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Uber Pricing Strategies and Marketing Communications

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Teaching Note

Synopsis

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Many believe that technology-enabled disruptive business models are key to our economy’s growth.
Many also believe that, all too often, business regulation forecloses opportunity for innovation and protects
incumbents without offering consumers sufficient compensatory protection. This case presents Uber’s
experience and provides an opportunity to examine value propositions, customer relationships, customer
segments, market positioning, and the role of government regulation in business.

By the spring of 2014, Uber Technologies, Inc., was on a roll, rapidly expanding service to untapped
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markets and gaining new and enthusiastic customers. Uber began as a private car service, using licensed limo
drivers who owned black town cars to cater to Silicon Valley’s executives. Uber’s mobile app linked potential
passengers to nearby drivers, calculated fares using its algorithms, and charged the customer’s credit card
stored in his or her Uber profile. Without directly employing drivers or buying cars, Uber created a branded
car service complete with a quality control system that directly affected the ability of drivers to generate repeat
business. Drivers easily found passengers. Consumers found Uber limos more convenient than hailing a cab.
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Perhaps motivated to grow faster or out of a perceived threat of lower-priced competitors (e.g., Lyft), the
company soon launched UberX. This service was priced lower, permitted smaller vehicles, and utilized drivers
who were not commercially licensed. Trade groups representing taxicabs took notice and promptly called for
the prohibition of what some called “bogus” and “rogue” ride-sharing services in the name of public safety.
Critics charged that UberX drivers lacked adequate training and weren’t screened—thereby endangering
consumers—and that ride-sharing services created unfair competition in the taxi industry. City governments
debated limits to the number of cars on the road that ride-sharing companies could offer. Given the pressure
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of impending legislation and growing negative public attention, Uber’s management would have to respond.
Was this the time to persevere or pivot? If persevere, how? If pivot, toward what?

Teaching Objectives

 Evaluate business models for digital intermediaries


 Apply the Lean start-up framework for evaluating business concepts
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 Recognize effects of government regulations in a market

This teaching note was prepared by Paul Farris, Landmark Communications Professor of Business Administration, and Gerry Yemen, Senior
Researcher. Copyright  2014 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-
mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form
or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

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Timing and Course Placement

Suitable for the MBA, MBA for Executives (EMBA), Global MBA for Executives (GEMBA), and
executive education programs, this case was successfully used as a closing stage for a first-year GEMBA
marketing course in a module on digital value chains and branding. In addition, it was used in a second-year

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MBA elective on integrated marketing communications and promotion. This teaching note was designed for
a one-day, 90-minute class.

Student Assignment

Suggested reading

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Virginia Weiler, Paul Farris, Gerry Yemen, and Kusum Ailawadi, “Uber Pricing Strategies and Marketing
Communications,” UVA-M-0871 (Charlottesville, VA: Darden Business Publishing, 2014).

Ramon Casadesus-Masanell and Joan E. Ricart, “How to Design A Winning Business Model,” Harvard
Business Review, January 2011.

Steve Blank, “Why the Lean Start-Up Changes Everything,” Harvard Business Review, May 2013.
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Hanna Halaburda and Felix Oberholzer-Gee, “The Limits of Scale,” Harvard Business Review, April 2014.

Study questions

1. How did Uber achieve its present position?


2. Where are the positive feedback loops? Is Uber losing momentum?
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3. Should Uber continue or pivot?


4. Was surge pricing a distraction or a core part of the business model?
5. Why did the use of social media fail Uber in Seattle?

Suggested Time Plan for 90-Minute Class


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5 min. Bridge to last class.

10 min. Has anyone used Uber services? How does it work?

20 min. What does Uber’s business model look like? What is Uber selling? What is its value proposition?

Run through the components of the business model matrix using a choice of questions offered
on Board One. Fill in student responses on the chalk or white board for UberBlack and SUV
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only.

15 min. What, if anything, changes when Uber expands to the taxicab market?

Move focus to addition of UberX and fill in differences to the matrix on the board as in Board
Two.

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20 min. What feedback loops does Uber possess? Are there negative loops?

20 min. What should Uber do? Continue on its expansion of UberX? With competitors and regulators taking notice,
should Uber consider pivoting? What about its surge pricing tactic?

How does Seattle’s limit of 150 cars per ride-share company affect the firm? Was there more Uber could have

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done to influence the process or get its voice heard in city council chambers?

