After nearly being run over by a taxi today in Greenwich Village (NYC), among many other misconducts by NYC’s cabs, I have decided to write a review of my positive experience with Uber as well as its clever business strategies, since, after all, this is a marketing blog. ๐Ÿ™‚

Keep in mind that Uber is not a saint. It has its flaws, especially since it is a startup. I’m just highlighting some smart things that the company did.

For those unfamiliar, Uber is an app that allows users to summon a car to take you to your destination. It’s essentially a dispatch service.

uber - everyone's private driver

Overview

Let’s first examine the items that are considered of high variance to consumers.

  • Driver actually picks you up — there are instances where a person can simply come around and stand before you at an intersection and claim entitlement to the next cab
  • Driver does not screen you for where you’re going (to see if the fare is worthwhile)
  • Driver offers simple services, such as placing and removing luggage from the trunk of the vehicle
  • Vehicle usually does not smell — cab drivers normally eat their lunch / dinner while driving

As you can see, most of these items are traits of a common taxi. Below, I will explain how Uber is increasing willingness to pay, reducing costs, and reducing prices by battling the aforementioned and much more.

taxi vs uber - wtp comparison

Better and cheaper? That’s just a butt-kicking.

Adding Value by Increasing Willingness to Pay (WTP)

If you live in NYC, you’d know that cabs are crooks. Plus, they’d outright refuse to service you if your destination is either not somewhere they like or it is not worth the fare.

Uber increases perceived benefits by improving the output, thus increasing WTP by consumers.

uber - pickup
Tangible Improvements

  • App to summon service versus having to hail or be rejected by cabs
  • Luxury to wait for Uber indoors (with estimated time countdown) versus having to wait outside — for example, I could summon an Uber a few minutes before I leave a coffee shop
  • Quality service assured because Uber drivers are ranked on a rating system โ˜…โ˜…โ˜…โ˜…โ˜… and fired if below a certain threshold
  • Tip included (ease of mind) versus having to debate whether to tip a taxi driver, even though the taxi driver was possibly unhelpful and rude

Intangible Improvements

  • If you use the black car service, you have the prestige of cruising around, according to Uber, “like a European diplomat” versus arriving in a smelly yellow cab (not joking) or in a Lyft with its silly pink mustache (until its recent abandonment)
  • For those who feel this way, be an early adopter of technology

Adding Value by Decreasing Costs

Uber has increased efficiency in production, thus lowering costs. If it lowers costs, it can lower prices charged, making it more competitive (and customers happier).

  • Uber drivers do not need to drive around looking for customers to hail it, which saves fuel and time (Uber — inbound vs. taxis — outbound)
  • Uber drivers are not stuck driving for 8-12 hours a day; they can turn their availability on or off at a whim
  • Uber does not have vehicular equipment to purchase, maintain, and depreciate as Capital Expenditure, making the company more agile
  • Uber has fixed costs and employs technology to achieve economies of scale
  • Uber is able to pool risk because of aforementioned

As a result of reducing costs, Uber has the luxury of reducing prices without hurting its bottom line.

Williamsburg to East Village

uberx cheaper

Nolita to Lincoln Center

uberx cheaper

Grand Central to Financial District

uberx cheaper

Threat of Rivalry

Uber will face, if not already facing, various threats in the ensuing years.

Easy Imitability
Since Uber’s app features are easy to imitate (e.g., Lyft did so), Uber needs to increase scale, utilize existing and shared resources (e.g., crowdsourcing drivers), and/or enter new geographies, which explains its aggressive expansion plans.

Barriers to Entry
(1) One issue that Uber is facing, from my personal experience, is government bureaucracy — Uber is not allowed to pick up passengers from airports or docks. Government regulation is a giant barrier in this situation.

Last week, my Uber driver was pulled over by a police officer and then cited by the Department of Transportation (DOT) for $1,000. The police officer did not cite the driver because he didn’t violate the law, but the DOT does not have the authority to pull a driver over, so it was a double team effort.

The Taxi Commission and local law enforcement are colluding. *snicker

(2) There is also the possibility of retaliations by competitors, such as the protest by angry taxi drivers. They gridlocked traffic in Washington D.C. as a caravan.

(3) As Uber expands, it will also need to have access to input (i.e., drivers). Since Uber is only a dispatch service, it does not have its own team of drivers. Therefore, it has to maintain the following to keep them on staff. Otherwise, drivers may turn to Lyft or return to cabbing.

