Complete the final case study paper on "Ford" Guidelines: The final case study paper should cover4 sections including an overview of the company and its competitive landscape along with 3 other sectio
Running head: Uber Case Study
Uber Case Study
XXX Student Name
June 30, 2018
Overview of Uber
Uber is a ride sharing company that was launched in San Francisco in 2010 when UberCab connected its first rider with a town car for a ride across the city (Uber.com). The company was designed to allow consumers to hail a ride from local drivers with the simple push of a button (using an app), and has since disrupted the taxi cab industry. The inception of Uber brought new technology and ideas into a transportation sector historically lacking in innovation and customer service. The company’s founders saw an opportunity to use technologies such as smartphones, GPS and Google Maps to improve transportation and the result has been a more convenient, faster and cheaper service.
Uber is headquartered in San Francisco, California and operates by charging consumers for rides. This is primarily how the company generates revenue (although they do participate in some advertising on their website). The Uber app facilitates the location of a driver and the transfer of funds. The fare is then charged to the consumer’s credit card (Investopedia.com, 2018). Uber quickly raised money and launched operations in hundreds of cities; it is now in over 65 countries and cities worldwide. Last year, Uber announced it had completed 4 billion trips (15 million trips are completed each day) (Uber.com).
Since 2010, Uber’s service offerings have become quite expansive. Although they initially offered only full service luxury vehicles, now when hailing a ride consumers have choices such as Uber Pool, Uber X, Uber XL and Uber Black. These choices were non-existent previously with taxi cab companies. More recently, Uber has entered other markets such as the food delivery business. They now offer services such as UberEATs which delivers food from local restaurants (Ubereats.com, 2018).
To understand Uber’s main competitors and market structure, it is important to understand some of the history behind taxi companies, especially in major cities. Taxi cab drivers had a monopoly prior to Uber entering in many cities such as New York. In 1937, New York City passed the Haas Act which established a licensing system to influence supply. The system required taxi drivers to purchase a medallion in order to operate. The government sells limited numbers of medallions which allows them to control competition and entry into the market. This is at the expense of consumers since it restricts supply and keeps costs high. Despite a growing population, the number of available medallions has remained partially fixed, only increasing marginally. Taxi drivers with a medallion enjoy high profits and have fewer incentives to ensure satisfaction. Today, the number of medallions in New York City remains capped, maintaining a barrier to entry.
After Uber launched in New York City, the prices of medallions dropped significantly; this has been coined the “Uber effect” (AE Ideas, 2016). Without the same regulations the taxi companies have, it has been able to provide significant value for consumers including faster service, cleaner cars and lower prices. There is concern, however, that its aggressive pricing will not generate enough revenue to adequately compensate drivers and ensure adequate profits to shareholders (Sherman, 2017).
Uber drivers are needed to provide the labor and equipment for the service. Drivers with Uber are attracted to the flexibility it offers and the fact that earnings per hour remain steady regardless of the number of hours worked. Uber drivers have diverse backgrounds and tend to vary their hours from week to week. Uber provides an option for educated individuals not working full time or in between jobs. It has been stated that Uber driver-partners earn “at least as much as taxi drivers and chauffeurs” so they are attracted to Uber because the entry barriers are lower and hours are more flexible (Hall & Krueger, 2016). Not surprisingly, UberX drivers spend more of their time and miles with a customer in the car than do taxi drivers (Cramer & Krueger, Disruptive Change in the Taxi Business: The Case of Uber).
Demand Analysis
As a concept, demand is based on the theory of consumer choice (McGuigan, Moyer, & deB. Harris, 2017). There are several alternatives to ride sharing that consumers can chose from. Consumers have the choice to get from point A to point B via taxi cabs, buses, personal cars, bikes, foot travel and the subway, just to name a few. In thinking about the demand for Uber, factors such as the price of gasoline come to mind. When gas prices are high, consumers may be more likely to walk or take a more efficient form of travel, such as a bus or a train (assuming Uber has to raise its prices to cover the cost of gas). Another factor is events or location. For example, demand for Uber services are likely to spike after a sold-out concert.
