Thoughts on Uber pricing and viability


There are plenty of stories out these days championing the future of Uber, noting it as a “disruptive” technology and convinced that it is the key to the future of urban transportation. I’ve been skeptical for a variety of reasons but perhaps never more so than right now. The company is spending plenty of cash to acquire new members (paying both sides on a referral event gets pricey in a hurry) and that’s OK so long as the free rides eventually translate into a pattern of paid (and profitable) usage. Given recent announcements about pricing in New York City, San Francisco  and Boston, however, it is unclear just how well that’s working for them.

It was five weeks ago, in early July, that the prices in New York were cut. Turns out that they want more riders and being more expensive than a yellow cab wasn’t doing so well for them on that front. The new prices are, based on Uber’s math, cheaper than a cab thanks to a 20% rate cut. That cut is a temporary one according to the company, though it is unclear when the rates might go back up or to what level they’ll increase.

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Boston is a slightly different situation. The company cut rates by 25% in June on a temporary basis, similar to the NYC move. But rather than raise them up at the end of that trial Uber instead cut fares again, this time an additional 15% was lopped off. This puts the service at a dramatically lower rate than taxis in the markets Uber identified, much moreso than the numbers in NYC. The Bay Area also got a 25% cut for the summer.

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And yet there are mixed messages about the overall impact the move has to the company. In Boston the cost of the June rate cuts appeared to come as part of the company’s budget; they stated that, “The price cut is only for riders – drivers are not impacted by the lower fare.” That detail was not mentioned in the latest announcement so it is unclear if the payouts to drivers remain at the higher levels or if they’re taking a hit on the additional cut here. For NYC it is a slightly different story. Uber maintains that this is a good deal for drivers, even as it admits the fare cut is being passed along to the drivers rather than absorbed by the company:

What we’ve seen in cities across the country is that lower fares mean greater demand, lower pickup times and more trips per hour — increasing earning potential and creating better economics for drivers. What does what mean in the long run? They’ll be making more than ever!

Unlike in Boston, however, the drivers in NYC are rather heavily regulated. They must be licensed as a livery driver by the NYC authorities. So it is quite unlikely that Uber is their only gig for acquiring business or that a sudden influx of new drivers is going to appear as rates get cut. On the contrary, it is likely that fewer drivers will participate as their revenues per ride go down, at least based on the rationale Uber uses for their Surge Pricing model (in order to meet the high demand of passengers fares must increase so drivers are willing to get out on the roads. Now we’re supposed to believe that drivers are going to want to be on the road more at lower rates, not higher ones, because they will have more fares. My admittedly rudimentary understanding of basic economics has my not-quite-so-rudimentary bullshit-o-meter going off on this one.

Putting aside the various legal issues surrounding their operation in many locales Uber faces a very difficult balancing act. They must keep fares low enough to attract paying customers while keeping the payout to drivers high enough that they can actually find people willing to drive those customers around. And as the novelty wears off it is unclear that consumers are willing to pay for the rides, even where the rates are demonstrably lower than taxi fares. So either people are unwilling to give up driving their own cars (unlikely in the major cities noted here), mass transit is more viable than some want to admit (entirely possible in these cities) or the demographics of taxi/Uber riders and smartphone users don’t overlap (maybe a bit??).

Or something else. Like maybe Uber isn’t really all that “disruptive” after all. Car dispatch systems have been around for decades. Just putting it in an app rather than via a call center isn’t all that special.

Then again, the drivers are all contractors paid on commission and, other than marketing, the overhead to run the apps is pretty low. Though the legal bills likely are not.

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Seth Miller

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I fly ~200,000 miles annually; these are my stories. You can connect with me on Twitter, Facebook, LinkedIn and .

25 Comments

  1. Really? It’s not so disruptive? I have not seen yellow cabs give out referral credits for getting your friends to ride, having promotions to get free rides, hailing a car right to you instead of walking to the main street, getting a gps of what is going on, not having to tip, not having to pull out your wallet to pay! Cmon, i know car dispatches have been around for decades, but this is the most disruptive car service the market has seen! I think you missed those points a little bit.

    1. Referral credits are not disruptive.

      You do tip; it is included in the quoted rate.

      And, yes, dispatch services have been around for a long time.

      I don’t think I’ve missed those points in the version I’ve recounted. And the evidence of the company’s limited growth vis a vis price cuts is very real.

  2. I exchanged tweets with @Uber_BOS regarding the BOS pricing. My latest understanding is:
    1. Prices were cut 25% as you say in June for the summer. The cut was off of the just prior UberX pricing.
    2. This past weekend Uber announced UberX was now permanently 15% off, but 15% off of what? My understanding is that it is 15% off of the pre-June UberX prices., Or said another way, we are now paying 10% more than we did in June-Jul-early August under the summer promotion, but still paying less than the pre-June UberX prices.

    Uber also states these UberX fares are 40% less than a Boston taxi. I don’t know if this is true or not, but they do seem somewhat less than a taxi.

