Name: Pooja Jha Case Study: Uber Professor: Nagaraj Sivasubramaniam Introduction: Uber Technologies Inc. (Uber) is a tech startup that provides ridesharing services by facilitating a connection between independent contractors (drivers) and riders with the use of an app or software. Uber has expanded its operations to over 60 countries around the world and is valued at around $51 billion with net commission from drivers to be between $1.5-$2 billion. Because its services costs less than taking a traditional taxi, in the few years it has been in business, Uber and similar ridesharing services have upended the taxi industry. The company has experienced resounding success and is looking toward expansion both internationally and within the United States. Travis Kalanick and Garrett Camp, the founders, developed a smartphone application to connect drivers-forhire with people needing rides to a destination in their city. Consumers liked the Uber app because of its convenience and ease-of-use. After the mobile-app is downloaded to their smartphones, passengers can pay for the rides-for-hire service through credit card and not worry about tips. This made Uber enormously successful in a short period of time. Uber does not maintain automobile inventory for drivers, such as a fleet of taxicabs or limousines. Instead, each driver-for-hire supplies his or her own personal automobile, gas, insurance, and maintenance of his or her own car. Drivers can drive their own cars where they want when they want, providing them with significant freedom to run their own small businesses. In 2013, its revenues were leaked to be $500 million with a net revenue of more than $100 million which grew to $400 million in 2014. Business Model: In efforts to cater to the growing instant gratification need, Uber provides an on-demand car service app powered through the smartphone platform. The software company connects drivers to passengers through the app seamlessly, making the process user-friendly and eliminating money transactions. Uber caters to several target markets by providing differentiated services. The types of available cars include UberX, Taxi, Black, SUV, and LUX . The most affordable option is UberX, which directly competes with traditional taxi services. Uber is amongst the leaders in the technology for mobile car shuttling services. Only after a few years, this disruptive technology has sent a noticeable jolt down the taxicab and limo market. Being the first firm to market, Uber has had the preliminary opportunity to enter profitable areas, recruit quality drivers, and establish the brand before its competitors. This advantage allowed Uber to grasp the biggest market share and establish itself as a global company. Uber also identified a quick way to connect drivers and passengers using a mobile platform. Considering the growing number of people using 1
smartphones, the process is well integrated into people’s lifestyles with the help of a user-friendly application. This innovative business model has been incredibly successful for Uber, which is reflected by the fact that its net revenue has grown to $400 million since 2009. Uber has made a historically expensive and inaccessible service cheaper and more accessible, which makes it possible for consumers to consume more thus increasing the size of the market. (Exhibit 1) Porters 5 forces: Based on Porter’s 5 forces model, the industry attractiveness is moderate. The threat of potential entrants is high as there are no proprietary or legal elements that can prevent or make it difficult for a new entrants from competing in the industry. Also the capital investment required is low. The bargaining power of supplier is low as the main supplier for Uber are the drivers. Because there are so many drivers available, this is not an issue for Uber. The bargaining power of buyers is low-moderate. Buyers have a variety of options to choose from in terms of transportation without any switching cost. However, Uber presents a variety of services from the low-cost Uber X to the luxurious UberLUX that attract both price sensitive and quality seeking riders. The threat from substitutes is moderate to high as the only biggest two substitute for Uber is public transport and self-driving. Although, Uber is said to be more convenient and a low cost option for the customers, buyers can always switch to the other options as there is a minimal or no switching cost for them. The competitive rivalry is moderate to high as there many competitors like the taxi-cab, livery services, and similar ridesharing services with little or no differentiation in the service. But in spite of the fact the industry is not very attractive presently, the industry is relatively immature. There is a huge potential for growth. Should the industry mature there is a huge profit to be reaped from the sheer volume of potential customers that is still untapped. In addition, Uber has the resources to secure those potential customers. Of all the competitors in the industry, Uber is the one that has the best odds of becoming the industry leader. If Uber survives the currently crowded industry, it will become the leader in network transportation and prove to be an extremely lucrative company. Price Surging and marketing tactics: Uber is known for having an aggressive marketing tactics which have ranged from ignoring the local regulations to poaching of drivers from other ride sharing services. This has led to a lot of bad press in the recent years. While Uber is extremely aggressive toward competitors and seems to disregard the law when convenient, its success is not based just on regulatory arbitrage. Nor is it simply toppling an ancient régime of taxi regulations that merely protect medallion holders’ monopoly rents. Rather, Uber’s key innovation lies in having reduced the transaction costs that otherwise plague the sector and provided the justification for its extensive regulation in the first place. I feel as long as it strives to better its customer service and innovate, coupled with the aggressive marketing, it will certainly help the company to capture more of the market share. 2
