Uber, a cab company valued at $51 Billion without even owning a single cab has raised many eyebrows. The business model of Uber has created what is called the ripple effect in the on demand economy. The widespread term ‘Uber for X’ says it all. But, “What led to the massive success of Uber?” is a question that many of you would be interested to get an answer to. I, here at Juggernaut, dug deep into Uber’s Business Model and researched their strategies to answer this million dollar (or maybe a billion dollar) question for you.
The question: What led to Uber’s Success?
I’ll answer this with the help of Alex Osterwalder’s Business Model Canvas. To be precise in my answer and for better explanation I have divided the Uber Business Model canvas into 2 parts.
First part: Product
Second Part: Market
This is the second part of the 2 post series on Uber Business Model and their success secrets. This part talks about the market side of Uber’s Lean Business Model.
While you may think that the product and the market for which it has been built both have an equal impact on the success of a startup, but I’ll assert that market is more important than the product. Any market that needs to be fulfilled will be fulfilled by the first viable product that comes along. The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.
- When a great team meets a lousy market, market wins.
- When a lousy team meets a great market, market wins.
- When a great team meets a great market, something special happens.
By now, you’ll be able to make out that in case of Uber, it was a great team that met a great market.
You can obviously screw up a great market — and that has been done, not infrequently — but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. so, the market matters the most. The cab industry chosen by Uber actually wanted something of this sort which can be termed as their first factor to success.
Let’s move beyond the first factor of Uber’s success and dig deeper into the Uber business model canvas to understand the other factors.
Customer segments — Who are we creating value for?
For a startup to be as successful as Uber, the main question an entrepreneur should ask himself is “Who am I creating value for?”. This would define your customer segments. Let’s turn this question towards Uber and understand if their initial product was a perfect fit for the market or not.
Who does Uber create value for?
Let’s start answering this through Uber’s company vision which says:
‘Transportation to be as reliable as running water for everyone, in every city in the world.’
It becomes clear that Uber creates value for anyone who wants to go from Point A to Point B within a city. But the use cases have evolved over time. When Uber started, their initial target customer segment were wealthy young people being catered through what goes by the name of Uber Black today. At this point, Uber is becoming a verb in many cities, clearly signifying that it has slowly expanded its offering by providing value to a larger set of people.
Uber’s customer segments:
- I want a ride; I want a luxury ride – Choosing Uber Black, a high end luxury sedan or SUV comes to the curbside.
- I am willing to pay a lot more to get a ride now. The dynamic pricing concept is meant to cater this target audience. Balancing demand and supply ensures that there is always an option after that Friday night concert or a huge sports event to go back to your place.
- I want a cost effective ride – Great thing with Uber’s network effects – more demand, more supply is the ability to reduce the time their driver partner’s spend on the road. Thus economics 101 tells us that Uber can offer some of this increased efficiency to the end customers in the form of reduced costs. In many cities, UberX (a lower price Uber variant with hybrid and mid-range cars) is available at rates 30% lower than the regular taxi rates.
- I want to share the ride to reduce cost – UberPool allows you to share the ride. Again this value is enabled through network effects as more the probability of finding a match on your designated route with another customer, easier it becomes for the platform to offer the carpooling option.
- I want to travel with a group – Uber offers a range of options like UberXL that helps you hail SUV’s and minivans to your place.
Over the last 4 years, in addition to expanding its value for different sets of customers it has also been expanding its coverage area to create a network that now spans over 311 countries across 63 countries. View the updated list here: https://www.uber.com/cities
It would perfectly fall in line if we say that creating value for a large audience with different services and different price range has been the second biggest success factor for Uber.
Uber Drivers / Uber Partners:
Being a 2 sided marketplace, the value that Uber brings to its driver partners has been an equally important variable that has led to Uber creating a biggest taxi network without owning a single taxi. Here’s how the partner network evolved:
Jan 2013 – fewer than 1000 partner drivers.
Jan 2014 – More than 6,000 partner drivers.
June 2014 – Over 19,000 partner drivers.
