Uber Business Model
May
The Uber business model is also known as a multisided platform business model, as it connects drivers (offer) and passengers (demand) to offer cheaper transportation and an additional source of income.
According to Dara Khosrowshahi, CEO of Uber, “Uber accounts for less than 1% of all miles driven globally. Just a small percentage of people in countries where Uber is available have ever used our services”. Still, I am sure you know this company very well — you have probably already used its services, and you most likely have the app installed on your smartphone.
Owned primarily by institutional investors like Morgan Stanley, The Vanguard Group, and FMR, Uber also has significant stakes held by individual investors, including its employees, such as CEO Dara Khosrowshahi.
Guided by the mission to “ignite opportunity by setting the world in motion,” Uber has achieved a global presence, transforming how people move within cities worldwide. By offering accessible, on-demand rides, Uber has simplified urban transportation and opened new avenues for flexible employment.
The company’s technological platform has revolutionized urban transportation, giving taxi drivers and cab companies many headaches. In short, it is an app that connects drivers to users who need a ride using a smartphone as a tool.
Contents
A brief history of Uber
Uber’s history starts back in 2008 in Paris. Travis Kalanick and Garrett Camp attended the city’s annual tech conference (LeWeb). One night during the meeting, they simply could not get a cab, so they started thinking about how it would be if people could just ask for a cab via smartphone.
Camp kept thinking about it, and back in San Francisco, he bought the domain UberCab.com. In 2009, Camp was CEO of StumbleUpon, a startup he had sold two years earlier to eBay for $75 million. By the way, Kalanick also sold his startup, Red Swoosh, to Akamai Technologies for $19 million in the same year, but he began working on UberCab as a side project.
Camp persuaded Kalanick to join UberCab by summer, and the official launch occurred in 2010. The company grew quickly. One year later, it was launched internationally — in Paris. From 2009 on, Uber raised a lot of funding; in 2015, it was the most valuable startup in the world ($51 billion).
With over a decade of existence, Uber operates in more than 900 cities worldwide and has a market cap of over $163 billion. It is among the top 100 most valuable companies by market cap, at 93rd. Let’s understand the business model of this innovative urban transportation giant, which allows us to get a vehicle within reach of a click.
How Uber operates
To get an Uber, you need a smartphone with GPS, internet access, and the Uber app. Then, in the app, you will enter your destination, and the platform will locate an available driver based on the location of both. As soon as you get in the car, the driver will take you to your chosen destination using the app’s navigation system.
The app offers different categories of vehicles depending on the city in which you will use it. The rates for each category vary accordingly. An Uber algorithm calculates the value of the race, considering the distance traveled, elapsed time, and fuel used.
There are also different payment methods, depending on the location where you use the app. Besides, there is a rating system, which is an essential feature of Uber. The rider evaluates the driver, and the driver also evaluates the passenger. Thus, everyone can check each other’s degree of confidence before accepting a ride.
Uber Pros and Cons
Uber’s most significant advantage for users is its convenience and user-friendly application, which rarely experiences downtime. Today, practically everyone in urban areas has a cell phone, mainly with an internet connection, so most of the population can ask for a car without walking even a step from wherever they are.
When making the request, users receive plenty of information about the driver and the car, such as the license plate, name, photo, time of service, and grade within the ranking system. This offers more security to the user. They can also send their ride information in real time to someone else, guaranteeing them more security and peace of mind.
For drivers, the most significant benefit is being able to get a job by just having access to a car and a cell phone, choosing their working hours, and having their income come in regularly. In addition, due to the ranking system, the driver also has greater security by being able to check the user’s profile and score on the app to decide whether to stay with the ride or not.
Regarding Uber, its core advantage is that it was the first entrant in this market. Although it can be said that taxis are competitors of Uber, the customer segment is different since we are talking about an audience that will ask for a ride via the app and not wave at an identified car in their way.
In addition, Uber has established itself in the market not only because it is the first in its business model, but also because it has set up a functional structure that works and has guaranteed the confidence of both drivers and riders.
Negative points include liability questions and insurance issues, which the company continues to face in the cities where Uber enters and those in which it has already been operating. This includes battles against taxi drivers’ unions and some municipalities worldwide.
The disadvantage for customers, users, and drivers is the lack of solid competition. Although there is already competition in some locations, competitors cannot force a fight over price, for example, making Uber practically choose how much to charge the user and, mainly, how much to pass on to the driver.
How Uber makes money
Uber’s revenue model is based on commissioning, which is its revenue stream. The total value of each ride includes the driver’s payment, fees, taxes, and company commission. Generally, the driver gets about 75% to 80% of the value, and the rest stays with Uber.
Due to the fees and minimum fare, the commission can reach around 50% in the short run. However, this is not the company’s only source of income. Uber also makes money with promotional partnerships.
