Today we’re talking about Uber, the ridesharing company and putting its business model on to the business model canvas. So, there is the Uber business model canvas, a short video presentation, and an analysis of the Uber business model based on the 9 segments of Alexander Osterwalder’s business model canvas.
Uber’s a ride-sharing company. It has disrupted the taxi industry by using technology to allow people with cars and spare times to drive people who don’t want to drive but who have money.
Basically every city had two or three taxi companies, but because of the way they operated they could not scale beyond a limited geographical area. Uber changed all that and that’s what we are going to look at now.
Click here to go straight to the Uber Business model canvas and skip the analysis
The Uber business model has 2 groups of customers. It has passengers and it has drivers. In a traditional taxi business model canvas, the customer segment is purely passengers and drivers are part of the company.
What distinguishes Uber’s passengers from traditional taxi passengers most is they need a smartphone and a credit or debit card. Without these, they can’t use the platform.
Uber’s other customer segment are drivers. Instead of employing drivers and having an asset heavy company, Uber uses freelance drivers – which brings many legal battles worldwide. Here Uber has reached well beyond the traditional source of recruits for taxi drivers. They made driving accessible to anyone with a smartphone, a smart car and a smart appearance. As well as anyone who’d like to earn some cash whenever they want to.
Next on the Uber business model we have the value proposition. At the heart of the business is the value proposition that says
We will always give you a ride when you need it
and for drivers
We will always give you passengers when you want them
In a traditional taxi business, the number of taxis is determined by the rides that are available over time to support that number of taxis and drivers. If demand surges there is no excess capacity. And if there’s low demand for a period? Drivers are slow to leave the market and payments for all drivers suffer due to excess supply.
Uber’s value proposition is thus like a market but if it were that simple it would not have the same disruptive effect. What enables it to deliver on the promise above is that it is able to match supply to demand.
How do they match Supply to Demand?
By using real-time metrics it is able to see what demand is like and then as demand starts to exceed available capacity to reduce demand by introducing surge pricing (but taxi fares are somewhat price inelastic so this is a lesser effect) which increases prices where demand is highest. At the same time, the increased fares encourage more drivers to work and thus increases supply.
Uber is able to do this because the drivers are owner operators. It doesn’t own the assets and thus it can flex capacity within minutes, whereas a traditional taxi company takes months or years to achieve the same results (in the case of New York taxi medallions almost never).
The technology enables this value proposition and at the same time, it also enables traditional pain points to be addressed at minimal additional cost. If you have no cash it’s not a problem. Uber charges your card. In fact, the whole system is cashless making it safer for both drivers and passengers.
It also brings transparency by identifying both driver and passenger and their positions to each other – and by showing exactly where the taxi is at all times. Uncertainty – and thus anxiety – is reduced for both
These are issues that were difficult to resolve in a traditional taxi business model.
The only time I’ve spoken to anyone at Uber was when I bumped into the local Uber country manager at a startup event. For the everyone else, it’s a totally automated process as far as the passenger is concerned. The old dispatchers are removed and the passenger’s phone automatically identifies the pickup point.
For the driver’s there is a more hands-on role, principally around quality assurance and making sure that the drivers meet the minimum quality standards that Uber expects. And ideally they don’t pull guns on their passengers
Let’s take a look into the Uber marketing strategy and channels it used in its early days. Uber started to use many different channels as it grew, but early on the focus was in moving from city to city to get enough drivers and users signed up. They also wanted to get them using the app so there was a strong enough market to make it work.
Increasingly with a market in each city, the channels are through the mobile app. As for the Uber marketing strategy, it was purely through email and word of mouth! This was incredibly important in overcoming adoption fear and crossing the chasm from early adopters – and PR.
One of Uber’s huge strengths has been the amount of money that it has raised which has given it a huge amount of earned media which in turn has driven passenger and driver growth.
Revenue is pretty simple. Uber moves the traditional taxi meter from the car to its servers – tracking via GPS technology on the phone – and then charges the passenger based on the miles traveled and whatever surge multiplier is in effect. If the passenger uses a different Uber brand the same process applies but with different pricing.
Uber has three key resources without which the whole thing falls apart. First, it has the platform. This connects Uber to drivers and passengers and both to each other.
That’s a necessary but not a sufficient requirement. Then it has the algorithms that do the heavy lyfting (sorry couldn’t resist that). These are the pricing and routing algorithms. Pricing algorithms are used to balance supply and demand in the market. It also helps ensure that there is always enough capacity available to meet demand – fulfilling its core value proposition.
The Routing algorithm focuses on ensuring that the customer wait time is as short as possible. By implication it reduces the deadhead time for drivers as they’re either waiting for, or driving to a new job.
A key part of the Uber business model is then developing the platform. It is continually adding value to ensure user adoption and retention as well as optimizing it algorithms.
It also has to do significant marketing on a global and a local lever to driver/passenger adoption and ensure an adequate supply of drivers. Churn apparently is a problem.
Uber still has the same problem as traditional taxi companies. It serves lots on unconnected geographical markets. Singapore, London, Frankfurt. Each has specific attributes and requirements. So marketing to users in each city, and ensuring that there’s the right level of driver support for user growth is critical for meeting its value proposition.
The main one is the drivers who own all their cars. That saves Uber from having a contract with a leasing company for hundreds of thousands of cars. It has the payment processors and the map data providers.
Often missed are the local authorities. In many cities, there are legal actions against Uber. Taxi companies are fighting to protect their businesses and persuade the ‘authorities’ to erect barriers to entry against Uber. This is often characterized as adversarial. But in the long run regulation is seen as important and Uber will need to resolve these issues. So they are long term partners, even if they are not right now
There are the huge costs for the platform development, hosting etc. There are the salaries for the software engineers, the sales, and marketing teams and the country and city managers. And then there are the driver payments. Uber gets paid upfront, keeping the money before paying drivers each week to ensure that the payments are valid.
The Uber Business Model Canvas
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