Uber Technologies Inc.
Uber is a personal transportation network that connects available drivers with passengers in need of a ride through a lightweight user-friendly smartphone app. As of May 2015, the Uber app and ride sharing service was operational in 58 countries and 300 cities worldwide. Uber drivers use their own vehicles and are afforded high earning potential with a flexible work schedule. Its adherence to a network orchestrator model—as opposed to the more capital-intensive service provider framework to which traditional transportation companies subscribe—has provided Uber with higher profit margins, continued growth opportunities, and the agility to respond more quickly and effectively to market changes relative to its competitors.
Uber’s dual business model delivers value to both drivers and passengers alike by catering to each group’s unique incentives in constructing a symbiosis between the two. Thinking of drivers as the “other customer” and not merely a resource deployed in providing a service to the end user has enabled Uber to cultivate a higher-quality workforce, resulting in both lower employee churn and increased customer satisfaction. Not only do Uber drivers’ hourly wages exceed those of taxi drivers, but Uber’s employees are saved the downtime and inconvenience associated with procuring a hackney carriage license and renting a vehicle from a cab company. From a fiduciary standpoint, paying drivers an 80% commission on their fares as opposed to an hourly wage more accurately ties revenues to local market share and unlocks increased analytical capability. Furthermore, having drivers use their own cars allows Uber to boost bottom line profits by saving both the capital expenditure required to invest in a fleet of company-owned vehicles as well as the operating expenses associated with insurance and repair costs. These operational decisions are directly in line with Uber’s business model aimed at converting driver satisfaction to customer satisfaction through industry-competitive employee incentives and innovative business practices.
Uber’s heavy investment in the development and iteration of its mobile app reflects an underlying commitment to continued growth and competitive performance. Connecting drivers with passengers via their smartphones eliminates the need for Uber to establish a brick and mortar presence in each new city to which they expand operations, making this a highly scalable strategy with limited barriers to future growth. This scalability also unlocks the potential for Uber to expand into contiguous service segments such as food delivery without material changes to the company’s operating model. Optimizing for ease of use, learnability, and efficiency in the app’s user interface design has won customer loyalty and mitigated competitive pressure as passengers are less likely to switch providers if doing so requires them to learn and adapt to a new technology.
The Surge Pricing algorithm is a cornerstone of Uber’s business model that has provided the company with an information edge in capitalizing on the dynamic relationship between supply and demand and willingness to pay. When there are more passengers than available drivers in a given area, the algorithm increases rates in order to equilibrate this discrepancy. The first benefit of this model is that it attracts drivers to areas offering higher rates, thus increasing their numbers in regions of high demand. Second, it narrows the initial pool of potential passengers based on how much they value a ride, allowing Uber to more accurately segment their customer base and satisfy those users who need their service the most. This creates a stronger brand image because customers will associate Uber with getting where they need to go in the times when convenience and speed were most important. Thus the Surge Pricing model serves the purpose of capturing the highest possible margins for the company while establishing a targeted base of loyal users and a positive brand perception.
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