Board Plan

Board one

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UberBlack

What value does the company deliver to


Value proposition customers? Which one of Uber’s customers’
problems needs solving?

Who are Uber’s key partners? Who are its key


Key partners
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suppliers?

What key activities does Uber’s value proposition


Key activities require? What are Uber’s key metrics?

What key resources does Uber’s value proposition


Key resources require? What is needed to solve customers’
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problems?
How does Uber get, keep, and grow customers?
Customer relationships Which customer relationships has Uber
established?
Through which channels do Uber’s customer
Channels segments want to be reached?
For whom is Uber creating value? Who are Uber’s
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Customer segments most important customers? What are the customer


archetypes?
What are the most important costs inherent to
Cost structures Uber’s business model? Which resources are most
expensive? Which activities are most expensive?
For what value are Uber’s customers willing to
Revenue streams pay? For what do they currently pay? What is the
revenue model? What are Uber’s pricing strategies?
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Board two

UberBlack UberX
Fast, clean, convenient, no cash, rating
Value proposition control, trusted service

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Regulators/public policy makers;
Key partners Livery drivers welcoming regulatory environments;
drivers
Ensure drivers meet passenger
Recruit drivers; manage and grow
Key activities balance of supply and demand
expectations around cleanliness,
responsiveness, and attitude
Technology; commercially licensed
Key resources drivers
Willing, capable drivers

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Word of mouth; accelerants; high
Customer relationships service levels; passenger/driver Lobbying local governments
rankings
Channels Mobile: smartphone, text, cell

Customer segments Corporate; social events; affluent users Regular taxicab passengers
80% revenue to drivers, marketing,
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Costs insurance, software
Pricing tiers: luxury, SUV, black car; Pricing tiers with lower-priced UberX;
Revenues surge pricing add-ons such as baby seat/bike rack

Discussion Questions and Student Analysis


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Before class, instructors might want to generate a blank table similar to Steve Blank’s business model
canvas on the board.

1. How did Uber achieve its present position?

The fun part of this case is the discussion of how Uber users (passengers) are recruited. It is worthwhile
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to poll the Uber users in class and ask them how they first became aware of Uber and when they downloaded
the app, signed up with their credit card, made their first trip, and so forth. The reason for this poll is to draw
out information about how the firm operates and to set the backdrop based on customer experience. Most
students will likely have had an experience with UberX. Allow the discussion to run its course until someone
who has used the UberBlack car service speaks, or ask if anyone has used it. The next part of the discussion
focuses solely on UberBlack.

Uber entered the market as a black car service. The company recruited professional drivers who already
had cars, insurance, and commercial licenses, and added software and payment services that made it much
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more convenient for potential passengers to hail drivers. Further, since Uber calculated the payment,
customers knew the cost and driver tip up front, making for a transparency that some users trusted. The only
variable, the exact route taken, was at least subject to review and protest.

Despite Uber’s success in the space, expanding the market for black car services was not without its
problems. Late-night passengers, and those unaccustomed to black car services, were more likely to be
intoxicated and boisterous. In an effort to protect drivers and passengers, Uber developed a system that

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allowed Uber drivers to rate passengers and passengers to rate drivers. That system imposed a level of
individual quality control that was heretofore only possible for frequent users of limo services. This
“branding” of individual drivers through the Uber app and star rating system were things that most Uber
users valued highly.

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At this point, instructors may want to start to fill in the empty matrix on the board box by box, again
only focusing on Uber’s black car services. What does Uber’s business model look like? Once the discussion
reaches an appropriate stage, go back, add UberX service, and see how much of the matrix changes.
Instructors could ask, “What is Uber selling? What is its value proposition?” A value proposition is about
customers you want to serve, how you add value to those customers, and how you do it better than the
competition.

Value proposition: Uber created branded car services that ensured product quality, which is the first

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function of a brand—not just ease of requesting service, obtaining an immediate response (even if there were
times passengers were required to wait a bit), and making payment, but clean cars, polite drivers, and a
relevant driver/passenger rating system.

Key partners: With the limousine service, the only partners Uber had were livery drivers who were
willing to become Uber drivers. Without directly employing drivers or buying cars, Uber created a system that
directly affected the ability of drivers to generate repeat business.
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Key activities: Vital to the business model is Uber’s ability to recruit drivers. Uber must manage and
grow the balance of supply and demand.

