How Startups Can Avoid Uber’s Pricing Fiasco

This story was originally published in Forbes in 2014.

One of the darlings of this generation of tech companies, Uber, ran into what seems to be unanticipated trouble this year: A hefty backlash over its pricing polices.

The company, which aims to disrupt taxis and black car services, started charging clients more if they took cars during peak traffic periods. The idea was that drivers would be more willing to drive then, and fewer customers would want to take cars. The result: a better match between the number of drivers and number of riders.

“Their goal was a noble one, which was to improve the supply of drivers during peak pricing,” said Huggy Rao, professor of organizational behavior at Stanford, in a lecture he gave as part of his massive online open course, Scaling Your Venture Without Screwing Up. “What perhaps the founders didn’t anticipate was the backlash. What seemed like perfect economic pricing … was perceived as an act of price gouging.”

Uber’s apparent failure to anticipate is an example of the kind of thinking that leads to what Rao calls a “clusterfug.” (You can read an insider’s perspective on Uber on Bill Gurley’s blog. He’s a board member and investor.)

I signed up for the MOOC that Huggy and his colleague, Robert Sutton, are teaching because I liked the book the duo wrote, Scaling Up Excellence, so much. (Disclosure: I edited a piece for Huggy about his book, part of the work I do freelancing for Stanford Graduate School of Business).

What leads to organizational disasters large and small, especially in rapidly growing companies? That’s one of the questions of their research. They call organizational disasters “clusterfugs.” Another example of a clusterfug: Pearl Harbor, which was, Rao says, a tragic failure to anticipate.

Uber’s backlash is of course nothing like Pearl Harbor or even more serious business clusterfugs, like United Airlines’ spate of horrific customer service screw ups a few years ago. But there’s no question that Uber’s pricing change could have been communicated in a way that seemed more honest and would have nipped the damaging controversy in the bud.

Rao and Sutton look at the deep undercurrents of thinking that cause startups to go off track. They talk about a trifecta that leads to disasters:

• Illusion: Decision makers believe that what they are scaling up is far better and easier to spread than the facts warrant

• Impatience: Decision makers believe that what they are scaling is so good and easy to spread that they rush to roll it out before it is ready, and the organization is ready

• Incompetence: Decision makers lack the requisite knowledge and skill about what they are spreading and how to spread it, which in turn transforms otherwise competent people into incompetent ones.

Executives at Uber apparently were acting under the illusion that its clients would believe the company was acting in a community-minded way. But most people, when asked to pay more, are at least a little bit angry, and not inclined either to think rationally about the supply and demand — if they were even lucky enough to get a basics economic course — or inclined to think kindly of successful startup executives.

It’s much better to acknowledge at least obliquely that your motivations are mixed, even if you sincerely believe they are not.

By Rao’s and Sutton’s analysis, illusion, impatience and incompetence spiral and then feed off each other.

What’s the antidote to the illusion? Healthy doses of worry and self-doubt, the duo write. How do you make sure you’ve got the mix right between the confidence you need to exude as a leader and the self-doubt required to make sure that you’re not falling prey to illusion?

Good executives I know employ a couple of strategies:

They hire, value and encourage, a lot, the people who challenge them inside and outside their organizations.

They routinely force themselves outside the bubble of friends, loyalists and comfortable environments. The loyalists often are the competent people who have become incompetent as they themselves have bought into the illusion.

Michael Kirven, the CEO of New York City-based tech consultancy Mondo, told me he gets on a plane every week  partly to go talk to the people in his far-flung offices to ask them what is going wrong.

“Every time I get on a plane, I think: I can’t believe I’m on another plane,” he said. “And every time I’m so thankful I did it, because it gives me something to fix.”