These are marketing campaigns run through the app and several times through the ride itself (for example, the BMW 7 Series offered free trips in its new car to promote it). In addition, it is worth remembering that Uber has been expanding its service offering.
Uber has also expanded into other services, the most well-known being Uber Eats, which thrived during the COVID-19 pandemic as a mobility and commerce solution connecting restaurants and customers through an online marketplace. It is a food service delivery app with the same characteristics as the transportation app — connecting restaurants to customers through an online platform and providing the delivery service through partner deliverers.
In this case, the revenue streams are three: advertising, the delivery fee, and the shares in revenue with the restaurants. All of these values and percentages vary depending on where the operation occurs.
Uber Business Model Canvas
Let’s see how the Uber Business Model Canvas can be designed below:
Uber Customer Segments
Uber’s core customer segments include:
- Riders: Typically individuals who:
- Do not own a vehicle or need temporary transportation;
- Require travel outside their city of residence;
- Prefer not to drive at certain times, such as during social events where alcohol is involved.
- Drivers: Generally people who:
- They are seeking personal income opportunities, either as their primary or supplementary job;
- They need a flexible work schedule and income they can build through driving;
- They want to hire themselves to work through the app without extensive experience.
Uber Value Propositions
Uber’s value propositions provide benefits for both riders and drivers:
- For Riders:
- The convenience of having a car come to them, available 24/7;
- Upfront fare estimates for easy financial planning;
- Trackable routes and built-in safety features;
- It avoids price haggling, as fees are predetermined.
- For Drivers:
- Access to a source of income, either as a primary job or as additional revenue;
- Flexible working hours and direct access to riders through the app;
- Pre-entered destinations from riders, reducing potential communication issues, which is especially helpful for drivers serving diverse communities.
Uber Channels
Uber reaches its customers primarily through:
- Word of Mouth: The most significant driver of user growth, especially in the early years;
- Social Media: A considerable channel for brand visibility and rider-driver engagement;
- App Stores: These are where riders and drivers download the Uber application, establishing a digital marketplace for connecting and transacting.
Uber Customer Relationships
The customer relationship involves three sides: customer, driver, and regulators. Uber’s focus is predominantly on the customer. If the company has no credibility with the end-user, it has no reason to create a relationship with the other two. Transparency regarding time and prices, as well as confidence in security and privacy, are essential here.
Uber’s second-largest customer is its driver. Since the driver is not an Uber employee and their vehicle is not Uber’s property — even though there are several lawsuits worldwide, the company needs to offer them attractive working and payment conditions to keep its business running. As for regulators, Uber seeks compliance and responsibility within the law, within a threshold, allowing it to obey the laws of the market itself.
Uber Revenue Stream
- Share (%) per ride
- Uber Eats
Uber Key Resources
Uber has two key resources:
- The platform that connects drivers and riders, with a focus on continuous improvement of its resources and algorithms;
- The Uber brand itself is used in all cities where the company operates.
Uber Key Activities
Uber’s two key activities are:
- App development and maintenance (as well as its algorithms);
- Maintaining and improving engagement between riders and drivers. For these activities to work, its key activities also include marketing, communication between the parties, customer service, and more.
Uber Key Partners
Uber’s business strategy relies heavily on partnerships to sustain its marketplace and service quality:
- Drivers: The most critical partners, as they:
- Represent the supply side of the chain, connecting directly with riders;
- Allow Uber to deliver its value propositions and reach the final customer;
- Revenue can be generated by providing rides, which is essential to Uber’s operations.
- Investors: Key for Uber’s financial growth, helping it to:
- Secure initial funding rounds needed to build and enhance the platform;
- Support development costs for the app, algorithms, and innovative solutions like driverless cars;
- Finance other expenditures necessary for expanding Uber’s services.
- Technology Providers: Essential for running Uber’s platform, providing:
- GPS, communication, and data analytics solutions for optimal driver and rider experiences;
- Cloud storage handles the vast amounts of data produced through the application;
- Payment processing systems for seamless transactions, ensuring ease of use for customers and drivers.
Uber Cost Structure
Uber’s cost structure is focused on platform maintenance and customer acquisition to support its business strategy:
- Platform Maintenance:
- Technology investments for developers who build and improve the app;
- Data storage and analytics to support efficient operations and enhance user experience;
- Payment processing fees, including credit card processing costs.
- Customer Acquisition Costs (CAC):
- Marketing expenses for attracting new users and drivers to grow the marketplace;
- Membership programs and promotions to increase user loyalty.
- Other Operational Costs:
- Legal and regulatory fees vary by region and are necessary for compliance;
- Insurance costs to protect both riders and drivers, ensuring security;
- Customer support, research and development, and investments in new mobility technologies to remain competitive.