  • Superior payment plans
  • Flexible schedules
  • Strong network of customers seeking the service – more $ for drivers

Retainment is based on co-specialization of all assets of Uber to enhance the performance of its drivers. Uber can’t own the employees (drivers), but can own the assets that make their experience most awesome (leverage).

USA Today — August 27, 2014 — Uber reported to hire Lyft vehicles with Uber Brand Ambassadors as passengers. While as a customer, Uber Brand Ambassadors will try to coax Lyft drivers to join their company. Recruiters even have “driver kits” should Lyft drivers want to take the plunge immediately.

Uber is utilizing resource-based view (RBV) to secure a competitive advantage by trying to control scarce resource (i.e., drivers).

(4) Uber also faces a barrier with finding qualified drivers. There are some terrible stories about a driver who held a woman’s phone for hostage and another incident with sexual assault. But then again, this could have happened with a taxi service too.

(5) Lastly, there is the barrier of a learning or experience curve for consumers. This is very different from the culture of whistling or raising your arm up to hail a cab.

Supplier Power
There are many possible rivalries with suppliers, but the most notable threat is the collaboration of drivers into a union. If they all get together to negotiate rates, then Uber (along with other services) will have to comply.

Presence of Substitutes
Depending on convenience, lower cost, or consumer taste, taking the subway or walking, as examples, to one’s destination are viable alternatives. Public transportation and walking are not only welcomed on a nice day, but they also reduce pollution for those who care about the environment.

Buyer Power
Since information is easily available via the web, Uber needs to stay competitive, which it is, or else the Substitution Effect takes place. For example, a consumer could easily find out if there are cheaper rates from other companies on social media. Uber also needs to rival buyer incentives, such as carpool services and so forth.

Pursuing Advantages

Uber has been strategic in its competitive moves. Thus far, Lyft has always been playing catch-up.

Changing of Prices
Since Uber has lower costs than competing limo or taxi services, it has the flexibility of changing prices to gain a temporary advantage (i.e., gain market share by stealing customers or pushing out competitors). UberX (cheaper than taxi) is the primary example.

Improving Product Differentiation
Uber was quick to integrate UberX and UberSUV. And most recently, it even integrated UberBoats and water taxis.

uber boats

uber water taxis

You have to give Uber credit for quick strategic maneuvering!

Vertical Integration
As of right now, I believe that Uber wants to remain scalable as a software company, despite moving real assets. At this point, Uber is at the highest point of input in the vertical chain. It can, theoretically, only integrate down into the segmented markets or other forms of transportation services. I won’t elaborate here because integration is not always advisable if contracts or joint ventures suffice.

Buyer Tastes
Calling your own “personal” driver sounds cool. Plus, it’s extra cool when he or she comes in a black car. This gives Uber a competitive advantage. This is why it was smart for Lyft to drop its pink fuzzy mustache in order to compete in NYC.

Supplier (Uber) Power and Commoditization of Driver Service

For cabs to operate, they need a medallion (costs roughly $1MM) in order to give the bearer the right to pick up passengers for hire. Uber has removed that barrier to entry because Uber’s service is the same as a user calling for a private car, except that Uber is done through an app.

As the industry competes on price, especially with UberX (cheaper than a taxi), supplier profits increase because the demand curve is downward sloping.

As the price of the service gets cheaper, the more people will use it. The more people that use it, the more the ruling suppliers will benefit. In this case, Uber profits. In a way, the car service industry is heading towards commoditization. As long as Uber maintains brand equity, consumers will make it the preferred choice, driving even more profits to Uber.

This is very similar to the photo industry. When barriers to entry are reduced and profits are available, there will be new entrants. In order to be competitive, new entrants drive the price down for the services. Since the photo services and products (e.g., prints) are cheaper, demand by consumers increase.

With the increase of photo supplies needed, camera manufacturers, camera bag producers, print labs, photo workshop teachers, online proofing services, and other suppliers profit.

Overall, Uber has done a wonderful job in differentiation and sustaining capital investment for rapid expansion. I’m going to stop here. I could do a whole writeup on driver compensation, rating system, etc., but not today. I look forward to Uber’s further disruption of the car service industry. Bye!

Ride safely,

Lawrence Chan

P.S. I am not a shareholder or employee of Uber, although I do believe that both would be fun ideas.

uber vs taxi

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