Key resources: Most obvious is Uber’s technology. Without it, drivers and passengers cannot be
matched. Willing, competent drivers are also critical to a successful model. Two-way channel communication
is also key—Uber can call drivers and drivers can call Uber.
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Customer relationship: This is almost entirely word of mouth coupled with the accelerants of special
events, some organized by Uber (e.g., Christmas tree delivery) and some not. Uber uses Red Bull seeding
tactics with sophisticated acceleration. It needs to keep service levels high and word-of-mouth experiences
positive. According to Emanuel Rosen, author of The Anatomy of Buzz: How to Create Word-of-Mouth Marketing,
consumers who are affected by word of mouth are those who are connected to each other. Is Uber’s target
market younger, wealthier? How connected are Uber’s customers? Could Uber harness the connectivity of
consumers?
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Both Rosen and author Malcolm Gladwell give the same advice: harness “hubs” or “mavens” (in older
language, “opinion leaders”). Rosen suggests that early adopters and hubs are related, but not identical,
concepts. (Again, that is similar to the older concept of opinion leaders.) For an idea to be successful, it must
move beyond local groups, and weak ties help with that. Seeding is another technique. People in the same
circle are exposed to the same information. For example, Rosen cites a campaign that sent influential
teenagers (cheerleaders, sports captains) free music in the mail and asked them to discuss the music with
friends and recommend potential hits. The argument is that Uber would need to give people something
interesting to talk about—it could be a rumor, an obscure or interesting product fact, or an experience.
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Would surge pricing fit the bill?

The company has little investment in assets (i.e., no cars, few employees), so it costs little to run it. Most
investment in building and keeping customers is through Uber’s ranking app and marketing efforts.

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Channel: Mobile marketing is a big deal, and that is a clear focus. Customers are managed through
smartphone apps and text, e-mail, and phone communications. Communications can be customized based on
customer preferences.

Customer segments: Initially corporate clients, partygoers, and affluent users.

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Costs: The most important costs are for marketing. Where should Uber spend the most marketing
money? B2C or B2B? Tactics for recruiting drivers? Uber needs to drive both sides of the two-sided network
and keep it balanced. The firm needs to scale at the right pace and to the right places, which means matching
city networks. If a lot of San Francisco–based Uber users travel to Los Angeles, Seattle, Portland, or New
York City, focus there. Instructors could ask students about the Halaburda and Oberholzer-Gee reading on
mistakes in scaling too fast—was Uber mismatching types of customers?

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Revenue streams: Special events and holidays provided an opportunity to showcase Uber’s model, and
the company was able to deliver on key nights such as New Year’s Eve in San Francisco—a city notorious for
a lack of taxis—which drove buzz for the new service. As the case points out, New York Fashion Week
generated heavy usage. These events created intense demand and pressure that motivate new users to take
their first Uber ride, driving spikes in new riders and total rides.

The issue of surge pricing is discussed later in class, but instructors will want to note that although there
was likely some short-term revenue gain, Uber’s reduction of the tactic seems to suggest that cautionary use
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of it might be in order. Instructors could emphasize that Uber has a $200 million margin to spend ($1 billion
in revenue  20%). What are they doing with that money? Most of it may be for recruiting drivers.

Once the matrix focusing on UberBlack is complete, instructors could ask the class to consider each
component as Uber moved into the taxicab market. UberX was priced lower, permitted smaller vehicles, and
utilized drivers who were not commercially licensed. Uber is operating in the gray areas of regulation with this
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service. In many ways, Uber competes in areas that have historically required local government licenses and
approval. Those local governments have to give at least tacit approval, but marshaling popular support via
social media is a key activity that Uber must master as the opposition becomes cognizant of the threat Uber
represents. We sometimes make the observation that Uber has added a “middleman” layer between driver
and passenger, making the entire transaction more efficient for both. All of this, of course, is enabled by
mobile technologies that didn’t exist a few years ago.
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As an aside, consider another automobile technology (plug-in electric cars) that has Tesla attempting to
remove the middleman (auto dealers) with respect to distribution channels. Companies need to consider the
strategic stance they will take with respect to the regulations governing the markets they operate in; new
technologies are rendering regulations inappropriate in many cases, but it is still risky to push too hard too
fast. Tesla’s high-profile investors and deep pockets enable it to take positions that other companies would
likely avoid.

