Uber – Reinventing The Taxi Station Operating Model
Can Uber sustain its business model and success while competition increase?
Uber has created a revolution in the transportation world.
Uber is a taxi fleeting company, that doesn’t own a single taxi. This unique situation, creates a highly effective alignment between the operating and business model of the company. However, this attractive position also creates some doubts regarding the sustainability of the model in the long term as competition increase.
Creating an innovative business model
Uber is a smartphones app that provides on demand transportation service to users. The company connects drivers that offer their services, and users that are interested in a convenient transportation method. The fare is set by Uber, using a dynamic pricing model – premium prices during peak hours and flat rates for off peak hours. Uber usually charges 20-30% of the fare of each ride while the remaining goes to the driver. The company ensures high quality of it services as it uses a feedback mechanism. By the end of every ride the customer can rate his driver and leave additional feedback. In order to continue using Uber, drivers must meet Uber’s standards.
Reinventing the taxi station operating model
The Drivers:
Drivers can be anyone with a driving license and a car. Uber provides the driver an alternative, flexible source of income. An interesting fact is that while one of the most important assets of the company is its drivers, they are officially not the company’s employees (as of today). In addition, the cars in use are being privately held by the drivers and the company does not hold a vehicle fleet. However, the ability of the company to attract and retain drivers, is a core essential asset to the company’s success.
The Passengers:
In order to use the service, passengers need to download the Uber app, register as users and provide payment method. Once the app is installed, the passenger can order a car, follow it on the map and contact his driver if needed. The passengers enjoy a convenient, simple service, at a relatively low cost.
Matching Supply and Demand:
An important core process in the company’s operating model is the company’s ability to connect between its drivers and users. If the company is not able to supply cars to the users fast enough – the users will use other transportation methods. If the drivers do not have enough work – they might shift to the competitors. In order to optimize this matching process, Uber uses price surge technology that allows the company to increase prices whenever demand is increasing. This unique ability increases the correlation between supply and demand, making the business model more sustainable. In addition, the company continues to develop more and more products like Uber Pool and Uber XL, customizing its services to the different types of users.
Riding forward?
An important asset is the company brand and its ability to enjoy the first mover advantage. Currently, the company is growing rapidly, creating huge revenues while maintaining a relatively small amount of assets. However, the question is how long will Uber continue to be the market leader? Are the company’s assets abilities strong and unique enough?
The competition from companies like Lyft, Sidecar and Curb is increasing, and as they are suggesting very similar services and using aggressive marketing, Uber’s sustainability is being put into question. In order to continue its momentum, Uber will need to find new sources of uniqueness and competitive advantage.
Sources:
https://www.uber.com/
http://abovethecrowd.com/2014/03/11/a-deeper-look-at-ubers-dynamic-pricing-model/
https://www.quora.com/What-is-Ubers-business-model-1
http://nextjuggernaut.com/blog/how-uber-works-business-model-revenue-uber-insights/
http://www.iplanner.net/business-financial/online/how-to-articles.aspx?article_id=business-model-uber
http://www.programmableweb.com/news/ubers-first-mover-advantage-complicates-competitors-api-strategies/analysis/2014/08/22
http://www.zacks.com/stock/news/189318/who-are-ubers-biggest-competitors
Nice write-up, Yael!
I’ve heard quite a few people suggest that the only reason Uber is able to recruit drivers is because it is too difficult for drivers to understand that they are essentially making below minimum wage (due to gas, maintenance costs, insurance, self-employment taxes, etc.). Do you think that Uber may have potentially swung the two-sided market pendulum too far in favor of riders in effort to maintain share/open new markets? If I were an Uber investor, I’d be concerned about drivers eventually realizing that they are being taken advantage of.
I’ve found unofficial Uber drivers’ forums particularly interesting to read while thinking about this topic. Here’s one example: http://uberpeople.net
Great post, Yael!
One thing that I believe distinguishes Uber from its up-and-coming competitors is its corporate center’s treatment of riders — the service is fantastic. From what I’ve seen of the Center, they are extremely accommodating to refunding rides when there are errors and going to great lengths to answer comments that are left for them. I once left my suitcase in an Uber and had a driver go across the city to return it to me. That is not something you see from competitors, Lyft in particular.
It does similarly make me wonder, though, what else can be done to make customers loyal to Uber vs. other providers. I think the add-ons like UberEats, etc. are interesting, but I think it will have to be something in the core proposition to drive deep preference.
Yael – nice job! I agree with your post on Uber’s business model and the reasons for its success, especially with respect to how its operating model matches its customer promise, such as minimal wait time, and customer and driver feedback mechanisms. While Uber has faced various regulatory pressures in the US and has overcome them, such as in New York City, they are facing further pressures overseas, such as in Paris where there have been violent protests by taxi drivers. When looking on the international scale, I’m curious to hear your views on whether you think these are temporary challenges or if there are structural factors in these markets that will keep Uber out.
Great post!
I am an Uber fan 100% because it changed the way I commuted to and from places when traveling to emerging markets for work or pleasure (ie. Asia & South America). Traveling in taxis in certain developing countries can be a hassle for foreigners specifically because you always had to have the local currency to pay for the taxi, you are exposed to dishonest drivers that take you the longest way around to your destination, and frankly it sometimes felt unsafe. With Uber, transportation abroad is safe, simple, easy to access which is something that a couple of years ago was unavailable. This being said, I completely agree that they have a lot of regulatory challenges to overcome in their international expansion not to mention facing the power and lobbying of taxi syndicates that are present pretty much in every nation. It will be very interesting to see how they will face this issues going forward.