Lyft: Unprofitability, a Heavy Burden to Lift
Written by Jessica Hu & Raymond Shi
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Starting the Engines
Launched in 2012, Lyft provides peer-to-peer on-demand ridesharing services in over 300 cities in the United States and Canada through a mobile-based application. As the second-largest ridesharing app by volume in the U.S., Lyft has revolutionized personal mobility alongside its primary domestic competitor, Uber Technologies. Both companies have since expanded their product offerings with the additions of shared bikes and scooter networks, and information portals for public transit routes in select cities. Although the ridesharing industry is projected to continue growing at a compounded annual growth rate (CAGR) of 19.9 per cent through 2025, global incumbents in the ridesharing industry have not proven the long-term profitability and viability of the business model. In 2019, Lyft grew revenue by 68 per cent to $3.6 billion while net losses nearly tripled to $2.6 billion. Despite management promising profitability by 2021, investors have become increasingly skeptical as net losses grow. Consequently, Lyft shares have fallen 36 per cent to date since their highly anticipated IPO in 2019.
Stuck in Traffic
Today, Lyft faces two pressing issues: differentiating itself from its larger, diversified competitor Uber, and determining a plan for achieving profitability. While Uber has popularized food delivery services on its mobility platform, Lyft has yet to offer additional services that have been as widely adopted. Although the company has built a reputation for being friendlier to both drivers and consumers, this has not helped increase market share as price remains the dominant motivator for drivers and consumers alike. Uber drivers reported earning $2.24 per hour more than Lyft drivers, helping Uber develop a stronger driver network and cementing the company’s command of 69 per cent of U.S. rideshare spending; Lyft captures only 30 per cent as of December 2019.
Profitability continues to elude incumbents in the ridesharing industry. In addition to allocating 60 to 80 per cent of ride fares toward driver compensation, platforms frequently offer rider incentives, such as monthly discounts, to grow their active user base. Lyft has relied heavily on this user acquisition strategy, subsidizing one-third of its rides in February 2019. Lyft forecasts profitability on an adjusted EBITDA basis by year-end 2021, but given the hyper-competitive, low margin rideshare environment, investors remain skeptical.
To the detriment of top-line performance, Lyft reduced rider incentives in the second and third quarters of 2019 leading revenue growth to fall significantly in both quarters. As a result, Lyft management decided to reimplement rider incentives in the fourth quarter. This highlights the commodity-like economics of the ridesharing industry, characterized by price competition and low customer loyalty. Consequently, operators feel competitive pressure to offer subsidies to acquire new customers and retain existing ones. The ongoing price war makes profitability a significant challenge.
The Opportunity of a Lyfetime
Despite its reputation as a slow-moving industry, the U.S. parking management industry is expected to continue growing at a 10.8-per-cent CAGR between 2020 and 2025. Increased urbanization has resulted in traffic congestion, pervasive accidents, and increased emissions, creating a need for effective and flexible parking management solutions.
Despite ridesharing’s promise to change mobility habits, household vehicle ownership has continued to grow in the U.S. This has led to increased traffic and pollution, which have put a strain on quality of life for city residents. Urban drivers often spend up to 20 minutes searching for parking, as a result of poor awareness of parking spot locations, lack of information on lot vacancies, and expensive pricing. In New York, the average car owner paid $5,395 in parking fees annually in 2017, while cruising around the city to find parking spaces cost an additional $3,334.
The fixed pricing model currently employed by parking facilities is not efficient. Since supply of parking spaces is fixed, and prices do not take into account variable demand, average occupancy rates hover around only 60 per cent in Toronto. The vacant capacity available thus represents a significant opportunity for parking management companies to adjust their pricing to better monetize their parking assets.
Dynamic pricing is a strategy in which prices are flexible and adjusted depending on the level of demand, allowing operators to achieve a targeted occupancy rate. During periods of low occupancy, prices can be lowered to drive demand, while premium prices can be charged when occupancy rises above the target rate. By achieving a higher occupancy rate, parking lots can capture additional revenue typically lost from vacant spaces in a fixed pricing model.
With growing traffic congestion, low occupancy rates, and increasing competition, there has been a significant shift in the priorities and strategies of parking and transportation companies. The emergence of startups in the parking space, such as ParkMobile, ParkWhiz, and SpotHero, has enabled users to see maps of available parking spaces, reserve individual spots, and make in-app payments. This is complemented by the high adoption of payment technologies, which have reached 47-per-cent saturation. Parking companies have also begun integrating more technology into their offerings, with platforms like REEF Technologies-an alliance of seven parking management companies-providing next-generation digital kiosks and detailed data collection, which can be used by the operators of parking facilities to maximize the value of their assets.
An UpLyfting Proposal
Lyft should leverage its sophisticated dynamic pricing algorithm and mobile platform to establish partnerships with parking management companies. An ideal partner could be Impark, a company with 4,600 parking assets across 400 cities in the United States and Canada. A member of REEF, Impark has had limited forays into dynamic pricing in the past, including a pilot project in Chester County, Pennsylvania, partnering with small, targeted startups that focus on parking technology. Impark has not expanded beyond this, as the apps used for partnerships simply do not have the scale or user base of a large company such as Lyft. In comparison, Lyft’s large existing user base of over 22.3 million will provide an automatic data collection base for pricing. By using a modified version of Lyft’s dynamic pricing technology, Impark can increase revenue by maximizing occupancy rates. From Lyft’s perspective, partnering with Impark provides an avenue to increase revenue to fund its future investments and build brand awareness, especially in cities currently dominated by Uber.
Ready for Lyft-off
Lyft should develop an integrated LyftPark mobile feature within Lyft’s current application. It will include a live map showing occupancy rates and dynamic pricing of nearby parking lots while also offering a secure mobile payment system. Impark parking lots are set to go through a transformation as a part of the REEF Technologies alliance, so that all its parking lots will be updated with modern, smart technology. Lyft can assist in this transformation by providing the software algorithm needed for dynamic pricing, which can be easily displayed on the screens for users to see when they enter any Impark lot. Since Impark lots will already have the hardware, they can implement this partnership much more easily as they will not incur significant incremental costs.
Lyfting the Top Line
To ensure the partnership is financially beneficial to both Lyft and Impark, revenue will only be distributed to Lyft for transactions made through the app. Revenue from customers using pay stations at parking lots will still be allocated to Impark. However, revenue generated from the app will be split between the two companies: 50 per cent will go to Impark and 50 per cent to Lyft.
Lyft should initially roll out LyftPark in 10 major cities across North America with an Impark presence. Examples of dense, urban cities which LyftPark can target include Toronto, Chicago, Los Angeles, Houston, and New York City. Assuming that LyftPark will eventually be rolled out to all 4,600 parking lots, this new initiative could potentially generate $134 million incremental revenue for Lyft annually.
Driving Into the Future
By implementing the LyftPark platform, Lyft will be able to collect an abundance of user data and insights into the parking management industry. By establishing a first movers’ advantage within this industry, they can also partner with more parking lot management companies in the future to bring onto their platform. With this first step, Lyft can build its expertise in developing sophisticated dynamic pricing algorithms and establish an innovative new revenue segment to achieve growth.