Finding the Next Uber
Everyone wants to find the next Uber and be the company that can generate annual revenues of ~$2B in just six years. Here’s how Uber has become the envy of other companies.
Using a Customer Interface to Scale
Uber made the strategic decision to avoid purchasing its own fleet of vehicles and the “full stack” approach. Instead by focusing on developing a customer interface they exchanged some level of control for a better ability to scale. The customer interface allows them to access a huge supply of drivers and passengers.
Uber’s corporate structure also facilitates expansion and optimizes operations at the city level. While its main technology resources are centralized in San Francisco, each city is its own mini company. A general manager heads up operations and community departments which focus on the analytically-driven driver logistics and passenger relationships, respectively [1]. This setup allows Uber to customize their product offerings in each city. For example, Uberpool was launched in Bangalore, India before it was in Uber’s backyard (Palo Alto), because the product works best in a high density area where the likelihood of commuters traveling in the same direction is greater [2]. By having a customer interface that can be changed for each city, revenue can be maximized without sacrificing operational efficiency.
Using a Large Driver Network to Create Products
Uber was able to successfully disrupt the taxi industry because of its simple value proposition for both drivers and passengers. Most importantly, Uber has been able to build a large driver network because it offers a simple driver application process (versus contracting with a taxi company, applying for a taxi license, etc.) and in some cases offers up to 30% in commissions to drivers [3]. The passenger is able to dictate the location of their pickup, realize cost savings on the ride, and also match their preferred riding experience with their willingness to pay via different Uber products.
Armed with a large driver network, the company can optimize processes and overtake companies in other business segments namely delivery services. Uberpool is an example where improved vehicle utilization can be achieved because of high volume and density of both drivers and passengers. Its lower cost for passengers also can have a compounding effect for the business by making owning a car can become less attractive yielding more frequent rides. Uber’s introduction of UberEats and UberRush are examples where its superior driver network allows it drive delivery costs down and potentially crowd out competitors like PostMates [4].
Data & Analytics: Surge Pricing, Mapping, and Urban Planning
Uber has applied for a patent on its surge pricing algorithm because of the role it plays in optimizing both its revenue and operating models. It allows the company to quickly match customer demand with supply at a revenue premium [5]. The responsiveness of the pricing minimizes the possibility of a bullwhip effect. A study on Uber usage after an Ariana Grande concert at Madison Square Garden illustrates this phenomenon – the image shows the close mirroring of supply and demand [6].
The company has also invested in mapping technology and bought deCarta this past March. Superior mapping ensures travel times are reduced and passengers are provided with more accurate ETAs [7]. The driver interface was also recently updated to provide drivers with more detailed breakdowns of where surge pricing is occurring so they can be more responsive to demand.
Sources:
[1] http://www.inc.com/christine-lagorio/how-uber-hires.html
[2] http://recode.net/2015/09/21/ubers-carpool-version-uberpool-lands-in-india-before-palo-alto/
[3] http://www.forbes.com/sites/ellenhuet/2015/05/18/uber-new-uberx-tiered-commission-30-percent/
[4] http://recode.net/2015/10/14/uber-gets-serious-about-delivery-its-no-longer-an-experiment/
[5] http://www.sfgate.com/business/article/Report-says-Uber-surge-pricing-has-a-twist-some-6597012.php
[7] http://www.wired.com/2015/03/google-decarta/
[8] http://www.wired.com/2015/10/uberredesign/
[9] http://www.fastcoexist.com/3040964/boston-is-using-uber-data-to-plan-better-urban-transportation
[Description] http://recode.net/2015/08/21/leaked-doc-uber-nears-2-billion-in-revenue-expects-ipo-in-18-24-months/
Great post! I enjoyed learning how Uber is leveraging other services like mapping technology and how it is overtaking companies in other businesses. It shows that Uber is maximizing its business strategy in an innovative manner. Also, I think it’s interesting that Uber employs a model of “mini-companies” in each city as this allows Uber to customize and fit the customer’s needs. I’m curious how Uber recruits for each GM and if it uses any standard training programs that ensure the high-quality reputation of Uber. As Uber continues to grow, it will be interesting to see how it retains its culture and current operating model.
It’s been interesting to watch Uber’s success (and slip-ups) play out over the last few years. As the first-mover into the industry, they were well positioned to succeed but also well positioned to be threatened by other entrants who could observe their processes and “do them better”. Personally, I have started to use Lyft more often now because it utilizes fewer and lower surge pricing – one of it’s competitive advantages over Uber. Lyft has also been able to capitalize on Uber’s poor public relations as of late. After reading your post, I now wonder if Uber will win out through the development of its surge pricing algorithm. While annoying to me personally as I mentioned, if Uber is able to optimize its service and revenue in a way that Lyft or another ride-sharing company is not, it may triumph after all. Without sustainable operations, other ride-sharing services could just end up being a flash in the pan.
Nice post! I enjoyed reading about some of the data and details behind Uber’s user-friendly interface and experience. While it might be tempting to create a consistent product across geographies, I think it’s really key that Uber gives some level of autonomy to each city’s management team. In Hong Kong, for example, where taxis are plentiful and inexpensive, there isn’t an UberX option because there simply wouldn’t be sufficient demand. Instead, it partnered with taxi drivers to tap into their fleet, even paying them fees on top of their commissions to prioritize picking up Uber customers. I agree that Uber’s operating and business models are generally aligned and I’m also quite optimistic about the company’s longterm prospects, but it will continue to fight tough legals battle in almost all its geographies across a number of issues. From drivers-cum-employees class actions to lawsuits from abused passengers, as well as local governments cornered by taxi unions, Uber certainly has a first-mover burden as well as advantage.
Great post on the operating model of Uber, Steven! Uber is definitely a company that is set to disrupt the transportation industry at very different levels. I believe that most of Uber’s success has been due to its incredible ability to be first to market in many places and scale really fast. I wonder, however, how they are going to deal with the current regulatory backlash (in Europe, U.S. and India), and the new partnership among its main local competitors – Lyft (U.S.), Didi Kuaidi (China), Ola (India) and GrabTaxi (South East Asia). I was also wondering if you found any key differentiators between the Uber operating model and the one of any of its competitors, since I believe that being differentiated at that level is the only way they’ll be able to grow faster than any local competitor. It will be also interesting to see how all these companies will expand to complementary business models in a narrow (i.e. delivery of goods) or broader sense (i.e. car manufacturing), and which capabilities they can leverage and which ones they need to acquire to enter these markets.