My free business lesson from an Uber driver

Want a free business class? Find out more about Uber (or try talking to more Uber drivers). Every Uber driver has at least some kind of opinion to share about the Uber business model (its upsides and downsides for drivers and passengers alike), and some drivers (if you are inquisitive) will provide you with additional business logistics. Occasionally you will receive an outlook on the (potentially sobering) present and future societal impacts of Uber. If you are really lucky, you will have spent the whole ride entertained by a detailed rundown of the business' history and how it has been continuously adapting to novel locations, changing consumer demands, and emerging competition. I found myself the lucky passenger of precisely the latter kind of Uber driver on my last trip from SFO to Palo Alto: a young latin American named Marcos, with a square jaw and an equally square baseball cap bill. I will endeavor to provide a recount of this conversation (really, a monologue punctuated by my occasional requests for additional details). I aim also for my recounting to have the properties of a conversation, in that regardless of the factual accuracy of individual details or the exact temporal sequence of events (potentially tainted by the knowledge of my driver and my interpretation), the general outlines of the high-level picture should nevertheless surface.

source: http://johnbracamontes.com/

From my driver Marcos I learned that Uber sprouted up in SF to fill an existing gap in the market: the need for a professional and, importantly, reliable chauffeuring service. An emerging sentiment at the time was one of dissatisfaction with cab services, passengers having to unwillingly deal with unreliable service and rude or disrespectful drivers. The drivers seemed to have the upper hand in this market and behaved accordingly. 

Although I am not sure how widespread this sentiment was, I can attest to the fact that this is the reason I've never liked taking cabs.

Naturally, this was the sort of inconvenience and unpleasantness that the more financially-privileged were willing to pay to avoid. Uber saw this opportunity, and was perfectly positioned to take advantage of it: in a city with (1) a dense population packed in a relatively small (drivable) area, (2) large and growing tech companies providing a continuous supply of financially-privileged individuals, and (3) a traditionally startup-friendly environment, where bold new ideas regularly surface and are picked up by the wave of tech hype. And so, Uber was born (in 2010). As a professional and reliable chauffeuring service with a convenient mobile app interface (and up-to-date updates on driver location), passengers would be picked up in shiny black cars by courteous drivers in formal attire, offering additional frills like water and mints for the on-the-run business man. Sure, this was an expensive alternative to cabs, but to the users of UberBLACK, it was well worth it. Behind the scenes the structure was quite clever as well: Uber provided the cars and phones for the drivers (equipped with Uber app and Google maps), and regular people stepped up to provide themselves as drivers, no formal interviewing procedure required. Marcos dropped out of his community college to take on this new, respectable job that required a full-time commitment. As the success of a personalized on-demand transportation service had shown its colors, it opened up the market for new variants. And this is where Lyft comes into the picture. 

source: techcrunch.com

Lyft aimed to capture another SF-based market segment: the young crowd of current students and recent graduates, now employed at local startups. An alternative transportation solution was needed for the kind of person that ate Mexican from a food truck and sported giveaway t-shirts acquired at hackathons and career fairs. Lyft was marketed as an affordable ride-share, the distinctive pink mustache on car bumpers trumpeting the friendly, hip, and easy-going atmosphere that customers would learn to expect from it. In stark contrast to UberBLACK, passengers would sit in the front, engage in conversations with their casually-dressed drivers, and ride in whatever car the driver happened to own. Whereas Uber lent its drivers cars and phones, Lyft sent them giant pink furry mustaches. The latter was more financially viable, allowing prices to drop to student standards, well below cab fees. Importantly, Lyft drivers could work on flexible schedules, squeezing in rides in the free moments of the day, morning, evening, and between activities. Marcos could now go back to college and pick up passengers in his free time. 

