The next time you book a cab with an app, it might be a good idea to look at your watch first. A few taxi companies in India are adopting a new pricing mechanism under which fares vary widely depending on the day and time.

The practice, termed “surge pricing”, has been embraced by Uber and Ola cabs, both of which now charge a premium for rides during peak hours. As a result, the same journey in cabs called through them can cost a rider as little as Rs 7.50 per kilometre or as much as Rs 40 per kilometre.

While passengers may feel ripped off at times, surge pricing has its defenders, who assert that drivers as well as riders gain from it.

Supply and demand

The practice of variable pricing is not new, particularly in markets where there are more buyers than sellers. Airlines follow it. As do hotels, when they charge more during holiday seasons. What Uber and Ola are doing is not dissimilar.

The rationale behind surge pricing is that during t peak hours, many people look for cabs, which are limited in number. To ensure that those who book a cab get it as promised, the demand is regulated. Uber does this by increasing the prices, so that those who shell out more are provided a cab faster.

Uber’s surge pricing formula uses a multiplier, which can fatten the bill by 1.5 to 5 times the normal fare. Ola, meanwhile, adds a flat Rs 50 charge to the fare during peak hours. These charges – levied across all car segments – help cab drivers make extra money.

Encouraging drivers

When Uber introduced surge pricing in the United States some years ago, it drew trenchant criticism from many quarters. Doubts were raised about the scale of the premium charged. But the company argued that its policy ensured availability of cabs.

Since companies like Uber and Ola do not directly employ drivers – instead acting as facilitators. The drivers feel motivated to work longer hours during holidays when paid extra, it is maintained. In India, the drivers are not obligated to take rides as long as they switch off the app on their phone.

To make sure that users are not shocked by price spikes, Uber’s app has a feature cautioning them before they book a ride about the existing multiplier. This feature even requires them to indicate that they understand the extra charge.

Customer satisfaction

Another argument given for surge pricing is that while most public transport shuts down after midnight in many Indian cities, cab services work round the clock. Higher fares guarantee that drivers work even at odd hours.

“The bottom line is that the only real alternative to dynamic pricing is a ton of customers staring at screens that read ‘No Cars Available’,” wrote Bill Gurley, a board member of Uber, in a post recently. “Uber believes that the customer dissatisfaction from cabs being unavailable would be way worse than the limited customer dissatisfaction with their dynamic pricing model.”

Uber’s claims could be questioned since the market includes other companies, like Meru Cabs and Taxiforsure, which do not use surge pricing yet. Yet, it argues that surge pricing is not as big a problem as it is made out to be since less than 10% of all Uber rides are affected by it.