How Uber Works: Insights into the Business & Revenue Model

how_uber_works

How Uber Works

Uber is an on demand transportation service which has brought a revolution in the taxi industry all across the world. The business model has made it possible for people to simply tap their smartphone and have a cab arrive at their location in the minimum possible time, leaving a lot of budding startups yearning for an App like Uber.

Uber is one of those few tech companies in the world that has been valued over $70 Billion. Uber has already received an equity funding of $22.2B and is present in 633 cities worldwide. These facts surely shows the trust of investors in the business model and make it easy for us to imagine how much revenue will the organisation be making once it attains liquidity.

In this post, we’ve have highlighted some unknown facts and figures along with a detailed explanation about the model by which Uber earns money and does business. Uber’s customer segments, value propositions, key problems, solutions, cost structure and revenue model have also been discussed. For budding entrepreneurs, we have catered to the rise of uber for x’ startups and what you should be looking for in this space. Read on!

Uber Founders, Funding received and Timeline:

Founders: Travis Kalanick and Garrett Camp.

Company Headquarters: San Francisco, California, United States.

Funding received by Uber: $22.2 Billion. (as of December 2017).

Company Valuation: Over $70 Billion.

Number of Users: More than 50 Million. 

Number of registered drivers: Approximately 7 Million (as of November 2017).

Average number of daily Uber Trips: 1 Million 

The successful timeline of Uber:

 

Uber Success Timeline

 

Uber’s Revenue Generation Model:

If you have ever travelled in a taxi, you might have paid the driver in cash at the end of your journey. The cash collected by each journey is the only source of revenue for a traditional cab company. Uber is no different. Neither does Uber have a different revenue model than the one mentioned above nor it has any other source of revenue as of now. But just imagine 1 million rides a day. It will help you calculate those big numbers that the company earns. Let’s dig a little deeper to understand Uber’s source of income.

What has made them so successful is the fact that the revenue model is as unique as their business model. It can be explained as:

 1. Different cab models to cater to everyone:

Uber has not limited itself to a particular segment of cars or to a particular segment of people. There is Uber X, Uber Black for those who love to travel in a black car, Uber Taxi for those looking for cost-efficient solutions and Uber SUV for those who want luxury.

uber-business-model

Uber’s Offerings

 2. Surge Pricing Technology:

Variation in cab fares according to situation is an important aspect of their business model. Whenever the demand increases, per mile prices are automatically increased. The new price depends on the number of available drivers and the number of requests made by people who want to travel. It has applied for a price surge technology patent in the US.

surge_info_english_checkpoint_2

Uber Surge Pricing

 3. Other Uber rides:

Uber has come a long way from cabs. It now offers boats, helicopters as well as some other transportation means on demand. They recently launched a motor­cycle-pickup service in Paris, a delivery service in San Francisco, and an ice-cream-truck-delivery service in a few cities too. However, these means are available in selected geographical locations but it has led them to add new streams of revenue into its business model.

Salient Features of Uber

  • A user can tap his smartphone and call a cab at his location.
  • The driver has the option to accept or reject a ride.
  • If driver accepts the ride, driver details are sent to the customer along with ETA.
  • The customer can track the driver as he arrives to his location.
  • The driver can also track the exact location of the customer and reach his exact location.
  • The payment procedure is handled by them
  • In some countries like India, they have even started accepting cash payments which are paid directly to the driver.
  • The business model had a rating system in place for drivers right from beginning, where a customer can rate the driver after his ride.

Value Propositions

Customers:

  • No need to wait for a taxi for long times.
  • Free rides on certain occasions and discounts from time to time.
  • Prices lesser than the normal taxi fares.
  • Uber’s tagline says – Your personal driver. It lets customers travel in style.
  • Fixed prices for common places like Airport etc.

