Will Uber ever be profitable?
~Written in November, 2019 but still applicable today. Please keep this in mind when the story refers to statistics left undated.
Revolutionising the way we travel, the ride-hailing app has made going from A to B ever easier and more affordable. With an estimated 110 million active users (teriffs.com, 2019) you would expect impressive profits and an increasingly lucrative business. The reality is far from this. From Uber’s reports in the last 3 quarters, Uber has made a net revenue of $9.5 billion and a monumental loss of $7.68 billion. Just how and why has the biggest ridesharing app spent over $17 billion to get just $10 billion back? Well that has a lot to do with its flawed business plan.
The global taxi industry that Uber set to disrupt operated on low profits already so it’s plan to charge riders on average 25–30% less than traditional taxis should’ve been a cause for concern to begin with. The key aspect of Uber’s original business plan was its monopolistic nature. If Uber expanded enough to become a global monopoly, it’s cost should, in theory, become low enough to profit. In the meantime, the general idea was to operate long enough to put all other competitors out of business for this dream to become a reality.
Uber’s Revenue comes from its riders who pay on a per journey basis. Uber’s costs come from the driver’s they pay also on a per journey basis. Other costs include expansion, marketing and research costs.
Uber’s Competition
Today, there is a plethora of ride-hailing apps. Some more efficient in certain areas than Uber. For this reason, Uber spends a lot of its revenue on geographical expansion and AI development.
Further, for these companies to compete with Uber, they will have to charge users less in order to incentivise riders to use their platform instead. In addition to this, they must pay drivers more in order to incentivise drivers to use their platform too.
In basic economic theory, competing firms will keep lowering their revenue per journey until it is the same as their cost per journey in order to break even, in turn the most efficient company (who’s costs per journey are lower than others) will be the last one remaining. What has happened is that in order to compete, these companies (including Uber) have been lowering their fees to riders and increasing their commissions to drivers so much that their costs surpass their revenue.
Why are they doing this? This competition has turned into a game of who runs out of money last wins. For any company to stand a chance, constant investment is needed to keep scaling the business. Uber currently has the largest market share at 71.1% with its main competitor, Lyft at 27.2% as of August (Second Measure, 2019).
What’s to come?
The future of Uber is very uncertain. Firstly, if Uber can get enough investment to make Lyft go broke then it will have secured a near 100% market share. Its success would depend on achieving an economies of scale structure where it’s costs would be so low; it can finally be profitable. Uber could be looking in the direction of self-driving cars and a perfectly efficient app. The reason for this is, as it stands, if Uber had 100% of the taxi market right now, it still couldn’t be profitable with the 30% below traditional taxi fares it charges.
In the meantime, it must develop new revenue streams, it has done so already with Uber Eats, but there needs to be more revenue coming from the rides directly. Something like in-app or in-vehicle marketing could be a viable idea; businesses could advertise on Uber’s platform and Uber could receive payment for this. A partnership with Spotify could also be beneficial, a selection of ‘Uber Radios’ on Spotify with ads between tracks that plays in vehicles driven by Uber drivers would mean Uber could gain additional revenue from the advertisers on Spotify. Furthermore, partnerships like these would allow Uber to advertise via their partners marketing departments.
All in all, Uber has a long way to go to become profitable. The reality is many drivers and riders are switching between ride-hailing apps in hopes the next will be more cost effective for them. When Uber finds a way to stop this, that’s when it will have a chance of progressing to profitability.
