After a year and a half of keeping a flat fare on all its rides, on-demand transportation startup Lyft is set to begin a test of dynamic pricing based on demand. It’s testing out the new pricing model, which it calls “Prime Time Tips,” in Los Angeles beginning today, as a way to make more drivers available during peak demand.
Lyft historically has shied away from demand-based pricing, partly as a way to differentiate itself from competitor Uber. But as its popularity has increased, the company also faces periods in which demand outstrips supply. While the company says that it has made many backend improvements to increase ride availability, Lyft is hoping that providing higher tips during periods of high demand will encourage more drivers to take passengers.
With that in mind, the Prime Time Tips will be automatically triggered when rides outnumber drivers. Passengers will be alerted with a notification screen, à la Uber, before they choose to request a ride at the higher fare.
That said, Lyft’s initial test of Prime Time Tips varies a little bit from the way Uber currently does it. For one thing, Lyft is capping increases at 25 percent, compared to the 2x or more that Uber’s surge prices can hit.
Another way that Lyft is trying to differentiate — it says that 100 percent of any price increase during high demand will be passed on directly to drivers, with Lyft taking only its usual base fare. That contrasts from Uber in that the latter company has a fixed commission split which remains the same in periods of surge and non-surge pricing.
Lyft believes that by structuring its pricing that way, it can still incentivize drivers to keep picking up passengers, while providing a fair price to passengers.
For now, Lyft is testing the pricing scheme in Los Angeles, which is one of its oldest markets. Lyft co-founder and president John Zimmer said that one of the reasons it’s testing Prime Time Tips there is it can be too hard to find a ride there during peak demand. It’s unclear if that test will extend to its other 17 markets, but in the meantime, Lyft probably wants to see what the reaction is like in L.A. and what effect it might have in curbing demand and increasing supply there.
Kind of related: Earlier today, competitor SideCar sent an email to passengers saying that it would move from donations to a flat fare structure in California, where the Public Utilities Commission has given its approval for new ride-sharing services. That means its passengers will be able to know how much a ride will cost once they’ve entered in their starting point and destination. Zimmer told me this afternoon that Lyft, too, would be moving away from donations to a fare structure in California. Stay tuned!