Is Surge Pricing the Wave of the Future? [e147]

February 4, 2015

Nasir and Matt discuss the legalities of surge pricing and how one company is flipping the script on surge pay.

Full Podcast Transcript

NASIR: All right. Welcome to our business legal podcast where we cover business in the news and add our legal twist to the show. Mmy name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: All right. Welcome. So, again, for the second time, I feel like I just should repeat myself after Groundhog Day a couple of days ago.
We’re talking about surge pricing today. Unfortunately, we’re not focusing on Uber but I think we’ll have to talk about them, right? We get to talk about them, right?

MATT: Yeah. I mean, they’re kind of the ones that put it in the spotlight – at least recently they have. We’ll talk about surge pricing and I think everyone knows pretty much what that is but, for those that don’t, we’ll use the Uber example really quick even though I know you don’t want to. They have a certain rate for when you want to take a car or want to take a ride somewhere. But, if the demand is really high, they bump up their prices and then your ride is whatever – a multiplier of 1.5 to et cetera. So, you pay more during peak times. That’s kind of the surge pricing model. Well, there’s this company, Zappos, which I believe is, are they shoes?

NASIR: No, they do shoes but I think they do other apparel, too.

MATT: They are testing out surge pay so it’s not surge pricing per se but it’s the same sort of concept and it’s dealing with their employees in their call centers. And so, I’m not sure of the exact arrangement they have and I think it’s still relatively new, too. But, essentially, they tried this open market pilot that they tested out and it gave every employee 10 percent flexible time so you’re not working the same exact hours every single day, every single week, and the thing with this is, like I said, it’s surge pay. So, if you’re working at a time when the demand in the call center of this customer service center is really high, they actually pay you more and, if you’re working in times where it’s not, you get paid less. It’s an interesting concept.
Let’s say you’re on the East Coast and it’s early and a lot of people are calling in, especially because no one’s calling in on the West Coast, you know, it might not be as high a call time but, in the middle of the day, when both East Coast and West Coast people are calling in, the IRS is kind of a similar thing. When I call in to them, I’m realizing now that I structure my calls at a time when I think most Eastern Time zone and Central have all done for the day because that’s peak times. So, it’s an interesting concept, but I wanted to talk about the whole surge concept in general.

NASIR: I think, in this case, it’s pretty neat in that the surge pricing aspect of things, people are somewhat uncomfortable with it – not only customers are uncomfortable with it but even cities and governments are uncomfortable with it too – because there are anti-gauging laws that are put into effect in certain circumstances and, if you think about it, when Uber implements them and these other companies that may do the same thing, they do it when supply may be low and demand may be very high. But, since the surge pricing for Uber and other companies, it’s done on an algorithm or done automatically based upon how many people are requesting a ride and how many rides are available, sometimes, it can have some – I don’t know if it’s attended or unattended but – results in the sense that, during a national tragedy or a storm, for example, surge pricing can go into effect. In just this last month, we’ve seen the same thing happen in France during the last terrorist attack though the surge prices were done taken away manually but they kicked in as soon as that happened. And then, also, with this last winter storm last week on the East Coast, that was also kicked in. But the difference is now, with East Coast specifically and I think in New York City specifically – in the state of New York at least, I don’t know about the city – anti-gauging laws applies to taxis and ride-sharing services and, somehow, Uber made a deal and they announced that they basically made a price cap to 2.8 times the rate of the normal pricing so they still have a multiplier but it may not be as much as what they would have normally done, and I guess that 2.8 seems kinds of arbitrary to me but it’s based upon some deal that they made directly with the transportation department there.

MATT: Yeah, at least that’s something; at least it’s a little bit comforting for the consumer knowing that it can’t get outrageously high. Like you said, they delved the whole price gauging issue because, essentially, they’re trying to prevent consumers from being taken advantage of and I know, in California, they can’t do price gauging if it’s following some sort of state of emergency or major disaster so maybe not the same as New York where – I think I had it pulled up here – it “prohibits merchants from taking unfair advantage of consumers by selling goods or services for an ‘unconscionably excessive price’ during an abnormal disruption of the market.” I mean, that’s pretty broad. It could be a lot of different things.

NASIR: Yeah, that’s true. And just to give the other side and I’m not on this side but Uber’s justification is that, okay, in the same way Zappos is saying, “Okay. Well, if we give an increased price for the drivers to give them an incentive to go out there, there’s going to be more drivers that come out, and then the price would go down. Just as New Year’s Eve comes around or a snowstorm comes around, no one wants to be out there at that time to drive people but this extra price gives them the incentive to do so. But that’s the whole point, right? That’s the whole point with these anti-gauging laws – that it’s the same thing of bringing a bunch of bottled water and selling them for premium prices on the highway for people that are escaping some hurricane in Louisiana which also occurred, right? And so, there’s something inherently wrong with that but, again, you know, I love bashing Uber but compare the Uber culture and this concept to Zappos, right? The purpose of Zappos’ culture is that their employees actually get paid more. Who’s the so-called victim that actually has to pay more? Zappos themselves because they have to pay their employees more versus Uber which is putting the brunt of the surge pricing on the actual customers. There is concept to fair market and a free market and so forth. But, again, it just seems wrong to me.