2. Where are the positive feedback loops? Is Uber losing momentum?

There are at least two loops that students will be able to easily identify: passengers and drivers (more
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passengers push demand for more drivers; more drivers means more convenience for passengers) and
business growth and investors (growth brings in dollars and the dollars are available to spend on marketing to
grow the business). Other positive feedback loops would be between investment funds and funds available to
further develop technology and expand Uber services (UberBlack, UberX, UberSUV, UberFamily, and a
more recent addition since the case was written, UberPedal, which is a car equipped with a bike rack).
Students may offer more ideas that would expand Uber into other areas. Of course, there are some negative

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feedback loops that Uber will need to face, such as regulation and competitive reaction, entry of competitive
services, and taxis adapting through use of hailing apps.

Several scholars have argued that to be sustainable, business models must identify and nurture the positive
feedback loops. Halaburda and Oberholzer-Gee caution that unless the right segments are identified, this can

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be difficult to achieve. Uber has the challenge of growing both sides of a two-sided network (drivers and
passengers) at the right pace in order to balance supply and demand. In our view, how to grow in order to
maximize the balance and synergies of both sides is an important and big point.

3. Should Uber continue or pivot?

With so many growth opportunities, it is difficult to predict which path Uber will take. To ensure
survival, the company could leverage expansion opportunities by moving into smaller cities or places that

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don’t have taxi service; buying or running taxis out of business; or delivering people and packages, dry
cleaning, or groceries. There is no shortage of ideas; however, taking the taxi services on directly (as with
UberX) has not been a universally successful move. The judge (if not jury) is still out on whether Uber will
succeed in disrupting the taxi industry. For more information and some useful observations on the how the
taxi industry is largely controlled by big investors and is rarely a “mom-and-pop” operation, instructors could
share this link to Emily Badger’s June 20, 2014, Washington Post Wonkblog article:
http://www.washingtonpost.com/blogs/wonkblog/wp/2014/06/20/taxi-medallions-have-been-the-best-
investment-in-america-for-years-now-uber-may-be-changing-that.
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4. Was surge pricing a distraction or a core part of the business model?

Surge pricing seems to have attracted more negative reaction than positive. The idea that Uber would
bring more drivers into the market by increasing prices makes economic sense, but it is unclear whether it
worked to actually increase the number of drivers. Further, the company seems to have reduced the extreme
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multiples it used in the beginning (8 times the normal rate) to what most consumers would perceive as more
reasonable multiples (1.5 to 2 times the normal rate). In the end, Uber seemed to do a better job of
communicating the reasons for the “surge” and providing confirmation that customers understood pricing
before they booked than it did convincing users it had increased the number of available rides.

5. Why did the use of social media fail Uber in Seattle?

When local governments wanted to pass regulation to directly affect ride-share firms, Uber countered
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that it was not a transportation company but a network that merely connected drivers and passengers, much as
travel websites linked passengers and airlines. Uber reached out to users on Twitter, Facebook, YouTube, and
its website to lobby public officials on its behalf. Although certainly some users supported the firm’s efforts,
Uber lost its fight to remain unregulated in Seattle (ride-share firms were limited to using 150 cars at one
time) but the social media battle continued.

Students will likely offer several reasons why Uber’s efforts failed. For example, someone might note that
social media can be extremely effective at uniting people to remove dictators (Hosni Mubarak in Egypt), seek
donors for transplants (Chris Strouth’s plea for a kidney), commit random acts of kindness (pay it forward by
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buying a meal or paying a toll for the person behind you), or connect for social good initiatives (the United
Nations Social Good Summit). But is the medium really as effective at uniting for a commercial effort that
may not be accessible to the average person? For the most part, the average passenger needing a ride may not
be able to afford Uber’s services. Uber is still probably only relevant to those with higher incomes. Is that
sufficient for a real social movement?

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There may be someone who notes that Uber’s social media efforts might be more effective at motivating
and recruiting drivers for UberX than rallying the faithful to become activists on the firm’s account.

Given the importance of maintaining good public relations in order to achieve the regulatory freedom
that Uber needs, UberX might have been necessary to attract a larger cadre of users to its UberBlack and

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other less-regulated services.

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617.783.7860.