Introduction

Uber’s a ride sharing company that has disrupted the taxi industry by using technology to allow people
with cars and spare times to drive people who don’t want to drive but who have money.

Basically every city had two or three taxi companies, but because of the way they operated they could
not scale beyond a limited geographical area. Uber changed all that and that’s what we are going to look
at now.

Customer Segments

Uber has 2 groups of customers. It has passengers and it has drivers. in a traditional taxi company the
customer segment is purely passengers with the drivers being part of the company.

The main thing that distinguishes Uber’s passengers from traditional taxi passengers is that they need to
have a smart phone and a credit or debit card. Without these they can’t use the platform.

Uber’s other customer segment are drivers. Instead of employing drivers and having an asset heavy
company Uber uses freelance drivers – and that is a source of legal bettles across the world. Here Uber
has reached well beyond the traditional source of recruits for taxi drivers and made driving accessible to
anyone with a smart phone, a smart car and a smart appearance – and who wants to earn some cash
when they want.

Value Proposition

And this brings us to Uber’s value proposition. At the heart of the business is the value proposition that
says

We will always give you a ride when you need it

and for drivers

We will always give you passengers when you want them

In a traditional taxi business the number of taxis is determined by the rides that are available over time
to support that number of taxis and drivers. If demand surges there is no excess capacity. If there is low
demand for a period drivers are slow to leave the market and payments for all drivers suffer due to
excess supply.

Uber’s value proposition is thus like a market but if it were that simple it would not have the same
disruptive effect. What enables it to deliver on the promise above is that it is able to match supply to
demand.

By using real time metrics it is able to see what demand is like and then as demand starts to exceed
available capacity to reduce demand by introducing surge pricing (but taxi fares are somewhat price
inelastic so this is a lesser effect) which increases prices where demand is highest. At the same time the
increased fares encourage more drivers to work and thus increases supply.

Uber is able to do this because the drivers are owner operators. it doesn’t own the assets and thus it can
flex capacity within minutes, whereas a traditional taxi company takes months or years to achieve the
same results (in the case of New York taxi medallions almost never).
The technology enables this value proposition and at the same time it also enables traditional pain
points to be addressed at minimal additional cost. If you have no cash it’s not a problem. Uber charges
your card. In fact the whole system is cashless making it safer for both drivers and passengers.

It also brings transparency by identifying both driver and passenger and their positions to each other –
and by showing exactly where the taxi is at all times. Uncertainty – and thus anxiety – is reduced for
both

These are issues that were difficult to resolve in a traditional taxi business model.

Customer Relationships

The only time I’ve spoken to anyone at Uber was when I bumped into the local Uber country manager at
a strup event. For the rest it is totally automated as far as the passenger is concerned. The old
dispatchers are removed and the passenger’s phone automatically identifies the pickup point.

For the driver’s there is a more hands on role principally around QA and making sure that the drivers
meet the minimum quality standards that Uber expects and ideally don’t pull guns on their passengers!

Channels

Uber used different channels as it grew. Early on the focus was in moving from city to city and getting
enough drivers and users signed up and using the app that there was a strong enough market to make it
work.

Increasingly with a market in each city the channels are through the mobile app and the marketing is
through email, word of mouth – which is incredibly important in overcoming adoption fear and crossing
the chasm from early adopters – and PR.

One of Uber’s huge strengths has been the amount of money that it has raised which has given it a huge
amount of earned media which in turn has driven passenger and driver growth.

Revenue

Revenue is pretty simple. Uber moves the traditional taxi meter from the car to its servers – tracking via
GPS technology in the phone – and then charges the passenger based on the miles travelled and
whatever surge multiplier is in effect. If the passenger uses a different Uber brand the same process
applies but with different pricing.

Key Resources

Uber has three key resources without which the whole thing falls apart. First it has the platform. This
connects Uber to drivers and passengers and both to each other.

That’s a necessary but not sufficient requirement. Then it has the algorithms that do the heavy lyfting
(sorry couldn’t resist that). These are the pricing and routing algorithms. The pricing algorithms are used
to balance supply and demand in the market and help ensure that there is always enough capacity
available to meet demand – fulfilling its core value proposition.
The routing algorithm then focuses on ensuring that the customer wait time is as short as possible and
by implication reduces the deadhead time for drivers as they are either waiting for, or driving to a new
job.