Nov 2014 – Near to 32,000 partner drivers.
December 2014 – Over 40,000 partner drivers.
The big question over here is that “How did Uber manage to get so many new driver sign ups on its platform?”. For any marketplace model, the supply has to meet the demand and vice versa. Let’s put some light on Uber drivers / partners.
Broadly, these new driver partners joining Uber fall into 2 categories:
- Existing drivers of other taxi companies
- Regular people with a car willing to drive for extra income.
Before we talk about specific value proposition for these 2 sets, the retention rates of 70% among the new drivers that join every month put a lot of things in context. Another aspect worth noting is that 50% of those surveyed as a part of the same survey were riding for less than 15 hours a week. These stats give us the third major factor for the success of Uber and define its business model as one of the best in the on demand economy.
[Image and Stats: Tech Crunch]
What is the value Uber is creating that keeps bringing these 2 set of customers together one city after another?
For the customers, Uber provides an alternative to the dysfunctional transportation system in many cities.
A quick comparison of the earlier way of hailing taxis and ‘Ubering’ rides gives insights into the value proposition for the customers. Rather than attacking any specific step in the transaction flow, Uber attempted to take a more holistic view by providing an alternative transaction flow.
Search (exclusive ride at an affordable price)
Book (On Demand availability at the doorstep)
Pay (cashless drive)
Review (in-built feedback loops).
The underlying value that Uber has strived to provide all the customer segments is reliability. A person who wants a ride can literally get one by tapping his smartphone. Uber’s ability to give the desired choice to a customer at any time and then fulfilling that request within ETA of 10 minutes and lower has been the key to success on the product side.
How this becomes possible is pushing every geographic location towards a critical mass of customers and driver partners and then let the network effects kick in. [More on network effects later in the post].
Something to learn from Uber’s Business Model:
The would-be disruptor should follow an approach that makes it easier and more affordable for people to do what historically has mattered to them. Making the complicated things simple and the expensive things affordable is why disruptors have the potential to dramatically expand a constrained market or prosper at price points that are far lower than market leaders.
Related reading – Maths behind Uber
Uber’s Value Propositions for Customers:
Uber gives customers an option to choose the type of ride they want – an SUV, Uber Black, Uber X, etc.
- Exclusive ride at an affordable price
- Convenience – comes at the doorstep
- On demand availability
- Certainty – will get a ride for sure.
- ETA – Track the cab while it arrives.
- Shorter wait time for a ride.
- Cashless ride
Uber says that Choice is a beautiful thing – read it HERE.
Uber’s Value Propositions for Drivers:
For the drivers, Uber gives them the flexibility to decide when and how often they want to drive. In addition, Uber drivers reportedly earn more per hour, viz.a viz., industry standard hourly averages. Again this can be attributed to busier days and more time spent serving customers.
- Extra income.
- Flexibility to choose work hours.
- Busier and efficient days
- Higher hourly wages on an average
Network effects — For most of the marketplace platforms network effects have a huge role to play, once they move beyond a critical mass. The usefulness of such platforms for the end suppliers and consumers is associated with how many other users are using this platform. Beyond a point, it is difficult to topple the incumbent.
When applied to Uber these network effects apply in a certain geographic area and the playbook needs to be repeated in every new city it enters. But for a particular geographical area, more customer means increasing utilization of the taxi network, busier day for drivers, more income, more drivers, lesser costs for customer and better pickup times.
If I had to put this in a nutshell, it goes like this:
More customers — Busier day for drivers — More income per hour — More Drivers and larger coverage area— Better pickup times and lesser costs for customers.
So, it’s a win-win situation for Uber Customers, Uber Drivers and of course Uber as a company.
Uber Channels: How Uber Reaches Out:
The Product Itself
The Uber app is itself a channel for Uber to reach out to people. It might seem strange but it is a fact that Uber has created a strong demand for its app. It has become the need of people to download the app and use Uber services.
