My Thoughts on “Taking the Wrong Lessons from Uber”

An Addendum to Sarah Tavel’s Post

I just finished reading Sarah Tavel’s succinct and insightful Medium post, “Taking the Wrong Lessons from Uber.” It got me thinking on a few similar things I have come to realize from my first year as a VC at Wonder Ventures* and from hearing numerous pitches for “Uber for X” businesses. First of all, I’ll say I’m aligned with her thesis: “The magic of Uber is that it used mobile to create a 10x better product than the incumbent (taxis), and did so at a lower price. The “and” is everything.”

So, I’ve played off her structure, taking it one step further to label her two points in order of importance as I see them. Number one, price is actually the most important factor in the success of an on-demand company. Number two, the 10x better product is a misnomer, meaning that with a better price, you only need, say, a 2x better product.

PRICE — It is an entrepreneur’s nature to be product-focused and always try to reinvent things (i.e. the 10x better product). As such, aspiring entrepreneurs and investors are quick to first credit Uber for its great product and convenience, but I believe that price is actually the more important factor in this on-demand company’s success. Convenience is nice, style is great, but if you already use a product and someone offers you the same thing for a better price, of course you are going to take it (with the important caveat that you reasonably believe it is of equal or greater quality).

It’s also very difficult and expensive to show the average consumer that your product is 10x better via ads or word of mouth (i.e. CAC). Nothing beats experiencing a product for yourself. Those of us in the tech world are willing to try a lot of products in search of the 10x better one. But, I don’t believe the average consumer gets out of bed for just the promise of a better product. The better price is required for them to try it and thus even have the chance of realizing the product is better too. In a way, they’ll ask themselves, “How much am I willing to be paid (i.e. how much am I saving) to try a new brand in order to compensate for the risk of getting something of lesser quality?”

10x — This is a term that gets thrown around a lot in the tech/VC world. I’m not fully sure if there is a clear person to credit, but I first recall seeing it in a Mark Suster post that credits Bill Gross (a father of tech and icon of the LA Tech scene) with the quote:

“You need to make sure your product is 10x better than that of your competitors. First, you’re probably exaggerating how much better it is. But also when you’re developing so is your competitor. So if you shoot for 10x better you might hit 3x better and that’s super important to win.”

The 10x mantra is great. It’s clean, clear and easy to remember, and this exponential gain on product is exactly the type of big thinking that entrepreneurs and VCs are looking for. I think Bill Gross gets it right when he talks about how you have to aim for 10x just to hope to hit 3x. But in reality, I think the need for 10x is probably overstated when it comes to on-demand businesses. The product improvement is an important, must-have part of this formula for company success, but if you look at Uber, the 10x is more a future goal for success (i.e. self-driving cars), rather than a present product delivery.

Do I love that I can order a car from my phone while sitting in my apartment, and 5 minutes later walk out the door and see it sitting there? Yes, this is great and definitely better than a traditional cab. But is it 10x better? I’d say more like 2x better. And without the price difference, I’m not sure it would be enough to scale to the average consumer.

Now with UberPool, we are getting closer to 3x. UberEats, maybe 4x. But what would a 10x improvement look like? Perhaps it looks like an autonomous eco-friendly drone summoned on-demand based on my future plans, which appears outside my front door. It then flies over all the streets, avoiding traffic and getting me to my destination in 1/10th the time a car would have taken. That may be 10x. And it may not be that far away.

SUMMARY — For me, price is the most important factor in the success of an on-demand business. It’s what actually gets the average consumer to try a service and stay with it. Combine this with a 2x improvement, or even just 1.5x, and that should be as good as Uber is currently doing. In a way, a better price can be seen as a feature. In my estimation, if your price is 10% better, this is the equivalent of a 2x feature, 20% = 3x, 40% = 5x, etc. So if you can deliver a 2x better product (as I believe Uber has) at a 40% discounted price, then you get 2x X 5x, which equals a 10x better business.

Thanks to Sarah Tavel for the inspiration. I can’t wait to see what she puts forth in her follow up post to this one.

Follow me on Twitter @du_ro and on Medium as I write musings on being a founder-turned early-stage investor at Wonder Ventures.

*Disclosure: I am an investor in on-demand businesses Uber, Luxe and Clutter.