Uber Competitors
- Lyft: This is the major competitor. Founded in 2012, the company provides services throughout the U.S. and in more than 220 cities, providing 18.5 billion rides per month. It went public at a $24 billion valuation;
- Curb: Owned by VeriFoneSystems, the company uses its systems and credit card machines for operation. Launched in 2015, Curb operates most of New York’s green and yellow taxis and aims to reach all the major cities in the U.S.;
- DidiChuxing: Launched in 2009 and already one of the largest companies in China, it offers services such as DiDi Chauffeur, Didi Test Drive, taxi-hailing, DiDi Minibus, and DiDi private car rental through its app. In 2015, the company reached 1.4 billion rides, and its valuation was $28 billion in 2016;
- OlaCabs: It began in Mumbai in 2010 as an online taxi aggregator. Now, the network reaches Australia, New Zealand, and the UK, and its valuation surpassed $5 billion in 2015. Currently, Ola has a more than 60 percent market share in India;
- Grab: Founded in 2011 in Singapore, the company also offers services in the Philippines, Indonesia, Vietnam, Thailand, Myanmar, and Malaysia. At the end of 2016, Grab introduced a messaging service on its app that allowed language translations, helping break this barrier in Asia;
- Cabify: Launched in 2011 in Spain, it is considered the most secure in the industry, with modern vehicles, expert drivers, and geo-tracking. The company operates in Spain, Mexico, Chile, Brazil, Peru, Argentina, and Portugal, among other places;
- Yandex Taxi: This Russian company offers ride-sharing and food delivery services in the Middle East, Russia, Eastern Europe, and Africa. It is also one of the world’s leading companies developing self-driving vehicles. The company completed 1 billion rides by the end of 2018, performed by more than 700,000 drivers;
- Local taxis: Every significant city globally has taxi spots, generally near stations, terminals, airports, and hotels. The advantage of taxis is the possibility of negotiating prices directly with the clients.
- Bolt: Established in Estonia, Bolt has rapidly expanded across Europe and Africa, becoming a key player in the mobility market. Known for its affordable pricing and diverse services, Bolt offers ride-sharing, electric scooters, e-bikes, and food and grocery delivery services in select locations.
Uber SWOT Analysis
Below, there is a detailed SWOT Analysis of Uber:
Uber Strengths
- Global reach: Uber is a worldwide company, making it the most recognizable brand in the industry, since it operates in 85 countries;
- Convenience: Uber is accessible to anybody with an internet connection and a smartphone. The app is easy to use, offers interaction with the drivers, provides several payment methods, and is usually cheaper than regular taxis;
- Pricing: The company uses multiple variables to determine the price of a trip, also bringing more advantages for the drivers;
- Operating structure: Uber doesn’t have employees, which allows the company to invest much more back in the business and R&D;
- Brand: Uber has the most comprehensive coverage in the industry, was the first to be launched, and had a lot of attention from the media.
Uber Weaknesses
- Lawsuits: Uber has been involved in many lawsuits, which have been affecting its image and reputation;
- Regulations: The company has a history of problems with governments regarding rules and laws of the taxi industry;
- Sustainability: Uber does not have internal policies to minimize the impact on the environment;
- Transparency: As it is a private company, Uber does not need to open up its finances, but this lack of transparency puts in check whether they are investing in R&D or others;
- Safety: Like any other transportation, Uber riders are subject to robbery, abuse, and other safety issues;
- Internet dependence: It relies on the internet and smartphones to run, but most emerging countries still face difficulties.
Uber Opportunities
- Expansion: Uber has a huge opportunity to expand into new markets around the planet;
- Diversification: The company has already added food delivery to its services, but it can still diversity its business and offers, especially niching down to categories of transportation, for example;
- The number of drivers: Whether it is a result of an economic crisis or not, the company has attracted many drivers. This increases the number of cars offered, which pleases the consumers, thus raising the number of regular users.
Uber Threats
- Competition: The high level and rising number of rivals may jeopardize Uber’s expansion, thus making it difficult to grow as planned;
- Margins: Uber keeps low rates, which results in low margins. For example, it has an 80% market share in Brazil, but it is still unprofitable there;
- Regulations: Governments may impose strict rules that can endanger Uber businesses in many countries.
-> Read more about Uber’s SWOT Analysis.
Conclusion
The success of Uber’s business model is very clear from the fact that you will rarely see a user comparing prices on their mobile before ordering a ride. They will simply open the Uber app and enter their destination. In addition, the company has had a very positive response from the population, especially in locations with employment problems, as it offers a new possibility to several people who are not working.
Any entrepreneur can draw several “lessons” from Uber’s business model. For example, you don’t need considerable equity to start a business. Uber doesn’t even own a car and, still, provides over 1 million daily rides. More than that, its founders saw a problem in an industry and simply sought a solution. And in doing so, they were able to transform the cab industry.
Finally, you can take two of the most significant entrepreneurship classes: 1) Treat your workforce as partners, and 2) Expand one step at a time. Uber started with cars and already operates with bikes, boats, and even helicopters!