Earlier people used to wave to taxis while standing on the road edge in order to stop them and have a ride. But Uber has changed the situation as now you can have a taxi at your location with a tap on your smartphone. Hence for Uber, the product itself is the best channel to reach out to people.
Reaching out to people after launching a product is the most difficult task for startups. It would had been the same for Uber if it would not have captured these accelerants. So, what are these accelerants? You may consider an accelerant as a push that has the ability to give a lot of users in one go that too without hampering the revenue. So, it’s nothing about discounted campaigns or something like that. Here’s how Uber made the most.
- Restaurants & Nightlife: People often had to make arrangements to go back home after a party. Uber was quick to understand this and offered its services at major night life points in the city. Anyone who availed the service became a fan of uber and made the word spread through word of mouth advertising.
- Weather: With its surge pricing technology, Uber has made the most of weather changes. When a person needs a cab and is struck due to rain or bad weather, he urgently needs a cab at his location. Uber is the best and the only available choice to people in such situations. This technique also led to criticism for Uber during hurricane Sandy, when they increased the prices. But after all, business is business and the fact is that Uber has a pending patent of its price surge technology.
- Sports: Another common channel captured by Uber is sports events. A lot of sports events take place and Uber was the first taxi company to reach out to masses by offering discounts to people when they book a ride to the event or while coming back home after the event. This strategy again acted as an accelerant as Uber was able to create the hype by letting people travel back home easily in a VIP manner by skipping the hassle of getting a random taxi on the road.
Social media is obviously a channel which has helped Uber gain fans and turn them quickly into paying customers. All offers, discounts and giveaways are pushed through social media campaigns. Social media is still an important channel for Uber to market out to new cities where it is yet to roll.
Partnerships with organizations who have Uber’s potential customers has been a major part of Uber’s Business model to gain new customers. Uber recently had a partnership with a mobile manufacturing company where it went out to deliver the phone to their customers. Apart from this, Uber has always been on the forefront to partner with well-known companies in the territory in which it wants to acquire more customers.
These partnerships have helped uber build brand awareness. You may go through the following news from Uber India to understand more about the type of partnerships.
Uber tied up with Zomato to offer a ride when a person books a restaurant for dinner.
Another strategy to gain users for Uber has been to serve people who wish to attend some event. Whether day or night, Uber has been active to tie-up with event organizers and provide services to those who wish to attend the event within the city. Here’s a blog from the newsroom of Uber: Bring Uber to your next event.
If the above channels were not enough, uber has involved itself in some eye-catching stunts. No, not car or bike stunts, but some great marketing stunts like ice-cream trucks. Being a cab company, uber launched a motorcycle pick up service in Paris, a mariachi-band delivery service in San Francisco and some other attractive services in various cities. Uber recently launched Uber eats to deliver food from local restaurants.
Everything that Uber did to grab eyes of its target audience was welcomed by the people whch ultimately led to word of mouth advertising.
Uber Revenue Model:
Just like all other aspects associated with Uber, revenue model incorporated by Uber is simple enough. Uber takes 20% cut on all rides (when there are no ongoing promotions on the customer side or driver side). The fact that Uber is currently valued at around $51 billion clearly indicates irrespective of bullishness the revenue numbers must be substantial.
Let’s talk about the last year’s leaked numbers which stand at $2billion projected net revenue by the end of 2015. Another astonishing number within the same leak said that most of the Uber’s revenue was coming from 5 cities among the 130 odd cities where the company was present at that point. This clearly implies that as Uber goes on to mature in many other cities the revenue numbers would significantly rise.
The Bottom Line:
Just like any other successful business, Uber did not gain popularity overnight. However, one thing which made Uber go viral was word of mouth advertising. The initial traction for uber came from corporates and other high class people but Uber soon realized that they had to target masses and give options to customers. This led to various segments like Uber X, Uber Black, Uber SUV etc and also made drivers to partner with Uber. The service provided by Uber to riders and easy payments to drivers accounted for a win. But again I’ll assert that Uber’s success is due to the fact that they touched a great market, had a great team and made a great product.
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