    I know I use UberX and Lyft a lot more than I would use a taxi because:
    1. It is faster than public transportation. I can get to work in about 8 or 9 minutes bs. 20-30 on the train.
    2. The app is significantly 90% more convenient than having to call a taxi, having real time ETA status, and not having to handle payment with the driver. Streamlining all of these little steps adds up over dozens or hundreds of rides in terms of time and efficiency savings. This could be streamlined even more say if your smart phone had a tile with an ETA for pickup at work, and if you could set the pickup with one click. Having your destination in the app also streamlines an interaction with the driver.
    3. It seems like Uber, Lyft, and Sidecar are less expensive than a taxi. On short trips, yes, but also especially on a long trip. I went from Boston to Acton with SideCar and it only cost me about $45. A cab would easily cost $100. I recently went from South Boston to BOS Logan in a Sidecar for $11. This is less than a taxi.

    Just as a data point I have taken 200+_ rides with Uber and about the same with Lyft in BOS and other locations.

    1. Fair points, particularly on pricing. But that’s also part of my skepticism on the whole thing. If the only way they can compete is on price then how do they deal with the ever shrinking margins that will create. At what point do consumers (just like you) start using the competitors because they’re cheaper? And when do drivers stop bothering because the payouts don’t cover their costs?

      Barrier to entry is low and it is not clear to me that Uber has built anything impossible to mimic.

  3. So you think Uber is not a viable long term company? That’s interesting as you are the only person I have ever heard express that opinion. In addition to the US, the international market is also an opportunity for the company. There is also the opportunity to leverage using the network created by delivering passengers. Uber could become a logistics company as well. Uber has done and will do way more than just put a car dispatch service on an app.

    1. It is, in fact, entirely possible that I’m the only one taking this view. And I won’t discount the opportunities of the international market (though the regulatory issues seem to be just as great).

      But I’m decidedly unconvinced that they’ve done more than just create a dispatch app. Unless you’re counting the co-branded marketing gimmicks they’ve run.

  4. Uber will have to play the blancing act for the next few years. The real game begins when they can get the driverless cars on the road. Thats the future of taxis.

  5. I’ve used taxi hailing apps in a few European cities in the last 12 months, they all worked great and the tariff is typically lower than hailing on the street (usually the same tariff if you phone them or order online). I haven’t actually tried Uber, but it seems that the only practical difference is the pre-set price and no cash exchange. Those are good things but are they enough to justify Uber hype? Time will tell.

    1. +1 on taxi hailing apps. We have these apps in Munich since 2012, mainly ‘mytaxi’ and it works like a charm, very similar to uber. IsarTaxi had standards for their participating drivers since quite a while (car needs to be <4yrs old, etc) so the 'disruptive' innovation of uber can be swept away if taxi companies/associations decide to update their services a bit.

  6. And let the Uber shills come out…

    Nice analysis.

    But the reality is…

    They are viable as long as investors keep funneling them cash and believing in a global growth story.

    In other words, as long as interest rates remain absurdly low and investors chase growth.

    The founders have already cashed beyond their expectations. The losers will be cab drivers and later investors if your analysis is correct. But it may take years for that to come clean if capital remains liquid.

  7. Somewhat agree. But NY is a very specific case with very high operating costs, very high barriers for entry and unlimited access to cabs as soon as you walk out your door. most places aren’t like that. so it’s not really fair to look at NY in particular and judge a whole business model by how they compete in the few square miles of Manhattan.

      1. DC as well. We’ve seen several Uber X cuts, to the point where there are times that I question how they can possibly sustain such low prices. Right now they’re offering a 25% discount. Don’t get me wrong, I love a good bargain like anyone else. But, when I’m paying $4-6 for 10 minute trips across the city in Uber X cars that would cost $10 in a cab, I know they’re selling me a ride at below cost. This past Sunday morning I called Uber X to take us to a restaurant we were meeting a friend at. The car that picked us up was a brand new Cadillac XTS (no idea why he was driving for Uber X and not Uber Black in that car), the ride was 8 minutes and two miles in length, and the price was $6.57. It was a great deal, but there’s no way that was a profitable trip for Uber.

  8. ANY company can burn through VC and make people believe they have a viable business. The problems start when they actually have to MAKE money. We saw this during both .com bubbles. People thought pets.com, webvan, etc all would last because people were using them galore. Problem was, when you stopped feeding them unlimited money to buy customers they found out you can’t run a business like that, and they folded. I don’t know what the future holds for Uber, but you have to be BLIND to not see the pattern repeating itself.

  9. Its interesting also in Boston mostly tech savvy people and students use Uber, Lyft, and Sidecar. Its hard to get “normal” people to switch over to a new model. I remember when ATM machines came out, people did not trust them. I tried to get people at work to sign up, but they were afraid of irrational things like say if the driver asked them for extra money even though its billed via the app. I see a lot of people are also apprehensive to enter their credit card number in an app. I could see being more nervous with your debit card but I wouldn’t be that nervous with a credit card.. But “normal” peple are nervous.