Next is the criticism regarding dynamic pricing. Uber operates in a market with large fluctuations in demand and a variable supply of drivers. Drivers are free to work whenever they want and must be incentivized to provide services. Under these conditions, economic theory tells us that using prices to signal to riders that rides are scarce and inducing drivers to forgo other activities will close the gap between supply and demand and lead to improved outcomes for both riders (as a whole) and drivers. During periods of excessive demand or scarce supply, when there are far more riders than drivers, Uber increases its normal fares with a multiplier whose value depends on scarcity of available drivers. This socalled surge pricing uses microeconomics to calculate a market price for riders and drivers alike. The goal of surge pricing is to find the “equilibrium price” at which driver supply matches rider demand and riders’ wait time is minimized. But surge pricing, although not necessarily a bad thing have led to bad press for the company. Concerns about surge pricing stem from the way in which it is structured and also from how it is explained to consumers. I have mentioned in my recommendations how Uber can address this issue. Drivers Model: Is it economically viable Uber operates in an industry where trust between strangers is vital. This trust ensures a safe and comfortable ride for both passenger and driver. Uber has developed a rating system to help assure this trust and reliability between passengers and drivers, called a rideshare ratings system. Rideshare rating systems pose a unique challenge for Uber because of the way they are set up and the level of rider objectivity. Uber's insistent policy of maintaining a five-star fleet can put drivers at a disadvantage. Low driver scores can mean drivers are forced to take remedial classes where they learn about safe driving techniques and driver etiquette. Those who fail to increase their scores risk suspension or permanent deactivation. Because consumers have different views of what constitutes quality, it can be argued that Uber drivers are placed at the mercy of the consumer’s mood. Drivers have also expressed unhappiness with Uber’s pay. Uber will often lower fare rates in order to gain a competitive advantage in different markets, which cuts into driver earnings. Additionally, drivers are driving their own cars and spending their personal funds on upkeep and insurance. In addition to this because Uber drivers are not employees but independent contractors, Uber is not responsible to give them health benefits, retirement, disability, vacation leaves etc. The only thing the drivers are satisfied are flexible hours and easy of becoming an independent contractor. Uber has begun to guarantee hourly earnings of $25 per hour for its drivers, but to qualify drivers have to comply with Uber’s rules including accepting 90 percent of ride requests, doing one ride per hour, and being online 50 out of 60 minutes. Critics say these restrictions effectively keep drivers from working for other ride sharing services. Since Uber drivers are independent contractors and not employees of the company, so they have the option to work for competitors. However, these new criteria may be a way to keep drivers working for Uber and no one else. 3
This independent contractor status has also created controversy for drivers. Drivers claim that Uber’s requirements make them more employees than independent contractors. For instance, Uber has certain rules about types of car and soliciting business. Disgruntled drivers have staged protests and filed lawsuits against the firm. If we look at the opportunity cost and not only the gross pay per hour we find some unimpressive results. For example, in the article, In search for Uber’s Unicorn, it shows that Uber’s claim that the driver that may earn up to $30 per hour before taxes does not factor in other costs such as, taxes, gas price, insurance, maintenance etc. When we factor in these costs, it leaves the drivers with around $12 per hour. That’s an annual salary of $22,280 which is similar to a median taxi driver’s salary in US. If we consider the surge pricing, it might go up to $30,000-$50,000 but it is nowhere close to $90,000, as per Uber’s claims. For earning an income of $100,000(pretax) an Uber driver has to take 120 rides per week which does not seem feasible. Hence I feel that Uber drivers are not very well taken care of as the company does not provide them with any benefits and even earning wise, it is not more economically attractive than taxi or a limo. The only thing that is good about Uber is the ease of becoming an independent contractor and the possibility of flexible hours. Tetra threat framework: Macro-level industry outlook alone will not determine Uber’s potential for success in the industry. In order to gain a holistic understanding of Uber, we must examine the sustainable advantages Uber has over its competitors. In order to determine Uber’s sustainable advantages, we will examine the threat of imitation, substitution, slack and holdup. Uber is in a business, in which the threat of imitation is high as there are no patents protecting the technology at present. Uber’s economic viability is relatively sound, but undifferentiated from its competitors. In terms of proprietary elements, Uber has an advantage over its competitor in the sense that it have filed for close to 11 patents. Although the patent is still pending, Uber still own more proprietary elements compared to their competitors. Since their competitors utilize technology that not only function similarly, but also look similar to Uber’s software, Uber can potentially sue their competitors once their patents are approved. Uber has no proprietary elements for the time being but this might change in the future. For now the treat of imitation seem pretty high. The biggest hold up for Uber is not the customer and driver acquisition and retention cost. Uber’s sole fixed cost is their app and software hosting services. Software and hosting services are inexpensive and can be maintained by contribution margins. Operating cash cycle is also relatively short since payments are done electronically. Uber’s biggest hold up concern is its high customer acquisition and retention cost, especially in a highly competitive environment. Since competitors’ business structure is undifferentiated, Uber has no sustainable advantage in terms of economic viability and hence has need to work on being one step ahead of the competitors to keep and expand its market share. 4