Uber wisely recognized that much of its infrastructure was already in place to allow its service to be differentiated for different kinds of customers. Uber then branched to provide a new option: UberX. Learning from the successes and failures of the Lyft model, UberX allowed drivers to work flexible hours in flexible attire, operating their own vehicles – provided, and this is important, that the vehicles passed some minimal quality standards (Lyft passengers had begun to complain about the run-down condition of some of the cars). The water and mints were still there. Drivers were encouraged to be friendly and hip. 

Uber had a first-player advantage: it had been first in the market and thus enough time to acquire a good reputation and loyal customers through its UberBLACK service. UberX brought in new customers and gave the old ones a flexible option. Provided with the same reliability and courteousness, some of UberBLACK customers now opted for the cheaper, more informal option. It is part of SF culture not to flaunt financial well-being, as evidenced by the casual hoodies and slacks regularly worn by some top tech executives. So black cars became regular cars (that were nevertheless guaranteed not to be run-downs).

As an aside, Uber now has a variant that is intermediate between UberBLACK and UberX. Do you want to get picked up by a casually-dressed Uber driver but in a brand-name car like a BMW or Mercedez for an intermediate price? Well now you can with Uber Select. And if you don't want a fancy car to pull up at your office entrance in SF, you can stick to UberX. Different Uber options happen to be dominant in different cities. For instance, perhaps unsurprisingly, LA tends to prefer the luxurious option.

After the introduction of UberX, Uber's customer pool grew. This meant that the density of ride requests was often higher on Uber than on Lyft. Drivers had more customers overall and could cover smaller distances between ride requests. Marcos and his friends signed back on with Uber.

source: techcrunch.com

New measures had to be taken. Lyft gave its drivers new incentives: “complete X rides and receive a rebate on the hefty commissions paid back to Lyft”. Uber followed suit. The new incentives served an additional purpose: having to complete a minimum number of rides, many drivers could no longer afford enough time to work for both companies and still complete enough rides with each. Choices had to be made. Uber tried to give drivers incentives for accepting all ride requests in a row. Drivers obliged and accepted all that came their way. They accepted requests even if it required going around the whole block just to pick up a passenger directly on the opposite side of the street. Passenger wait times increased. Passengers were not happy. Uber pivoted its incentives structure.

A vicious price war ensued. The water and mints disappeared from Uber cars. With few noticeable differences between the two services from the customer perspective, customers went where prices were lower. Lower prices meant more ride requests and a quicker way to hit the incentive ride minimum. Drivers went where there were more customers.

As Marcos prepared to drop me off in Palo Alto, he got his Lyft app ready. He said he'd take the first request he got - Uber or Lyft. Palo Alto has longer ride distances and fewer customers per square area than SF. Time is costly, and Marcos would not spend it passenger-less. After all, he needed to be in class soon. He let me out.  My half-hour, 21-mile ride cost $37.78, including a $3.85 airport surcharge. Uber would take 20-30%, gas would cost Marcos another few dollars, and car depreciation isn't to be forgotten either. Marcos told me that the prices are more expensive in SF than surrounding areas. (In fact, my trip back to SFO from Palo Alto 2 days later cost $28.47). On my Uber app, I gave Marcos 5 stars and left some feedback about what a knowledgable guide he turned out to be. Then again, I don't remember the last time I gave a poor review.

source: http://images.cdn.stuff.tv

Lowering prices means even more burden on the drivers. Already the fraction of a cab fee, Uber fees are reaching new lows. Two days later, I logged onto my Uber app at 5 a.m. to request a car back to the airport. I could see some cars circling around the Googleplex complex, 15 minutes from where I was. After about 2 minutes, an Uber driver accepted my request. Another minute later, he canceled the request. He'd probably gotten a more conveniently-located ride request and would make more money by keeping the distance driven without passengers minimal (and 15 minutes was already pushing it). His car stayed around the Googleplex complex. I placed another request, finding myself irritated that it was taking me longer than 5 minutes to get a car. My last dozen or so Uber trips involved instantaneous request acceptance, with a car picking me up 1-2 minutes later. How spoiled I had become. Finally, after another 3 minutes, my request was accepted by a middle-aged Latin American gentleman named Juan Carlos, and in 15 minutes, he was at my hotel.