Drivers:

  • Additional source of income.
  • Flexible working schedules. Can work part time or simply whenever they like.
  • Easy payment procedure.
  • Those who love to drive can earn money while pursuing their hobby.
  • Uber pays drivers to be online, even if they don’t get any request.

Customer Segments

  • Do not own a car.
  • Do not want to drive themselves to a party or function.
  • Like to travel in style and want to be treated as a VIP.
  • Want a cost-efficient cab at their doorstep.

Uber has such a vast customer segment that it has got something on offer for everyone. From Uber Taxis to Uber Black and from Uber X to Uber SUV, the company has got a vast range for its customers to make a choice.

Uber serves professionals as they hire an Uber cab to and fro work. For this Uber did few tie-ups with corporates in the beginning and does so when it launches in a new city in a new country. Apart from professionals, Uber tries to touch hearts of people by offering special services like:

Uber for Kids: A special service from Uber dedicated for parents who want their kids to reach home from school in an Uber cab.

Uber for Senior Citizens: Another special service from Uber where it targets senior citizens. As per the statistics, Senior citizens make for upto 30% to 40% of total rides in many cities. This made Uber have some special features for seniors and hence attract more senior citizens on the platform. Check out this post from fortune: Why senior citizens are flocking to Uber.

June-Driver2_FB_960x540px

Uber for Senior Citizens

All this might raise another question in your mind. The question about how does Uber find them or how does it market out to its target audience? We extended our research beyond Uber business model and came up with an entire growth model of Uber and some insights about how you can build an Uber like App. 

Growth Model: How Uber finds customers

In less than 6 years, Uber has managed to become the best example of a city-by-city mobile service company roll-out. Many generic pointers that I talked about in this Blog Post regarding scaling User Acquisition efforts for On Demand platforms borrows elements right from Uber’s playbook.

Let’s try to decode Uber’s Playbook and how it plays out as it launches in a new city or a country:

The underlying principle here is that for every city it launches, it faces the same chicken and egg problem. The advantages that Uber has as compared to new startups in this space are:

  1. Lot of money to incentivize both drivers and customers.0
  2. Rock solid processes or playbooks that have evolved through experience launching Uber in 311 cities till date.
  3. Already known brand that gets early curious adopters.

Everything starts with a small city launch team. Every city has a general manager who heads the customer acquisition as well as driver acquisition. The first cabs to come on board are generally professional drivers who are already associated with local taxi companies and have their own cars.

First customers come from various local advertising channels like FM radio, newspapers, online advertising etc. Uber is such a large name that people are already waiting for the cab company to start services in their city.

Uber Business Model Canvas

Uber Business Canvas- Understand to make an app like Uber

Uber Business Canvas- Understand to make an app like Uber

 

4 step model about how Uber works

  • Step 1 (Request a cab): The first step in the business model is about creating a demand. People have a smartphone app which lets them request a cab instantly or schedule it for some time later.
  • Step 2 (Matching): As soon as the request is made, a notification about your details is sent to the nearest driver. Cab driver has the option to accept or reject the ride. In case he rejects, notification is sent to another driver in that area.
  • Step 3 (Ride): Customer can track the cab when it is arriving and the ETA is also shown to the customer. The meter starts as soon as the customer sits in the cab which can be tracked through the customer side app as well. Friendly drivers make sure that the ride is comfortable for the passenger.
  • Step 4 (Payment & Rating): Once the ride is over, customer gets an option to rate the driver. Rating system is an important part of  the business model as it lets a person know about the driver before booking a ride and helps him trust the driver.

How and Why Uber became so successful:

Uber’s business and revenue model just can’t be stated as complete if this widely asked question about their successful journey is not answered. There were certain factors that led to Uber’s success. Here’s a brief journey that Uber went through when it launched. Similar journey can be followed by any startup which aims to make it as big as Uber.  