Ultimately, Uber’s competitive advantage comes from their access to resources that are unavailable to competitors. Uber has received over $51billion in funding so far. The number is especially impressive considering Uber has way more funding than their competitors.(Lyft has raised $2.01billion in 9 rounds).The access to extra capital allows Uber to spend more money on acquiring more drivers, pushing into more markets, and developing better infrastructure. As a result of Uber’s superior access to capital, it is present in 60 different countries and over 330 cities worldwide. Their competitor will have an extremely difficult time reproducing results like this, especially given their funding. Uber’s superior access to funding is the driving force behind their sustainable advantage. Uber’s success can be attributed to the fact that the company used the blue ocean strategy by eliminating the hassles of booking taxi, ease of payment, no tipping, platform to voice customer’s opinions and raising the standard of customer service in this industry. It created a new market which in initial stages was uncontested market space but in the growth stage competitors flooded the market. Uber’s sustainability will depend on the company’s ability to continuously innovate and stay ahead of the competition while keeping or increasing the customer service. Growth Strategy: Uber is valued by investors at $51 billion with a net revenue of $400 million. The question here is, is the company really worth $51 billion or are the investors being too optimistic. As per me, unless something drastically goes wrong, the company can prove that it's worth $51 billion when it goes public. The valuation of this company is clearly based on massive expansion plans. One of the reasons is the Big Market size. Uber is offering car service in 330 cities in 60 countries now, up from 60 cities in 21 countries just 2 year ago. It has its presence in all the big markets, be it in Asia, America or Europe. Taxi and limousine companies around the world generate maybe $100 billion a year, estimates New York University's Aswath Damodaran, a finance professor. Secondly, in some businesses, the more people who use a service, the more valuable it becomes. For example, the telephone companies or Facebook. With 1.35 billion people on Facebook, more people want to get on line to connect with friends, and that drives ad revenue. The same dynamic—called the network effect—may apply to Uber, at least on a local level. The idea is that more people using Uber will attract more drivers, which will cut wait times and attract still more drivers, which will attract more passengers in a virtuous feedback loop of growth and profits. And lastly, Uber is expanding into other areas like logistics and also investing in R&D to dilute its risks. Hence I feel in the long run, Uber has a bright future and expansion opportunities are great. It is therefore important for Uber to ensure the safety of their riders and the drivers. They should also adopt controls to ensure that independent contractors using their app obeys relevant country laws. Uber has to address these issues to uphold the trust of their customers and achieve long-term market success.
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Recommendations 1. In order to have more control over the surge pricing model and better its image in the minds of the consumers, it should cap the surge multiplier at a reasonable number and communicate the cap clearly. For the company, an open-ended cap on the multiplier is counterproductive for two important reasons. First, it creates the impression that Uber is out to exploit riders by extracting every single dollar it can. Second, the open-endedness generates uncertainty. Even though Uber has gotten better at notifying riders when and to what degree surge pricing is in effect, the fact that there’s no known ceiling is a PR problem and a customer relations issue. Capping it at say 5X and communicating it clearly will help in a long run in assuaging consumer angst and media criticism. 2. Like any other two-sided market makers, Uber enlarges the network by subsidizing one side of the market and charging the other side the full price. Specifically, car owners pay nothing to register and switch on their availability on the Uber mobile app. In return, they are rewarded by dynamically priced fares paid by ride hailers based on real-time supply and demand conditions. Although this pricing model is not flawed, Uber is not taking any special effort to tell its customers the benefit of the same. As a result, there is a lot of negative connotation associated with this type of dynamic pricing. Uber should market the beneficial consequences of surge pricing to riders and rebrand the surge pricing concept. Many riders only see the high price they are paying, failing to account for the significant benefits received in exchange. Uber can send an end of the trip email or text saying that “Because of the surge price, you had to wait 30 minutes less this evening” or “It would have taken you 45 minutes to reach your destination had you taken a taxi, but it only took you 20 minutes today because you used us”. Also it can rebrand surge pricing with something more positive such as convenience pricing or priority pricing. 3. Uber should focus on valuing drivers as much as it values its customers. Instead of trying to poach drivers from its competitors, it can focus on enhancing their own driver’s experience which can prove helpful to the company in the long run, without its name coming up in any kind of unwanted controversy. 4. Although, Uber has a first mover advantage over its direct competitors that should allow it to build highly scalable competencies for the next innovation, but that is no guarantee of future success. In a world where technology, customers, and markets are changing faster than ever, to maintain a transient competitive advantage a firm has to constantly reconfigure its corporate and business strategies to deal with the threat of imitation and regulatory challenges.
Exhibit 1 6
Source: A Disruptive Cab Ride to Riches: The Uber Payoff, Forbes, June 2014
Exhibit 2
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References 1. Allison Grisworld, In search of Uber’s Unicorn, Slate 2. Hagiu, A., & Wright, J. (2013). Do you really want to be an eBay, Harvard Business Review 3. Eisenmann, T., Parker, G., & Van Alstyne, M. W. (2006). Strategies for two-sided markets, Harvard Business Review 4. Hagiu, A. (2009). Multi-sided platforms: From microfoundations to design and expansion strategies, Harvard Business School Strategy Unit Working Paper
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