    I know it has hit the taxi business, look at all the protests and regulatory efforts by old line organizations, but I don’t know how much. I’d like to know how many taxi rides are completed now in a day in Boston vs. before we had Uber, Lyft, and Sidecar?

    Also these TNCs have the advantage that they can put as many cars on the road as they can find drivers. They are not limited by a small supply of taxi medallions in a place like Boston.

    A lot of drivers do this for extra money while they work another job or go to school. So that type of worker may do it even though it may not be sustainable as a full time job.

    Also Uber does go in to surge pricing pretty regularly, and if there are a few rain drops it can take longer to get a TNC ride, but thats no different than it was with the old way of calling a taxi. I don’t think they can readily bring in a lot of extra drivers on days it rains or snows especially given the sort of loose independnet contractor relationships.

    Also its interesting to try to avoid regulation Uber claims its a technology company and not a common carrier or dispatch. But really its more like a dispatch, and this nonsense about it just being a technology company they just try to use to get out of having to comply with regulation.

    You may also want to look at the California Public Utility Commission PUC, they have regulated these under TNC’s transportation network companies.

    One final thought is that Lyft & Sidecar have reduced their brand differentiation by elliminating a past feature where the rider could select the price of the ride. Back in the day with Lyft and Sidecar, the computer might suggest to you a $10 donation, but you were free to make it $9, $11, $12, or even $0. It was helpful if a driver got lost you could fix the issue on your own via a self service mechanism and you did not have to open a request with customer service. They had procedures where if someone kept choosing $0 it would kick them off. But essentially you as the passenger got to choose the price you wanted to pay. This was similar to Panera Cares.

    1. You touch on a huge point here – Uber may be “disruptive” of the traditional taxi business, but part of the reason they’ve been able to grow as they have, is because they are flagrantly and blatantly ignoring existing regulations on taxis and car services. Basically, they think they’re younger/smarter/hipper and can do what they want.

      And frankly they’re not wrong that the taxi business needs a kick in the pants – but totally thumbing their noses at local governments is probably not the best idea in the longer run, especially if they want to be around long enough to be a “logistics platform” as their execs keep talking about.

      Hopefully the competition makes all these services better for consumers – that goes for taxi businesses copying the features people love about Uber (smart dispatch, tracking, seamless metering & payment, reviews), and for direct competitors like Lyft, etc.

      And hopefully Uber’s management grows up a bit in the near term.

  10. You raise some very interesting, thoughtful questions; some of which I have also pondered while using Uber and seeing its rise the past few years. As a college student who’s found yellow cab and taxis to be much too expensive in New York and other areas, Uber (UberX specifically) has been great as far as being affordable and “easier” to use than traditional cabs. I realize not all of Uber’s clientele are college students, but I honestly think (or would like to believe) that they have thought about these questions and have made their judgement call. As another poster said, only time will tell. Seems like an incredibly tight rope they’re walking on – if the hype lessens, the money runs dry, their novelty dries off, they become more banned (or at least forcibly banned), then they will go bust like a plethora of other over-funded idea from silicon valley.

    All that said, I do think reducing the idea to a car dispatch system in an app is a bit disingenuous. Uber has, if nothing else, forced change in the ground transportation industry, and I think that’s worth something.

  11. Uber Picks David Plouffe, Obama’s Former Campaign Manager, to Wage Its Regulatory Battles

    “Uber wants your vote of support. And it has hired a campaign manager to win you over.

    Uber, the fast-growing private car start-up, announced on Tuesday it had hired the political strategist David Plouffe to be its senior vice president of policy and strategy. The move further signaled the grand aspirations of companies like Uber, which are challenging entrenched industries and running into resistance from some local governments.”

    http://www.nytimes.com/2014/08/20/technology/uber-picks-a-political-insider-to-wage-its-regulatory-battles.html?hp&action=click&pgtype=Homepage&version=HpSumSmallMedia&module=first-column-region&region=top-news&WT.nav=top-news

  12. I must be an outlier. I’ve never used Uber, or Lyft, or any other “taxi-hailing app”. I just moved to L.A. from NYC. In NY I used the subway to get everywhere, even at night (I’m a woman and lived in Downtown Brooklyn). I regularly took the A line to JFK and it was faster than a cab, or any other car service for that matter. I just never really had a use for it. I rented Zipcars when I needed to get groceries, but again really had little use for hiring a car. Now I live in L.A. I still have no use for it, since I now own a little hybrid vehicle. When I go to the airport, I just go on Super Shuttle. What am I missing? I think Uber is over-hyped.

  13. Today’s Wall St. Journal reports (p. A11) that ridership on traditional taxis is actually increasing, and the price of medallions has remained steady at about $1 million. The implication is that total ridership of traditional and non-traditional taxis is increasing…Uber and Lyft are not stealing riders, they are increasing the number of paid rides taken.

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