Lyft’s Long Path to Profitability

When Lyft went public in early March 2019, their IPO prospectus document gave the public insight into the inner workings of the company for the first time. This S-1 document sheds light on the company’s rapid growth, product strategy, and risks.

Two of those risks jump out at us:

1. We have a history of net losses and we may not be able to achieve or maintain profitability in the future

2. If we are unable to efficiently develop our own autonomous vehicle technologies or develop partnerships with other companies to offer autonomous vehicle technologies on our platform in a timely manner, our business, financial condition and results of operations could be adversely affected [IPO Pg 10]

Translated to plain English, Lyft is saying that it is not currently profitable, but a big driver of future profitability could be autonomous vehicles. On the surface, this makes sense. Drivers are by far the largest expense any ride-hailing company has for each ride. Research has shown that a fully self-driving ride could be half as expensive per mile to operate as a human-driven ride-hail.

But how far off is this reality? What happens if autonomous technology takes decades to come to fruition? Or if unforeseen costs negate many of the projected financial savings? In these scenarios, how could Lyft — and by proxy other ride-hailing companies — become profitable and remain a stand-alone viable business?

In this post, we will examine Lyft’s current financial drivers and propose strategic solutions the company could adopt without relying on AVs to become profitable, before ultimately recommending a path forward.

Lyft’s Current Financial Situation

From the S-1, we learn that Lyft lost over $900M dollars in 2018, on revenue of $2.2B.

Source: Lyft S-1 Document

Digging deeper into the numbers, we can see what is causing this loss. The company is proud that their contribution has been increasing steadily, however this only captures part of the story

Source: Lyft S-1 Document

Contribution margin is defined as revenue (Lyft’s share of bookings taken from the driver) minus cost of revenue which includes things such as payment processing fees, insurance required by city TNCs, and platform and technology costs. Many of the other income statement line items are quite significant.

Analysis based on Lyft’s S-1 Document

Because these numbers can be hard to interpret on their own, let’s run a theoretical scenario. We can assume that as Lyft gets more efficient, spending on things that aren’t variable with rides such as R&D, Sales & Marketing, and G&A might level off — which would result in a smaller percentage of sales as the company grows. The problem is that these costs currently represent 72% of sales and to break even they would have to shrink to to just 27% of sales — a sizable reduction to say the least.

But what if Lyft’s revenue was so big that this was possible? If Lyft was able to grow to $5.8 B in revenue without spending a single dollar more on Sales & Marketing, R&D, or G&A then economies of scale would kick in and the company would break even. This assumes variable costs of Cost of Revenue and Ops and Support scale proportionately with revenue (e.g. Payment processing remains 15% of revenue). The problem with these assumptions, is that it seems almost impossible that Lyft would be able to nearly double it’s business without investing in new technology, additional personnel and significantly more marketing. If we assume these costs also grow with revenue — albeit at a slower pace — than Lyft will have to be many times bigger than it is today before the company merely breaks even.

In short, without fundamental changes to Lyft’s business model, continued growth is not going to help the company’s profitability issues. The rest of this post will examine alternative strategies for Lyft to become profitable without relying on the “silver-bullet” of autonomous vehicles.

Option 1: Reduce Marketing and Incentives Spend

Two risks in Lyft’s S-1 stand out:

If we fail to cost-effectively attract and retain qualified drivers, or to increase utilization of our platform by existing drivers, our business, financial condition and results of operations could be harmed. [IPO Pg 23]

If we fail to cost-effectively attract new riders, or to increase utilization of our platform by our existing riders, our business, financial condition and results of operations could be harmed. [IPO Pg 23]

In short, Lyft is spending significant amounts of money on attracting and retaining drivers and riders. This spending comes in several forms: advertising, sign up and referral bonuses, rider promotions and reduced pricing, driver mileage bonuses, and driver discounts on third-party rental cars and maintenance programs. Lyft provides some level of detail on these costs in its S-1:

Analysis based on Lyft’s S-1 Document

While these costs have come down considerably as a percentage of revenue, they still remain high. Lyft’s path to profitability certainly includes further marketing reduction, but the question is how to do it in such a competitive environment? If Lyft pulls back, Uber will likely eat into its market share. This dynamic was on full display in the months leading up to the Lyft IPO, when the company went on what may have been its largest promotion spending spree in company history in order to increase market share and paint a more compelling picture of the company to investors.