Since Uber typically charges lower prices than taxi cabs, consumers who have historically taken cabs have more purchasing power with Uber. This means they have more money in their wallets to spend on transportation which may result in more frequent trips using the ride sharing service or possibly even opting to upgrade to one of Uber’s higher end services such as UberX or UberBlack. As Uber has become more competitive in most cities, people have been substituting cabs with Uber. This is known as the substitution effect. Uber could be considered an income-superior good, therefore, because of the combined impact of the purchasing power and substitution effects, there will be more demand (McGuigan, Moyer, & deB. Harris, 2017).
Uber has implemented surge pricing for ride sharing in times when the demand is higher than the supply of cars. The demand for Uber is elastic; this means that an increase in price often results in a decrease in consumer utilization (McGuigan, Moyer, & deB. Harris, 2017). With surge pricing in times of high demand, people who can wait for a ride often wait until the price drops. Meanwhile drivers working go to the area of high demand to pick up customers who are unable to wait until the price drops, or are otherwise willing to pay an increased price. As these actions occur, wait times begin to come back down.
A customer’s desire to purchase a product or utilize a service like Uber can be impacted by factors other than pricing, such as marketing, targeting the most likely customers and establishing loyalty programs. Uber has done a fantastic job marketing (so much so that Uber is now used as a verb!). While actual switching costs to use a competitor service such as Lyft are low, many customers, once they have downloaded the Uber app, uploaded their payment information, etc., are unlikely to shift to another service. This means that users already familiar with and using the Uber app have effectively reduced the number of substitutes under consideration in the short term. Also, loyalty programs that provide Uber credits (such as when a customer refers a friend), helps keep customers loyal to the company.
Another concept I want to touch on in this paper is the concept of price discrimination. Since its inception, Uber has changed the way it calculates fares several times and has embraced the economic concept of price discrimination. A recent article mentioned that Uber has moved to a system that price discriminates and “charges what customers are willing to pay based on factors like whether you are traveling to a wealthy suburb” (McKenzie, 2017).
What Uber Got Right
Uber has gotten a lot of things right. One is that they secured first mover advantages in the development of ride-sharing technology. Other companies, such as Lyft, engaged in a pattern of quick imitation. (Uber is also the first to begin integrating into applications from a number of other large companies such as Starbucks.) Furthermore, Uber timed their expansion well. Around the time they were expanding, there was a large pool of unemployed individuals coming out of the recession. Uber was able to tap into this workforce and provide a lot of labor supply. They have tapped into what has been coined the Gig Economy, the labor force of new entrepreneurs.
In addition to securing the first mover advantage, Uber secured brand name reputation. Branding is an investment for companies and they become capital assets that “provide future net cash flows from repeat-purchase customers as long as the brand reputation holds up”. As mentioned previously, Uber is now used widely as a verb and is known for quick and reliable service.
Something else that Uber has gotten right is eliminating some asymmetric information for the consumer. In competitive markets, under ideal information conditions, you get what you pay for (McGuigan, Moyer, & deB. Harris, 2017). For this reason, I appreciate the fact that with Uber, I know exactly where I am going and I am allowed to select the algorithm that takes me from point A to point B by way of the shortest route. Also, with Uber I am able to rate the drive and the driver is able to rate me. This provides us each with information about the quality of the other and helps us both make informed decision about whether to use/provide the service. I would also say that in my personal opinion, Uber has responded quickly and effectively to criticism and fears that they are a dangerous service and have been able to maintain positive associations with their brand name.
There are several pricing decisions that Uber has gotten right. Along the demand curve one will find people who are more price sensitive and people who are less price sensitive. A company’s goal is to differentiate these groups enough to get the less price sensitive customers to pay more. Uber has gotten the concept of price discrimination right, since they charge different prices to different consumers to ensure they are getting the highest price. Economic theory shows that everyone can benefit from this under the right conditions. For example, if Uber makes more money it can enter new markets or attract more drivers, which decreases customer wait times.
Uber is very efficient; in fact, it has been demonstrated that Uber drivers spend less time than cabs driving around and looking for someone to pick up than do taxi cab companies. A recent paper by Judd Cramer and Alan B. Krueger demonstrated that Uber drivers have more passengers per mile driven or hour worked than taxi drivers. “On average, the capacity utilization rate is 30 percent higher for UberX drivers than taxi drivers when measured by time, and 50 percent higher when measured by miles” (Cramer & Krueger, Disruptive Change in the Taxi Business: The Case of Uber). The authors describe the following four factors that are thought to contribute to the higher utilization rate of UberX drivers: 1) Uber’s more efficient driver-passenger matching technology; 2) Uber’s larger scale, which supports faster matches; 3) inefficient taxi regulations; and 4) Uber’s flexible labor supply model and surge pricing, which more closely match with supply throughout the day.
