Each pixel has a count. Each tile gets a 90 percentile value. Every corner gets the average of its 4 tiles. Every pixel in the currently requested tile gets a value [0, 1] based on the bi-linearly interpolated "max". It's then colored based on that final value.

Maybe unnecessarily complicated, but it does provide really good local normalization. You also get cool looking shading like in this location http://labs.strava.com/heatmap/#16/-121.76487/38.49134/gray/...