare structure. In that sense, I guess this was an “average ride”, in terms of the distance by time covered. This was the kind of ride where their assumption on distance travelled per unit time (in coming up with their new formula) was exactly obeyed!

So how do we compare the old and new formulae? We can start by applying the discount on the nominal numbers of the old formula. That gives us a fixed cost of Rs. 32.5, a per kilometer cost of Rs. 9.75 and a per minute cost per 65 paise. We can neglect the difference in fixed cost. Comparing this to the new cost structure, we find that the passenger now gets charged a lesser amount per kilometre, but a higher amount per minute.

In face, taking the “slope” between the old and new rates, the per kilometre cost has come down by Rs. 1.75 while the per minute cost has risen by 35 paise. Taking slope, this implies that Uber has assumed a pace of a kilometre per five minutes, or twelve kilometre per hour.

So if your journey is going to go slower than twelve kilometres per hour, on average, you will end up paying more than you used to earlier. If your journey is faster than twelve kilometres per hour, then you pay less than you did under the previous regime.

A few implications of the new fare structure are:

1. Peak hour journeys are going to cost more, for they are definitely going to go slower than twelve kilometres an hour
2. Your trips back from the pub should now be cheaper, for late nights when the roads are empty you’ll travel significantly faster than twelve kilometres an hour
3. What does this imply for the surge pricing in the above two cases? I think the odds of a surge during peak office hours will come down (since the “base price” of such a trip goes up, which will push down demand), and  the odds of a surge late on a Friday or Saturday night might go up (since base fare has been pushed down for that).
4. The Rs. 30 fixed cost implies that if a driver travels at 12 km/hr when looking for a new ride, the gap between rides for a driver is 11.5 minutes (if the driver spends X minutes, he will travel X * 12/ 60 kilometres in that time. The compensation for this combination is X + X*12/60 * 8, which we can equate to 30. This gives us X = 11.54).
5. Trips to/from the airport will now be cheaper, for you can travel much faster than 12 km/hr on that route. So Uber will become even more competitive for airport runs. Again this might increase probability of a surge at peak flight times.

I continue to maintain that Uber has the most rational price structure among all on-demand taxi companies, since the fare structure fairly accurately mirrors drivers’ opportunity costs. Ola doesn’t charge for the easily measurable time, and instead charges for “waiting time”, which is not well defined. Ola also has a very high minimum fare (Rs. 150). I wonder how they’ll play it if their planned acquisition of TaxiForSure goes through, since TaxiForSure was playing on the short trip model (with minimum fares going as low as Rs. 49). Given the driver approval before a ride, though, I doubt if anyone actually manages to get a Rs. 49 ride from TaxiForSure.

Times continue to be interesting in the on-demand taxi market. We need to see how Ola responds to this pricing challenge by Uber!