The Competition Commission has published its report on metred taxis and e-hailing drivers, showing that the introduction of services such as Uber and Bolt has caused disruption in South Africa’s transport sector.
While the final recommendations of the commission are set to be published in detail at a later date, the findings of the report do provide an overview of how e-hailing prices are determined in the country.
The commission said that e-hailing fares are not regulated and that there are two ways in which e-hailing companies set fares.
Uber and Bolt independently set their fares, while inDriver allows passengers to set their own fare for their selected route.
Uber and Bolt fares are based, among others, on vehicle type, rates depending on demand and supply which varies per city, and traffic and weather conditions.
The trip is calculated based on these three components:
- Base fare: a fare charged to the passenger per trip;
- Time (per minute): a fare charged per minute during the trip;
- Distance (per kilometre): the fare charged per kilometre.
In setting fares, Uber and Bolt adopted an upfront pricing system where a passenger and e-hailing operator are presented with an exact fare.
In the case of Uber, this is an estimated fare; in the case of Bolt, it’s a set fare before a passenger accepts the trip.
The upfront fares are calculated based on the expected time and distance of the trip in current traffic conditions, the availability of e-hailing operators, the number of people requesting rides, and toll fees.
The consequence is that prices for the same journey may vary, depending on the prevailing demand. Dynamic pricing allows e-hailing operators to go to areas where demand is high, thus resulting in greater vehicle utilisation.
This, in turn, leads to an increase in fare-paying trips and operator’s earnings, which consequently result in lower fares for the passengers.
The below graph, included in the report, shows how these factors come into play for short trips in South Africa and the net amount drivers would actually take home after a commission has been taken:
Operators have claimed that their earnings are below minimum wage, and they cannot quit as some have invested in vehicles. The vehicle resale value is insufficient to repay the initial car purchase loan and they are therefore forced to remain in the business.
The operators also submitted that short trips are less profitable and the e-hailing companies are reluctant to increase fares.
Uber operators’ gross earnings between 2016 and 2017 has been consistent at R20 for trips less than 2km and Uber has since increased the minimum fare per trip to R25, from August 2018.
Bolt operators’ earnings have been at R20 for trips less than 2km for the period 2014 to 2018.
“Uber and Bolt have adopted a market-based approach in which the fares are determined by demand and supply,” the commission said.
“When the demand for the service outstrips supply, dynamic pricing kicks in, which increases the fares, until demand and supply normalises.
“Passengers have full transparency of pricing. The rationale provided by e-hailing companies for dynamic pricing is that it incentivises more e-hailing operators to come onto the platform in response to increased demand.
“When the market reaches equilibrium the price returns to normal.”
Bolt and Uber both said that dynamic pricing has several benefits:
- A passenger who is willing and able to pay high fares during peak times can get service, and price-sensitive passengers will wait until the price falls.
- Dynamic pricing incentivises the operator to go to an area where the price is surging, which results in supply increasing in that area, which in turn brings prices to an equilibrium.
- E-hailing operators are also incentivised to work on public holidays such as Christmas and New Year’s Eve, with an expectation of higher fares and earnings.
Uber indicated that it divides cities into hexagonal zones, to ensure that a change in fare is accurate and effective.
Each zone has its own dynamic price multiplier, based on the real-time demand and supply in that zone. The system frequently updates fares based on the latest, real-time conditions in each geographic area.
Uber said that its pricing is not simply implemented city-wide, but targeted to very small hexagonal areas. As such, e-hailing operators are notified when demand increases through an in-app map, which shows the busiest areas.
In some instances, e-hailing operators are provided with advance information about upcoming events which can improve their earnings.