The problem with local Taxis

Earlier, people had to stand on the street side and wave their hand in order to signal a taxi to stop. The wait time, the inconvenience and high rates were a problem for everyone. Quite a few taxis were available and drivers / taxi companies used to charge whatever they thought was right. There was no control on prices and people were left with no other option. Apart from this, the situation was worse during the peak hours as it was quite hard to find an empty cab.  

The launch of Uber

Uber recognised the ongoing problem in regard to booking a taxi and gave a technological solution through a mobile app. The solution to book a cab by tapping a smartphone brought a revolution in the taxi industry. The app was officially launched in 2010 and soon became popular due to the value it provided to people.

The early adopters

It is quite difficult to market a newly launched product or service in any geographical area. What gave it the edge is that it launched in San Francisco, a city which is home to tech savvy people. The first drivers on the platform came through cold calling. Many of them were professional drivers with other cab companies or were self employed as a taxi driver.

To get their first customers, they took to social media and other mass marketing means. It offered discounts, free rides and rates that were too less as compared to other cab services in the city. The first customers were those who enthusiastically wanted to try the new service. It offered rides from club venues to user’s doorstep so the party people were amazed. It offered rides to the corporate sector who worked in offices helping them to save time.

Word of Mouth advertising

Whosoever took a ride in Uber was baffled by the first hand experience. This made the early users to become regular customers and they also helped spread the name by word of mouth advertising. This word of mouth advertising was one of the major driving force

Main Growth opportunities tapped by Uber

  1. Party people who go to clubs, parties or events.
  2. Business Travellers and Tourists.
  3. Cab at doorstep in bad weather conditions.
  4. City’s Nightlife.

Problems Uber still faces

Lawsuits: Uber has pending lawsuits in courts of New York and San Francisco. According to Uber, all drivers working for it are its partners while the court says that they are employees. Uber is not the only company facing such a problem but in fact almost all companies who hire 1099 workforce are under the scanner.

Chicken & Egg problem (New city Launch): Uber faces the chicken and egg problem whenever it launches in a new city. Acquisition of customers as well as partnering with new drivers is not an easy task. To solve this problem, a marketing team starts working in the new city by reaching out to professional drivers. Soon, online and offline marketing is initiated. Discounts are always the main USP to woo customers in the starting stage. Read – How to solve the chicken and egg problem.

Trust and Safety Issues: There have been cases where Uber drivers have acted rude to passengers. Some cases where Uber drivers have outraged the modesty of female passengers have come to the limelight. This is a big challenge for Uber. Although the company takes all steps such as police verification of drivers and their ID details but still such cases cannot be ruled out completely.

Takeaways from Uber Business Model

  • Go for less ownership model. Uber does not own any cab but still provides over 1 million rides a day through its partner network.
  • Choose an industry. Think about the most common problem it has. Find a solution and disrupt the existing model through technological infrastructure. That is what Uber did in the cab industry.
  • Treat your initial users as kings. They are really important for the growth of your business.
  • Expand step by step. Do not add everything in your business model in the first go. Uber started with cabs but now even has boats, helicopters, bikes and other means.
  • Opportunity won’t come to you. You have to look for them. Uber created an opportunity by offering discounted rides for particular events / party venues and hence got its first customers.
  • Treat your workforce an important part of your business. Uber calls its drivers as partners and gives them a decent 80% of the total fare.

There’s no doubt in the fact that Uber has brought a revolution not just as a taxi company but as a business model where businesses reach out to serve customers at their location. A lot of startups have already made their app like Uber and many others have made small iterations to launch startups in various industry verticals.

Want to create an App like Uber? Get in touch with us and know how we can help you build the next big thing!


Want to get the business model of your On Demand Idea right?
Download the free eBook ‘On Demand Economy Business Model 101’ now!

Related Resources

5 Comments »

Leave a Reply

7 factors that will make your Uber for X startup a success

uber-for-x-success

Uber for X is attempting to disrupt industry value chains across many verticals. Both enterprises and entrepreneurs involved are vying to create successful platforms. But not all platforms created on the Uber for X model are successful. Here are 7 critical factors which can govern the road to success for your Uber startup.