One tool that Lyft can leverage to achieve profitability is a loyalty program. Many of both Uber and Lyft’s promotions target all users in the market, resulting in a fight for market share that lowers pricing and margins. On the other hand, loyalty programs prevent companies from competing for the same customers, ultimately allowing them to raise prices. To illustrate this, let’s run through a simplified hypothetical in which Lyft and Uber both charge $10 for rides and riders make purchase decisions purely on price and brand:

1. Instead of targeting all customers, Lyft offers a $2 loyalty discount to the riders that are already choosing Lyft over Uber. Let’s call them “Lyft Loyalists.” The remaining riders that choose Uber can be called “Uber Users.” Since Lyft Loyalists would select Lyft over Uber without the promotion and vice versa for Uber Users, this move does not affect market share.
2. Lyft then increases pricing for all riders by $2, the amount of the loyalty promotion. Lyft Loyalists now pay $10 per Lyft ride while Uber Users must pay $12 for Lyft. This move also does not affect market share as, by definition, Lyft Loyalists select Lyft over Uber when prices are equal, while Uber Users will still select Uber for $10 per ride vs. Lyft for $12 per ride.
3. If rational, Uber should increase its pricing by $2. This will not affect Lyft Loyalist demand, as they were already riding with Lyft prior to this price increase. This will also not affect Uber User demand as they are now facing the same price for Uber and Lyft rides, and, by definition, will always select Uber in that scenario. The end impact of this move is that market share remains unchanged and price increases, resulting in higher profits.
4. Lyft, then, can increase its pricing by $2 as well. Similarly, this will not affect Uber User demand, as they were already riding with Uber prior to this price increase. And it will also not affect Lyft Loyalist demand as they are now facing the same price for Uber and Lyft rides, and, by definition, will always select Lyft in that scenario. The impact is the same: unchanged market share, increased prices, higher profit.

As you can see below, this process is a cycle, allowing both Uber and Lyft to continue to increase profits:

Obviously, the market is more complex than that, but the example should still hold some weight in the real world. And Lyft already has existing initiatives that follow this strategy, but it should lean into them further and make them more transparent in order to more clearly signal to Uber. However, there are issues with this approach. For one, it runs the risk of breaking anti-competitive laws, a fact that airlines are all too aware. Secondly, while this strategy works in a market with only two players, users have more options in reality: from taxis to public transit to personal autos. Price increases will be limited by the value of these other options to users.

Conclusion: Reducing marketing and incentive expenses represent a large opportunity, one that Lyft has the ability to execute on if it can cooperate more and compete less with Uber.

Option 2: Expand Mulitmodal Platform

Lyft describes itself as a multimodal platform that offers “riders seamless, personalized and on-demand access to a variety of transportation options.” (IPO pg 130)

Within the confines of this business model, there are a number of services Lyft could offer consumers, including rides in shuttles or buses, access to public trains and subways, VTOLs (vertical takeoff and landing flying cars), or new vehicle form factors such as single occupancy vehicles, motorcycles, electric skateboards and more.

While some of these modes are novel and may be costly, they don’t all have to drive profitability. Instead, in order for this strategy to work, Lyft must believe one of the following statements:

1. Lyft can monetize new transportation services in a way that has stronger unit economics than ride-sharing
2. By building such a comprehensive platform, Lyft will have very strong customer loyalty and therefore will be able to reduce marketing and incentive expenses

Point one may hold some merit, particularly for micromobility transportation such as scooters or bikes. One could imagine that the cheaper vehicle cost and lack of paid driver in scooters and bikes could lead to profitable rides. Lyft’s co-founder Logan Green has stated this is not yet the case, as scooters have a very short lifespan but he seems confident future redesigns could fix this. Lyft could also find a way to monetize public transit by taking a commision or payment processing fee for trips booked through the app.

