Listen on Strategy Simplified
Uber was the largest IPO of 2019. One of the world’s most famous “unicorn” companies, its stock price has dropped 20% since its IPO. Why aren’t more folks asking the question, “Is There A Future For Uber?” Is Uber’s business model viable for sustained profitability and growth? Our answer may surprise you! Listen to Jenny Rae, Managing Director of Management Consulted and ex-Bain consultant, as she breaks down the following things:
- What kind of business is Uber actually in?
- What will it take for Uber to succeed in that kind of business?
- Is Uber doing the things necessary to succeed?
- Is Uber’s problem worth fixing?
Is There A Future For Uber?- YouTube Transcription
Uber. Crazy founder. Amazing IPO, one of the biggest of all time. Lots of leadership and culture changes. Uber has been in the news, and for many people that are watching this video, I would be shocked if you haven’t taken an Uber somewhere in the world. For me, I’m super glad that they exist. But I have a different question today. Will their business ever work? And, you might be surprised at my answer.
I’m going to tease this out in four parts.
- We walk through this, first of all we talk about what kind of business Uber is in.
- Second of all, we talk about what it will take for Uber to succeed in that kind of business.
- Third, we’re gunna talk about whether Uber is doing the things it will take to succeed.
- And fourth, we’re gunna talk about if this is a problem worth fixing.
I’m Jenny Rae, the Managing Director of Management Consulted, we’re a group of ex- McKinsey, Bain, and BCG consultants, who train people in case studies to prepare people for consulting interviews We also train corporations on thinking and communicating more clearly. I’m really excited to walk you through Uber today because this is one of THE most popular businesses of our generation.
What Kind Of Business Is Uber In?
First of all, what kind of business is Uber in? We break this down into two types. Is it a fixed cost business, or is it a variable cost business? Uber IPO’d as a fixed cost business, as a software business rate. But Uber is a variable cost business. Every time you or I take an Uber, Uber has a cost to that. They have to pay the driver. (Which changes depending on the length of ride given.) They have a percentage of the fees that they are able to gather, but they have to pay the driver. Therefore, Uber is a variable cost business.
What Does It Take To Succeed In A Variable Cost Business?
Number two, what does it take to succeed in a variable cost business? Variable cost businesses that succeed focus on either:
- radical cost cutting, ie- they pay their drivers less.
- Or, premium pricing. They are able to capture a higher delta because of brand loyalty.
Is Uber Doing What They Need To Succeed?
And, number three, is Uber doing that? Well, they’re not. They’re not able to. Because a driver has very low switching costs when they’re working for Uber. They’re not beholden to the Uber platform, they’re not in an Uber car, they’re in their own car. And so, drivers can just decide whether Uber or Lyft today is paying higher rates and where they’re going to get their next ride from. And that can change in a ten to twenty second period.
In addition, the ability to price higher is limited by other competitors such as Lyft. Other competitors that are foreign, for example in other markets like Didi. These other competitors provide a price ceiling, what customers are willing to pay. Why? Because I also as a customer have very low switching cost in choosing between Uber and Lyft. And I don’t have loyalty to the brand of Uber where I say, “You know what, the Uber experience is going to be better.” Uber can’t even control their brand, because they don’t control their drivers. And they don’t control the experience.
So Uber has this dual problem, they’re in a variable cost business, but they can’t pay people less, because drivers would just leave their platform. They can’t charge more because nobody is willing to pay a super premium on an Uber car, over a Lyft or another alternative.
Can Uber Fix Their Business Model?
And therefore, I think number four, can Uber fix this? Can they fix their business model to become profitable and sustainable? The answer is “No”. Now God love ‘em, they’re trying. They’re working on a number of initiatives internally, where they are focusing on rewards and sustainability. Rewards and sustainability is one way that you can drive people to pay more for the same product, just based on their brand affinity. And they’re doing things like, premium airport pickup. Great. Maybe people will be willing to pay more for that. I don’t think it’s going to be at the scale they need.
On the drivers side, they’re trying nothing. They can’t. They can’t lose drivers, because then they don’t even have a product to sell in the first place. So I think Uber has unfortunately, an unsustainable business model. Such a cool idea, I really wish it would work. But I don’t think we’ll see them around forever.
Thanks for watching, this is Jenny Rae from Management Consulted. You can view us on www.managementconsulted.com, on social, or make sure you subscribe to our YouTube channel.