Understanding Uber’s virtuous cycle
From a UX experience, Uber is “hit a button and a car comes,” but from a business standpoint, it’s a vast collection of hundreds of hyperlocal marketplaces in nearly 70 countries. Each marketplace is 2-sided, with riders and drivers, has its own network effects driven by pickup times, coverage density, and utilization.
Andrew Chen has written a insightful post about the challenges Uber faces everyday to match riders and drivers. I hope he continues to share his learnings (he started working in Uber a few months ago).
One interesting question is if lowering fares increases earnings-per-hour for drivers. Uber did that a few months ago and the results were successful.
Uber has recently cut fares in about 100 markets. Like surge prices, these cuts are a marketplace balancing mechanism to increase demand and ultimately increase driver earnings.
This is done in a way described within Sack’s diagram above, where the “less downtime” arrow is the key. When drivers aren’t sitting and waiting for their next trip, they are more efficiently utilized, which increases their earnings. If you can get earnings-per-trip and trips-per-hour to go the right way, you can increase earnings-per-hour.
Uber has released some directional charts showing this as positive for drivers, as part of Price cuts for riders and guaranteed earnings for drivers. The essay describes an approach of lowering fares to boost demand, and pairing that with guarantees while the rider side of the market figures this out.
Those cuts didn’t increase earnings-per-driver everywhere. As the first article of the quote explains, Uber pulled a 40 percent price cut back to 29 percent in Charlotte and in two cities, including Seattle, they ended up reversing the price cuts entirely because they realized that prices were affecting negatively earnings-per-driver.
Uber worked on its new driver app for over a year (interesting article on Wired). As you can see on the left screenshot, drivers can see which areas of the city have surge pricing activated so they are more willing to move to those areas to equilibrate the demand. They also provide tips to drivers on their ratings section so they can improve them.
Another interesting articles about Uber, its market and its dynamics:
- How to Miss By a Mile: An Alternative Look at Uber’s Potential Market Size by Bill Gurley (Series A investor and board member at Uber)
- Why Uber fights by Ben Thompson