Point two is believable, but will it be a significant driver, particularly given that Uber is building a very similar platform? Pricing schemes such as subscriptions could help to lock users in and ease price competition. And exclusive contracts or permits (e.g., Citibike in Manhattan) exclude competition altogether. While these may appear like more modest initiatives, anything that can be done to decrease the marketing and incentive expenses that account for 62% of revenue would be a plus.

Conclusion: Lyft will likely continue to add new transportation modalities in order to search for better unit economics and increase customer loyalty, but it is unlikely that more and more transportation services can offset the losses generated by Lyft’s core business. Instead the company might have to rely on building very loyal customers so that Lyft becomes the only app one needs for all transportation needs.

Option 3: Offer Ancillary Services

While Lyft’s core business is personal transportation, the company could offer other transportation services such as personal delivery, logistics, or air travel. As reports about Doordash or FedEx’s public data indicate, there are opportunities for transportation businesses like these to be profitable. This certainly seems to be a strategy Uber is exploring with Eats and Freight. While Uber’s presence in these markets might prove their viability, it also makes it difficult for Lyft to carve out a unique position of its own.

Outside of transportation, Lyft could monetize other aspects of its business such as providing in-vehicle content, selling goods, or allowing third party ads. It could also include services that monetize the data and assets that come from the Lyft platform such as real time traffic and weather data. The market potential of this is huge. Intel estimates that the market value of in vehicle ads could reach $20B . While this might seem a bit far fetched for Lyft to generate significant profit from businesses other than the core, Amazon faced a similar situation when the company released its S-1 in 1997. The core business of online selling lost money at the time. Over two decades later, Amazon is extremely lucrative, but the profit is driven primarily by the “ancillary” business of web services, not online retailing .

Conclusion: Monetizing other aspects of transportation could be a significant driver of margin for Lyft, but it isn’t clear in what areas Lyft has a competitive advantage.

Option 4: Influence Regulation

For all the noise about ridehailing, it is surprising that it still represents just ~1% of total vehicle miles traveled in the United States. People often find public transit, personal cars, micromobility, or other options preferable. As a result, Lyft must keep its prices low (depressing profits) in order to compete with these other modes.

One way in which Lyft could lessen this pricing pressure is through regulation, specifically congestion pricing. If implemented on a per vehicle basis, road taxes would make Lyft’s shared rides more attractive versus non-shared autos such as single-occupied taxis or personal vehicles.

Congestion pricing does not currently exist in any major US city, but both Lyft and Uber are aggressively lobbying for the legislation. Uber announced a commitment of $1 million towards lobbying in New York and other cities, and Lyft has long called for the regulation as well. New York City is near approval , and other cities are starting to seriously consider the policy as well.

Conclusion: While regulation could be a big boost to Lyft’s profits, It will likely take some time for congestion pricing to be implemented in the US, and even more time for it to meaningful impact Lyft’s bottom line.

Option 5: Change Insurance Economics

One surprising takeaway from Lyft’s IPO filing, is the sheer size of Lyft’s insurance cost. Insurance is listed as a major contributor to Cost of Revenue and General & Administrative. The company uses both a wholly owned insurance subsidiary and third party companies but it is clear this is a major expense that should be reduced.

Lyft has already indicated they are working to do so by taking initiatives such as routing routes through intersections they know to be safer or mining data to tailor rates based on driver history. Thus, while this is an important cost for Lyft, it seems the company has already put a lot of initiatives into place to curtail it.

Conclusion: Lyft should continue to cut insurance costs where it is safe to do so, but given the company’s focus on this already, it is unlike to move the profitability needle too much.

Summary

So what is the best path forward for Lyft? Here is our final prioritization of the company’s options to achieve profitability:

1. Reduce marketing and incentives spend
2. Expand multimodal platform
3. Offer ancillary services
4. Influence regulation
5. Change insurance economics

In realty, Lyft will and is pursuing a combination of these options, but it is still a question whether they will result in returns that are acceptable to Lyft shareholders. And while autonomous vehicles are coming to market, it remains an open question as to when and whether Lyft will capture a share of their value. All in all, it will require a significant amount of work and some luck for Lyft to live up to its potential.