I was really thankful to Juan for picking me up. He was surprised to find out there wasn't a swarm of cars ready to take me. Uber cars often outnumber passengers at this early time in the morning, he told me. I was in turn surprised to hear this, having spent that night tossing and turning in bed worried that no Uber drivers would be on the roads so early (I didn't even consider cabs as an alternative anymore). Our differing expectations for what would be the Uber availability situation that morning led me to thinking that there are too many variables at play to fully predict driver behavior. Uber drivers have to somehow optimize ride fares, company incentive structures, passenger availability, and competition with other Uber cars to figure out if a particular ride is going to bring them more than it will cost. Earlier that morning Juan had driven another passenger to San Jose airport - a 20 minute ride that cost the passenger $10, of which Juan would probably get less than $6-7.

I told Juan about one of my recent Uber experiences in Boston. I had decided to try UberPOOL for the first time: a variant where multiple passengers can share the same ride, with different initial and destination locations, as long as the trips are relatively in the same direction. Each passenger pays less in return for the potentially longer ride. If multiple passengers are picked up, the Uber driver can hope to make a sliver more in the same fraction of time by combining the trips. The interesting catch is: you get a guaranteed UberPOOL price regardless of whether another passenger is taken. In other words, you pay a lower price (even lower than UberX) just by agreeing to potentially share the ride. Talking to my other friends in Boston, it is pretty common for no additional passenger to show up. So my friend and I took an UberPOOL. We counted as a single passenger (it would be the same price if only one of us was there), but didn't end up picking up a third passenger on the way. Our ride was 10 minutes from Downtown Boston across the bridge to East Cambridge, and cost us a total of $6. Splitting it, each of us paid $3, almost the price of a subway ticket, but with the walking distance (from subway to house) cut from 15 minutes down to zero.

Who takes the loss when no additional passenger request is made on UberPOOL: the company or the driver? I asked Juan. Turns out, it's the driver (in Lyft's case, the company pays the difference). So if drivers are making so little money, how can Uber remain a viable longterm business model? Without missing a beat, Juan replied that it doesn't need to be viable for longer than a decade at the most. "After all, Uber is building a fleet of self-driving cars. No paid drivers will be needed." Juan paused. But there's a bigger problem: Juan is concerned about the strawberry-picking robots that are now working on farms day and night, 24 hours straight. Soon, there'll be even more robotic farm hands. Juan's family back in South America along with thousands of other people are going to be out of the farm jobs that provided their livelihood. "What happens then?"

Juan Carlos got some fraction of the $28.47 I paid via my Uber app, and 5 stars.

source: http://www.econlife.com

Further reading:

Dated sequence of events in Uber's history: http://techcrunch.com/gallery/a-brief-history-of-uber/slide/26/

More about the Uber-Lyft battle: http://www.npr.org/sections/alltechconsidered/2016/01/18/463473462/is-uber-good-to-drivers-it-s-relative

How much Uber drivers make: http://www.buzzfeed.com/johanabhuiyan/what-uber-drivers-really-make-according-to-their-pay-stubs#.ropJdNaxxo (compared to Lyft: http://www.fastcompany.com/3048563/fast-feed/this-is-how-much-uber-and-lyft-drivers-make-in-different-cities)

Different types of Uber services explained: http://www.ridesharingdriver.com/whats-the-difference-between-uberx-xl-uberplus-and-black-car/

Uber's pricing and incentives model: https://newsroom.uber.com/guest-post-a-deeper-look-at-ubers-dynamic-pricing-model/

Quora discussion about Uber VS Lyft: https://www.quora.com/What-is-the-difference-between-Uber-and-Lyft-1