I’ve come to live on Uber (regrettably, I am not an investor in the company), it’s a great service that makes me think: why hasn’t it been done sooner? Uber is an on-demand car service, you open your smartphone, it picks up your location and sends you a car. All the payment is taken care of via your account in the app, based on distance and time of your trip. Tip is factored in automatically. It’s a two-sided platform where drivers sign up to the app to get business. Uber started out as a black car service only, and now includes regular taxis and UberX which are drivers with their own cars, nice clean cars but not black cars.
So what is Uber really selling. It’s not just the on-demand transportation. It’s the experience - convenience and more importantly service. In fact it’s so good, I would argue, that it makes users take a car service more often than they would normally do without Uber - in other words, it expands the market for car service. This also improves Uber’s user monetization (LTV) and justification for its user acquisition cost.
I want to emphasize service - how is Uber able to provide better service. Well let’s start with what the world was like before Uber. Taxi drivers were rude, because they have a difficult low paying job that involves servicing customers going short distances and lots of idle time with no business. But more importantly, any one rider has no power to demand better service - the cab driver can treat a customer rudely and never risk encountering the same customer again. Cab companies are also unresponsive to complaints.
What Uber has created is a consumer advocate for better service, it has aggregated the consumers such that consumer feedback now has an impact on drivers. Drivers are rated, and Uber stays on top of those ratings. In fact, riders are also rated and drivers can respond to pickup requests accordingly. Uber can create better service because it has better data. It has information on exactly how long a trip took, the exact route the driver took and of course the bill to the rider. So if the driver takes an in-optimal route, whether on purpose or not, and the customer complains, Uber can adjust the fares to match the average optimal route. It’s happened to me twice and both times I got a fare reduction. Now, if a driver is rated poorly or takes improper routes, guess what, Uber can adjust their algorithm to send them less business.
It may be costly for Uber in the short term to provide these types of partial refunds to customers based on in-optimal routes, but they know they are adjusting the fares down fairly. By routing business to the most efficient and best drivers over time, Uber creates efficiency in the overall market. In other words, Uber is making sure that drivers are courteous and take the most optimal routes, across all drivers and all customers. These efficiencies eventually reduces costs for consumers in aggregate, and expands the market for car service, assuming price sensitivity and supply/demand curve behavior in this market. Uber takes a transaction fee, so it’s pretty clear that it benefits by being the enforcer of better service and therefore increasing business. (Of course, Uber’s marketplace model has built in supply/demand equalization capabilities - for example Uber dynamically adjusts pricing to ensure there are enough drivers during peak demand. UberX is itself a mechanism to bring more drivers online and increase availability of cars. Uber’s by-passing of taxi companies enables it to offer a larger revenue share to the drivers.)
Uber’s level of data-driven service is pretty much unprecedented in the consumer space. EBay and Amazon have already applied reviews and ratings successfully to physical products and sellers of those products. Now we are seeing feedback metrics being applied to service (TaskRabbit is another example). GrubHub is applying data-driven service to food, like how long it took for the food to be delivered. Airbnb has applied it to the lodging experience etc. There will be many more businesses created based on an improved user experience enabled by data-driven customer service that shifts the power to the consumer and improves efficiency of large markets.