MATT: Yeah. I mean, it’s definitely wrong. They’re claiming, you know, economic supply-and-demand model. Think of it this way: you buy gas for your car, it fluctuates like crazy all the time. If the supply is really low or the demand is really high, then gas might be really expensive. This isn’t the same thing and that’s a bad example because these cars use gas.

NASIR: Yeah.

MATT: Essentially, what they’re getting accused of – Uber and I think rightfully so – is they’re unfairly just jacking up the price when they know people need rides. You know, I get their argument that it’s going to get more people to get out there and drivers and make more money, et cetera. But they’re just taking advantage and that’s why they entered into this deal – was it the attorney general of New York? – that they would cap their multiplier.
Here’s an interesting thing. I was wondering if this was going to go expand out into other companies. The one that I was thinking of was there was a big storm on the East Coast this past week – or last week, by the time people are listening to this, or maybe on-going – and what about Netflix? Because it’s streaming internet to watch shows. What if they did some sort of surge?

NASIR: Like, maybe on the popularity of the show or maybe they charged if… I don’t know?

MATT: They’re a monthly subscription. I think it’s the same price. But, what if they said, you know, “Our price is subject to change every month, depending on how many people use it.” All the people that are watching Netflix this past week when they were stuck in their homes – and I don’t think this would be legal, it would be very hard to do, but I’m just trying to think.

NASIR: Yeah, whether the customers would buy it, yeah.

MATT: There’s other ways you could do surge pricing with things and it’ll be interesting to see if other companies try to duplicate the Uber model.

NASIR: Yeah, it’s hard to compare Zappos with Uber in the sense that it’s like literally no comparison. I mean, Zappos is known for their awesome, very innovative company culture. I mean, you can do your own research. For example, when they hire an employee, they have two sets of interviews – one that’s more classic in a sense, you know, the manager of some sort interviews them, but then they have another interviewer that their purpose of interviewing is just to evaluate the company culture fit for that particular employee. You know, I started thinking about it, on another note, started thinking about whether there’s any kind of labor law implications to paying someone more to come in at different times and so forth. Really, if any small businesses are considering doing something like that, because I’m sure it doesn’t have to be all automated like Zappos but, for certain days or times of the week that are more needed and, if you do have a flexible schedule for your employees, you would be permitted to have different pay rates, depending upon the different times and different jobs, so long as it meets the minimum requirements, as we already know. But I think there would just be difficulty in making sure that those policies are written properly, I suppose.

MATT: Yeah, and it’s got to be tricky to pull that off just because everyone – well, not everyone but – I think people would gravitate towards the hours that they could get paid more money. And so, if everyone wants to do that and other people don’t want to work the other hours, and I think that’s why they did this 10 percent flex time, you know, what if everyone wants to work this and then you say, “Well, not everyone can do it so you’re going to have to work this other time,” and then someone’s going to say, “Oh, you’re discriminating against me based on this,” and then you run into a whole problem. But I guess you could do it based on – well, I was going to say based on seniority but you might run into trouble – in terms of how long you’ve worked there.

NASIR: You can do seniority as far as picking a schedule and things like that. Seniority as in experience, not age. Keep in mind. That’s definitely a doable way to do it – doable way to do it.

MATT: We should just start charging surge pricing to our clients if we get really busy.

NASIR: I agree or just based upon the weather. If there happens to be a storm out there, then, “Sorry! I see some rain!”

MATT: Well, I think the thing is there’s a lot of things out there that are pretty similar to surge pricing and we just don’t realize it.

NASIR: You just don’t call it that, yeah.

MATT: Well, I mean, Uber and rightfully so, they should take a lot of the heat but they did take a lot of the heat even though there’s a lot of other businesses or other ways to spend money where you are indirectly paying surged prices.

NASIR: No, you’re right. Like, you can look at law firms and see, if a company is in litigation, they know that the reason litigation is so expensive is because they know that these companies can’t handle it themselves and so they get to charge a little bit more. But that’s when I think people say, “Okay. That’s the free market.” When surge pricing is unfair is when people have the need and they don’t really have any other options and they’re not in the for-profit kind of- I shouldn’t say that either – they’re not in a capacity to pay the extra price, right? Where a company that gets sued for X, Y, and Z, they’re in a business and litigation may be part of the business, but compare that to a person that needs to go from Place A to Point B, you know? They’re not necessarily in the position to pay that extra price.

MATT: Yeah, I think stranding people and so they can’t get rides is different than giving choices in litigation.

NASIR: Yeah, exactly. I think that’s it. Well, thank you for joining us and don’t forget to leave a top five review on iTunes if you would. Thank you.

MATT: A top five review?

NASIR: A top five, yeah – a top five, five star, top five review.

MATT: All right. Yeah, top five review, all right. Keep it sound and keep it smart.


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Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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