Ever since I wrote Why Taxis Suck and What You Can Do About It I’ve been fascinated by Uber’s business model.
You pull up an app on your phone, hit a couple of buttons and a car will come to your location to pick you up and take you pretty much anywhere you wish. You can watch the car’s progress as it approaches you on a map on your phone. When you arrive at your destination you get out of the vehicle and go, there’s no payment transaction — that’s all handled electronically with your card on file, and a receipt is emailed to you. Tip is included.
That’s revolutionized transportation for me. The traditional Uber black car model is great as far as it goes, but UberX — calling on someone with a car and spare time — is price-competitive with a taxi and far more convenient to ‘hail’. Plus the cars are generally in better repair, and since you rate the driver (and drivers need to maintain high ratings to stay on with Uber), they’re generally nicer too.
The business model is to take underutilized resources — downtime of professional drivers who would otherwise just sit around and wait for their next scheduled pickup, spare time for individuals with a car that isn’t being used — and make those resources more efficient. Uber takes a percentage of the fare, and the driver makes money.
Ultimately they are about making more efficient use of resources generally, and since they are tracking vehicles on the go they can be about moving ‘stuff’ as well as people. Uber’s corner store will bring you condoms in certain markets. UberTree has delivered Christmas trees. They’ve had ice cream on demand.
It’s the ability to scale that provides a glimmer of hope that Uber could actually become the company implied by its $18 billion valuation.
I’m skeptical it gets there but the underlying economic revolution enabled by technology is real. There are other competitors, of course, like Lyft — I tend to use Uber because it’s been in the cities I need and the initial idea of riding in the front seat and giving the driver a fist bump sort of turned me off. I prefer to remain more distant and anonymous in my travels.
One other avenue for Uber to expand its market presence and revenue is through greater product segmentation. There’s huge variability in UberX — you might get a Hyundai which meets Uber’s minimum standards, or you might get a luxury car, whatever the driver who accepts your ride happens to own.
In Los Angeles and Orange County they’ve launched UberPlus which differentiates the vehicle you’ll be picked up in. For a premium over UberX, but less money than UberBlack, you can get rides from BMW 3 Series, Mercedes-Benz C-Classes and Audi A4s and similar vehicles.
There are several possible effects here.
- This allows drivers with nicer cars to make more. It brings more drivers (and thus capacity) into the Uber system.
- It lets Uber earn a price premium over their current UberX product, often charging more money to customers for rides they would otherwise provide today (by giving those customers something they’ll pay more for).
- At the same time it could pull business away from the more expensive UberBlack, which could then put downward pricing pressure on the service.
All of these are potential good news for Uber, who benefits from more drivers and more rides and from charging more for things that people will pay more for. It’s all about more efficient utilization of resources.
If you haven’t used Uber yet they’ll give you $30 off of your first ride. (And I get the same for referring you.) In DC, UberX (a dude with their car) starts at $7 while a black car starts at $12. So make it a worthwhile ride to maximize the credit. For me, a black car from work to the airport is $29 or so for instance.
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