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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
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smartphones, the process is well integrated into peoples 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 Porters 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 rgime
of taxi regulations that merely protect medallion holders monopoly rents. Rather, Ubers 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.
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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
consumers mood.
Drivers have also expressed unhappiness with Ubers 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 Ubers 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.
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This independent contractor status has also created controversy for drivers. Drivers claim that Ubers
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 Ubers Unicorn, it shows that Ubers 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.
Thats an annual salary of $22,280 which is similar to a median taxi drivers 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 Ubers 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 Ubers 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 Ubers 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. Ubers 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 Ubers 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. Ubers 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. Ubers 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.
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Ultimately, Ubers 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 Ubers 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. Ubers superior access to funding is the driving
force behind their sustainable advantage.
Ubers 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 customers 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. Ubers sustainability will depend on
the companys 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
dynamiccalled the network effectmay 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.

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 theres 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 drivers 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
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Source: A Disruptive Cab Ride to Riches: The Uber Payoff, Forbes, June 2014

Exhibit 2

References
1. Allison Grisworld, In search of Ubers 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