1. Right Problem Statement

Everything starts with a WHY. The golden rule for any startup is that they should be solving an unmet need for customers.

When we talk about Uber for X startups in particular, they essentially are dealing with multi-sided customer segments with buyers and suppliers being the 2 core segments.  So for these Uber startups, the problem that you are trying to solve should echo with both of the groups.

There have already been some failures in the OnDemand space that I know of having failed for trying to solve a self prescribed problem –

Read Dinnr (On-Demand Ingredient delivery service startup) founder talking about the reasons behind the startup’s failure: Seven lessons I learned from the failure of my first startup, Dinnr

2. Unit Economics

At the end of the day even if you are backed by VC War chests you need to reach a point wherein unit economics start making sense. What VC’s are betting on is the platform attaining the scale/critical mass beyond which the unit economics starts making sense.

Although it’s difficult to accurately predict the unit economics to begin with, but a rough analysis of where the cut from every transaction is going to go before hitting the critical mass and after hitting the critical mass helps to decide the viability of the model.

Read Prim’s story – On-Demand Laundry startup- of Unit Economics gone wrong: Prim: Anatomy of a folded startup

3. Transaction frequency

Uber’s success can be partly attributed to repetitive high margin purchases. According to reports, a large number of Uber users spend more than $100 every month on the service.

There are some services which translate naturally to this metric. There are others which are used sparingly. Beauty of On-Demand platforms is convenience which leads to high retention rates.

Read Cherry’s story – On-Demand Car Wash-  of how low transaction volumes led to difficulty in scaling up and folding: Iterations: Lessons We Can Draw From Cherry

4. Reaching the Critical Mass

As is the case with multi-sided platforms, reaching the critical mass is the first milestone that all entrepreneurs are working towards.

What does critical mass imply for On-Demand startups?

Critical Mass leads to ensuring reliability (customer is not denied the service/product) and efficiency (service providers/delivery personnel are engaged above a certain threshold). Uber is built from the ground up on these principles.

For more details on Maths behind Uber and Uber startups – Read this analysis: 4 Key Elements that will impact your Uber-like Business Model

5. Right Design Choices in the Business Model

Any business model, either Uber for X or some other, needs a unique business model design to make itself different from others. Make sure that you choose the right model while defining your business.

Scheduling vs Instant

Scheduled and Instant both are permissible models and one is more suited viz. a viz. the other depending on the vertical you are operating in, area of operation, funds, etc. Instant puts more pressure on the supply side infrastructure and its easier to start with only scheduled if you are bootstrapping a business.

Aggregated vs Integrated Supply

Freelancers help in scaling the platform fast while the contracted supply helps in keeping the reliability of the supply side high. I have seen many platforms start with contracted supply, set the standards for the initial demand in the evolutionary phase and slowly start adding freelancers. Once you reach the critical mass the reliability automatically increases as you always have a sizable amount of available supply that is not engaged at a certain instant.

For detailed analysis on critical design choices for On Demand startups, go through this free ebook: Business Model Uber for X 101

6. Total Addressable Market size

A significant TAM is essential to make it worth your while. It’s important to differentiate between Total initial target market and TAM. Ideal scenario is starting off with a smaller initial target market and expanding to other use cases.

7. Domain Knowledge

It can be difficult to succeed without any domain knowledge since most of the On-Demand startups demand heavy-lifting on the operations side. Without the right knowledge, it is quite possible that you might not be able to understand your audience and ask the right questions.

It is furthermore important to look into the Cost to develop and app like UberHaving the right idea and the right resources can surely take you ahead.

Feel free to Get in touch with us for a sound technical advise in regard to your on-demand startup.


Want to get the business model of your On Demand Idea right?
Download the free eBook ‘On Demand Economy Business Model 101’ now!

Related Resources

5 Comments »

Leave a Reply