Key Activities

A key part of Uber’s business model is then developing the platform, continually adding value to ensure
user adoption and retention and optimising it algorithms.

It also has to do significant marketing on a global and a local lever to driver passenger adoption and
ensure an adequate supply of drivers.Churn apparently is a problem.

Uber still has the same problem as traditional taxi companies. It serves lots on unconnected
geographical markets. Singapore, London, Frankfurt. Each has specific attributes and requirements and
so marketing to users in each city, and ensuring that there is the right level of driver support for the user
growth is critical for meeting its value proposition.

Key Partners

The main one is the drivers who own all their cars. That saves Uber from having a contract with a leasing
company for hundreds of thousands of cars. It has the payment processors and the map data providers.

Often missed are the local authorities. In many cities there are legal actions against Uber as taxi
companies fight to protect their businesses and persuade the ‘authorities’ to erect barriers to entry
against Uber. This is is often characterised as adversarial but in the longer scale of things regulation is
seen as important and Uber will need to resolve these issues. So they are long term partners, even if
they are not right now

Cost Structure

There are the huge costs for the platform development, hosting etc, There are the salaries for the
software engineers, the sales and marketing teams and the country and city managers. And then there
are the driver payments. Nicely Uber gets paid upfront and keeps the money for a few days before
having to pay the drivers (as a consequences of ensuring that payments are valid)

The Uber Business Model in a Nutshell:

 The Taxi Driver - Anyone with a driving license and a car can apply for an Uber
driver in any Uber covered cities. After screening, the driver is enlisted in the Uber
system and given an Uber iPhone. This provides a steady income to anyone with a
car without additional hazard or investment.
 The Passenger - Registered Uber users download the Uber app to their phones and
if they need a taxi, they call a taxi via the Uber app. They can also track the taxi on
their phone as it approaches. This service is convenient for the passengers,
provides them relatively low cost comfortable service.
 Fare and Payment - Uber set the taxi fares. Premium fare during peak hours and
flat rate for off peak hours. Passengers pay through their credit cards and don’t
have to pay any cash to the drivers. The fare is based on car type, distance and
peak hour. Payment is secure because passengers pay only via credit card using
Uber app.
 Dividing the Profits - Uber divides the fare, usually 80% to the driver and 20% to
Uber. Even after a 20% pay cut, the taxi drivers earn more than the traditional taxi
services. In some cities Uber had to reduce its percentage because of competition
from similar companies like Lyft and Haio. It is estimated that Uber have to lower
its profit in all the cities it operates in coming months.
 Future Growth – At present, Uber doesn’t own any taxi and because of that Uber
can show a higher amount of its earnings as profits. Uber needs to invest in
research and development for future growth. The initial reinvestment will be a
modest amount, but enough to slow down future earnings. In addition, legal and
regulatory issues will increase costs. Growth opportunities for Uber is vast, it
already covers 200 cities in 55 countries and will progress to dozens of new cities
within a year.

The Strength of the Uber Business Model:

 Uber app is user-friendly, fast responsiveness from servers and systems and
minimal glitches make Uber exceptional.
 Calling a taxi cab with the smartphone is easy and any passenger can benefit from
it.
 Uber has no previous competitors in the taxi service business and established a
solid infrastructure, branding and consumer trust.

The Weakness of Uber Business Model:

 Uber is plagued with liability questions and insurance issue, more than any other
start-up services.
 Lawsuits from taxi companies and unions in several big cities including New York,
kept Uber engaged in regular court battles.
 There is a demand for such service, but overhead cost and costly legal battles
threaten the business.

What Entrepreneurs Should Learn from Uber’s Business Model:

 When starting a new business, you can’t be afraid of disrupting others business and
receiving criticism.
 In most cases, owning inventory is a liability and the Uber model of business is such
a relief in this regard.
 Use internet for new business and growth of present business.
 Deliver a swift and efficient service and charge at least 15% commission for any
transaction.
 Take full advantage of free market economy.
 There is no such thing as bad publicity, Uber’s frequent visits to the courts, actually
helped the company to grow.

Uber is a highly profitable company and revenues are doubling every 6 months. It has
far better expansion opportunities than most of the Fortune 500 companies.