Finally, Uber has mastered the networking effect. The more people that use Uber the more drivers are likely to drive for Uber. More drivers equals more access and everyone benefits. Uber has become an industry standard and it simply becomes more valuable the more widely it is embraced.
What Uber Got Wrong
Uber has gotten several things wrong in their short time in business. One thing they may have gotten wrong is the implementation of their surge pricing strategies. Uber raises the price to induce more supply in times of high demand. The more sensitive the drives are to prices, the more effective the surge pricing is. While economically this makes sense, anecdotally, people began switching to Lyft because they were not happy about the surge pricing and it has hurt the company brand.
Furthermore, Uber has recently come under fire for price discrimination. Consumers have been up in arms since learning that Uber participates in price discrimination by charging a customer what they calculate the customer is willing to pay based on information such as whether the customer was traveling within a wealthy neighborhood. One article interestingly points out that while this seems wrong on some levels, at least from an economic standpoint it is beneficial to all. The author states that "while this sounds like it comes at the expense of consumers, economic theory shows that society as a whole can benefit if certain conditions are met. For example, if Uber’s new pricing means it can enter new markets or reduce customer waiting times, price discrimination could increase society’s overall welfare." (McKenzie, 2017). All that said, from an HR and customer standpoint, Uber got this wrong, since the perception and negative press further hurt their brand.
Uber has also dealt with a principal agent problem over the past few years. In fact, their former CEO, Travis Kalanick, was recently forced out at the request of shareholders/major investors. Managers, or agents, are hired to act in the best interest of the company, and when they don’t the company has a principal agent problem. In the case of Travis Kalanick, the company dealt with a fair amount of HR issues during his tenure. The Uber workplace culture was alleged to be fraught with sexual harassment and discrimination. Additionally, Uber had many assault scandals, was under fire for safety concerns with its self-driving cars (as well as in a legal battle with Google over the technology), and all with Travis Kalanick at the helm.
It has also been suggested that Uber drivers (agents) do not always have their incentives aligned with those of the company (principal). Gratuities are a way to overcome such slightly diverging interests as they incentivize the agent to act in the company’s overall success. Uber drivers would like to see a prompt for tips on credit card receipts (currently tips are not the norm for Uber). This may help drivers earn more income, making them likely to provide better service and spend more time driving (Gail, 2017).
Finally, Uber has been banned in several large cities because they failed to comply with local rules and regulations. Uber became well known for entering into a city and then afterwards trying to make amends with the local government. Perhaps a better strategy would have been to work with them upfront.
Conclusion
At this time, Uber remains one of the most valuable private companies in the world.
Uber has recently restructured and has replaced the founder with a new CEO. They have also replaced some members of the board as well. This means they are positioning themselves to become a more mature company with greater governance in the future. They have survived numerous scandals are more in tune and responsive to investor concerns and to public opinion.
Uber has made clear its aspirations to become a publically traded company, which will subject them to even more oversight and controls. The requirement to publically report their financials and other important company information will reduce asymmetrical information for key stakeholders when this happens.
Uber is smart as they are beginning to think about the future. Strategically, it will help them in the long run to create alternative sources of revenue. For example, in the future, it may not be necessary for all households to have 1-2 cars that sit idle the majority of the day. Since self-driving cars may very well become a reality, Uber has taken this potential threat to them and is already working in this space to turn the threat into an opportunity. Because of their brand awareness, people will be more likely to use Uber self-driving cars in the future if they are offered. Uber is also trying to make use of their driver resources by aggressively diversifying their portfolio of products and services.
Uber should continue to be self-aware of possible threats like Lyft and other companies in the ride hailing business as well as other companies pursuing self-driving cars (such as Google and all the major car companies). With strong leadership, I believe Uber can continue its successful business as well as continue its revenue growth and expansion into new markets at a rapid rate.
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McKenzie, J. (2017, May 24). The economics behind Uber's new pricing model. Retrieved June 24, 2018, from The Conversation: https://theconversation.com/the-economics-behind-ubers-new-pricing-model-78180
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