Uber: A business model innovation that benefits and exploits
“Is the Uber disruption of local taxi and town-car markets a positive business model innovation for consumers?” a former colleague asked me.
Uber, and its competitors Lyft and Sidecar, are disrupting the regulated taxi and limo-service markets by enabling ride-seekers to secure transit in privately owned cars using a mobile app. The entrepreneurs have used technology to both transform what has largely been a local market into a national/global market and dramatically improve customer service (e.g., automated billing, knowing potential drivers’ locations, cleaner cars, customer feedback on specific drivers, etc.).
I am not in the least bit surprised about the emergence of Uber and its direct and indirect competitors (like Ridejoy, an on-line car pooling service). These disruptions demonstrate a number of consumer-friendly trends underway in our economy.
- Technology automates human tasks and makes markets more efficient and effective. Who needs friends–with-friends when you have Match.com? I love OpenTable for landing a reservation.
- Technology turns traditional local markets into national and global markets. Enterprise IT and the Internet enabled big-box stores and globalization, lowering prices. UBER is the next wave – platforms best leveraged over larger geographies. Even babysitting, long a word-of-mouth neighborhood market has an on-line marketplace.
- Digital technology enables new kinds of contracts. Today there is a computer behind almost every legal transaction, according to Hal Varian, Google’s Chief Economist. And its presence can be disruptive. Before Zipcar you had to borrow a friend’s car or sign a contract at a dealership or rent-a-car company to drive. Now you reserve a shared car. eBay turned local consignment stores into an on-line market.
- Lower prices win market share. During off peak hours, on-line ride services lower prices as private drivers have a lower cost structure than regulated drivers.
- Recycling and re-purposing of material, products and assets. Markets are growing for waste materials (e.g., recycling of building products from remodeling and demolition) and companies are adopting cradle-to-cradle thinking. Airbnb turns unused rooms in your home into an on-line rental opportunity.
Uber has fought off regulators to date. As to the future, we shall see. Seattle will limit the number of ride-share cars to keep a vibrant city taxi service. Local governments will likely pass room taxes on Airbnb rooms, as they should. New Jersey car dealerships recently used their political power to stop Tesla, who had the audacity to want to sell its electric cars through company-owned dealerships!
On the negative side, Uber has figured out how to cream excess profit from its customers through surge pricing, raising prices when demand is highest. Uber board member Bill Gurley makes an impassioned plea for Uber’s price strategy, claiming that surge pricing increases supply and reduces demand, leading to a better market equilibrium. But this claim is based on the wrong economic curves. In peak periods, demand is highly inelastic so a surcharge will not lower demand for Uber by much. Like a tax on a necessity, the economic value of the higher price is captured almost entirely by Uber. (In economic-speak, the supply curve shifts upwards along a given (not shifting as Gurley claims) very steep demand curve.)
Sidecar is fairer to riders as it lets them know the exact cost before booking the rush-hour ride and transparently trade lower wait times for higher prices. City regulatory services have dealt with excess demand by forcing licensed cab companies to have a set number of cars on the road at peak hours. Technology could help them perform this role more effectively.
I’m not against surge pricing in principle. On highways, it streamlines traffic by getting tourists and shoppers off the road at peak commuting hours. For resorts, it balances demand over the seasons. Department store pre-season clothes are sold only at list – in essence a surge price in a heavily discount-priced industry.
But should surge pricing be used in all markets? Should higher education raise prices during a recession, because there is more demand for courses during a downturn? Should you be hit with a surcharge just because you have to catch a plane at the end of the day to get home for dinner with your kids?
My choice is to find a locally owned car service through Yelp. The rates are known and lower than Uber based on what drivers tell me and a recent WSJ article suggests anecdotally. My 24-year old daughter and her NYC friends do the same. And, because these services are regulated and a company owns the car, insurance coverage is assured. Were I a third place player in Uber’s markets, I would pivot to “Plan B” – sell my platform to local cab companies across the US to enhance their customer service, branding it “Taxi on Demand” with a value promise of assurance.