Over the past month, there has been a barrage of criticism by users of ride-hailing services like Uber and Careem. The reason behind this criticism has been the higher than usual fares due to price surcharges.

So why are we seeing this peak or surge pricing model come in to play? The short answer is simple: a shortage of supply of vehicles.

Expense vs convenience

When Uber first began rolling out surge pricing around the world, it was vilified with social media campaigns like #neveragain, which called for a boycott of the service. Careem now faces a similar situation in Pakistan.

For those speaking up against the surcharge, the issue is simple—the increase in the frequency with which peak or surge pricing is implemented. This is seen by many as a departure from the initial claims by the companies to provide an affordable mode of transport to the masses.

On the other hand, users speaking up in favour of both Careem and Uber say that the convenience the service provides, through air-conditioned cars and an app that hails rides to your location, are enough to justify the higher fares.

Talking about the peak factor, Amber Arshad, editor at Aurora Magazine and a frequent user of Careem and Uber, said: “it makes sense to give incentives to drivers for their time away from family during Eid holidays and even in rain, but after that, the peak shouldn’t be a consistent affair, it feels like a new type of transport mafia operating without any rules.”

Uber, Careem say peak pricing is important — for drivers

Despite the consumer backlash that companies like Careem and Uber face, both surge and peak pricing are here to stay.

On the company’s end, a surcharge is implemented in order to balance out supply and demand. According to both Careem and Uber, additional charges result in higher earnings for drivers in the form of bonuses, encouraging them to be on the road during rush hours such as when there’s heavy rainfall or on public holidays such as Eid, when the supply of cars is understandably low.

Also, since the maintenance and upkeep of vehicles is the responsibility of car owners, such surcharges help compensate drivers for the depreciation that their cars suffer due to long travel times, or when they’re slogging through submerged and broken roads caused by a deluge.

How vendors see it

To further my understanding, I joined a WhatsApp group of Careem and Uber vendors to observe how they felt about this pricing strategy.

One vendor on the group turned out to be my former university batch-mate. He had two cars—one for Uber and one split between Uber and Careem—and told me that during the recent Karachi rains Uber’s surge went as high as 3.9x, leading him to bill a customer Rs2,100 Rupees for a trip from Clifton to Gulistan-e-Johar. (A fare estimate without peak shows me Rs344 – Rs396 for GO+.)

While this may seem excessive, investigating the global market reveals instances when Uber faced backlash for implemented an unusually high surcharge on fares during a snowstorm in New York, so it isn’t unprecedented.

The vendor went on to say that, while the sum was outrageous, the customer understood the inconvenience and risk which the vendor underwent to drive a relatively new Toyota Corolla for an hour in the rain. He was a good sport, and paid the entire fee.

But not everyone shares the same view. Sometimes, customers deny paying the full amount and when this happens the vendor simply adds the paid amount in Careem’s wallet system, and the company puts the short amount in the vendor’s account.

Uber doesn’t have a wallet system, so drivers have to seek reimbursements. Sometimes, those reimbursements aren’t provided.

Careem offers a daily guarantee to vendors and drivers upon completion of certain conditions, and a fare split of 80:20, whereas Uber offers no daily guarantee and a split of 75:25 (with the larger split going to the vendors).

More vendors find Uber more affordable and more consistent when it comes to matters of policy but that’s changing.

Consider this: Uber used to offer a ‘boost’ to its drivers, during which it paid them 60% of their total fares out of its own pocket. This incentivised vendors to join Uber.

However, recently, Uber slashed that 60% down to just 10%—a significant decline in the income of many drivers.

Careem isn’t much different. During May, Careem introduced a policy through which vendors could register their hatchback cars for the GO+ category. After making the necessary investments and bookings, by the time the vehicles started arriving, Careem scrapped the policy and moved the hatchback cars to GO instead.

Abrupt policy shifts like this remain the biggest complaint vendors have, resulting in a shortage of vehicles on the road which in return takes us back to price surcharges.

Local players

Gradually, a lot of smaller new competitors are starting to pop up in a bid to take advantage of this supply shortfall.

Paxi and Optimus Now are two such examples, capitalizing on their no Peak/Surge pricing model to attract disgruntled customers away from the already established Careem or Uber.

Identifying a gap in the market, telecom companies have also begun exploring the industry, with the likes of Jazz mLift looking to give Uber and Careem competition in the future.

The question remains, whether they can survive against their heavily funded global competitors, to whom sustaining losses is a strategic necessity.

Industry norm

Uber follows a strategy that Walmart innovated and Jeff Bezos of Amazon implemented. Bezos allowed Amazon to sustain losses for two decades by selling on lower prices, and investing any earnings back into fulfillment centers, logistics, and new products.

Today, Amazon has been profitable for eight consecutive quarters, with annual sales that topped $100 billion.

Uber is following suit: Invest heavily in the early years on pricing and self-driving cars, so that you’re able to beat competition, dominate the markets, and reach profitability after an IPO.

For the first time, Uber was able to reduce its losses to $708 million in the first quarter of 2017, against $991 million in the previous quarter through increase in revenue.

Meanwhile, Careem raised $500 million through a host of investors that included Daimler (the parent company of Mercedes) and Kingdom Holding. Since, its entry in Pakistan, Careem has also been sustaining losses through subsidizing rides, to maintain affordability.

Against such well-funded companies who have braced themselves for the future, local competition has little chance for survival. Uber and Careem with an initial boost and high incentives for vendors and drivers have already paid their price to an extent.

It is clear that these ride hailing companies have a thorough strategy and that peak and surge pricing, although attracting bad PR, is essential to that strategy.

While a price surcharge may inconvenience consumers, there is little that can be done to do away with them. This pricing strategy is simply part and parcel of the industry these companies have carved out of thin air.

The only way to ensure price surcharges will go away is for more vendors and drivers to sign up and be on the road. This means companies like Careem and Uber will need to address the concerns voiced by their driver partners to ensure a steady supply of cars in the long run.