The Business Model Canvas invented by Alexander Osterwalder is a popular tool for many who want to develop and communicate business model ideas. I have covered the Platform Business Model extensively over the last few weeks.
And Uber is one of the most prominent platform businesses. So, today I will be showing the Uber business model in the business model canvas.
The Platform Business Model Canvas
Let’s get started with the generic business model canvas.
Let’s go through the canvas from left to right and field out the fields for the Uber business model.
Key partners are generally the supply side who help deliver the value proposition to the end customers. But given Uber is still a start-up and pre-IPO, there are more key partners:
- The drivers are on the supply side of Uber and they can join or leave at a moments notice. It is essential to have a sufficient number of them to be able to provide the customer proposition (timely pick-up at low cost). They bring their cars into the value proposition for which Uber has to not outlay any capex investments.
- Investors/venture capitalists bring the initial rounds of funding to the table. The funding helps with developing the functionality, apps, algorithms, but also for acquiring customers. Investors bring down the (weighted) cost of capital (WACC).
- Lobbyists are important for Uber. Every time Uber enters a new city they have lobbyists helping reduce resistance. Uber has left cities that have put up high obstacles. The aggregate success (or failure) of their lobbyists can make a considerable difference to Uber’s trajectory.
- I would not add regulators or governments to key partners. Their job is not to partner with Uber but make a decision on behalf of their electorate.
Other (non-key) partners:
- Functionality & infrastructure providers
- Cloud storage
- Data analytics
- Financing partners/banks (car loans for drivers)
- Hire car partners (Uber-ready vehicles)
Cloud providers (and many other tech API providers) are not key partners if all they provide are easy-to-replace commodities (unlike a few years ago).
Partners that offer leading-edge, proprietary (and ideally exclusively provided) functionality would fall into the key partner category. E.g. Paypal was such a case for Ebay in the early days which led Ebay to acquire Paypal. I don’t see any such strong partner in the case of Uber.
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The network effects are the moat (i.e. competitive advantage) of platform businesses. The key activities should revolve around improving positive network effects and reducing negative ones.
- Enhance positive network effects between the participants (drivers and passengers) and
- reduce negative network effects (externalities)
- Grow the platform by getting more participants joining
- Keep participants engaged (e.g. low idle times for drivers)
- Further improve the value proposition
- Look out for complementary value propositions (e.g. car financing, new customer segments, etc)
- Deliver on the customer proposition
- Reduce churn (esp drivers)
- Expand to more cities (US and global)
- Analyse the data to fine-tune everything
The master resource of your platform are its network effects. It is the resource that needs to be built and the nurtured. The data, the algorithms and the capability to analyse and gain insights are essential. The latter also grows with the size of the network.
- The key resource are the network effect between the participants (drivers and passengers)
- Captured data
- The algorithms
- Analytic capabilities
- Venture capital to keep the business growing
- Brand name & assets
- The app
Your platform needs to create value for the supply and demand side of your platform.
Some of the value propositions for the drivers (supply side) are:
- Income generation
- Ease of joining (mainly: identification, background check, vehicle inspection)
- Ability to schedule own shifts and balance with family
- No upfront investment in joining (pre-existing car or ability to hire through Uber)
- Less regulated, i.e. more equal entry opportunities
- Ability to earn above average in peak demand
- For part-time drivers with a job: additional income
- Ability to get customers (passengers) at no cost to the driver
- No need to argue with passenger on any damages, spills, etc as platform manages this
- Insurance coverage through Uber (during the ride, driver still need to show they are insured at other times)
Drivers can join at low efforts and very little cost. In some cases when Uber enters a city, they give payouts to the first wave of drivers and referrers. They are also known for poaching taxi drivers. Uber prides itself in having many drivers from high-unemployment suburbs, providing transportation and job opportunities to those areas.
Some of the value propositions for the passengers (demand side) are:
- Convenience of the app: rider is often available within minutes at a passenger-near pickup point
- App gives you an estimated fare and duration of ride
- No need to tell the driver the destination
- Cashless transaction
- Lower prices than comparable taxi ride (exception: surge pricing)
- Rating system that allows for feedback
- Secure and safe
Let’s jump to the right-hand side and first have a look at who the customers are. Well, clearly the passengers are the customers – they pay the bill. But I would recommend that from a platform perspective you see the drivers as customers too. It makes sense not to take their participation for granted and try to understand what motivates them.
Thus, we are adding them to the list of customers and consider them in all aspect related to the customer (value proposition, channels, customer relationships). This makes our business model canvas much more solid.
Here is one way to segment the customers (and link them to an existing Uber offering)
- UberPOOL: Weekday regular workplace commuters in a car pool
- UberX: business travel users (e.g. airport to CBD)
- UberX: Casual users
- UberBLACK: Limousine users
- UberSUV or UberLUX: Weekend party users
- Full-time drivers
- Part-time drivers
- Drivers using their own cars
- Drivers financing (or hiring) cars through Uber
- Segmentation by location
- Offerings (segments both drivers and passengers):
- Economic options: UberX, UberXL, UberSELECT – normal price sensitive rides
- Premium options: UberBLACK, UberLUX, UberSUV – high end rides
- Accessibility options – wheelchair and other accessibility requirements
- Car pool: UberPOOL – car pool for people heading in the same direction
I am deliberately omitting other offerings such as UberEATS, UberBoats (in Istanbul), helicopter, etc as they are small by comparison at this stage.
As you can see, you can segment in different ways and there can be other ways that this if that is more useful for the questions you are asking. Further to this, there can be more micro segmentation that the acquired data and algorithms will allow you to identify.
The first thing to keep in mind to always own (and retain) the customer relationship firmly within your platform.
Our customers are the passengers and also the drivers as per what we said above. Here we are going one step further. I would recommend adding the wider group of stakeholders to this list. They interact with our customer directly or indirectly through several channels. And they have an influence on how our customers see us. There is great value in taking their concerns into consideration.
The customer relationship dimension is currently among the most important for Uber’s future trajectory. This is why I am going to cover this in some detail.
Relevant for both sides
- Deal with customer issues in appropriate manner and timeliness (see “Channels” for more details)
- Manage bad behaviours (on both sides drivers and passenger) and improve rules continuously
- Transparent pricing, e.g. criticism on surge pricing by riders and decreasing hourly income by drivers
- Portray the desired company image through social and other media *
- Transparency around privacy (a number of repeat coverage over the years on insufficient data privacy)
* there are major issues currently with Uber’s image, with workplace harassment charges, driver exploitation themes, and circumvention of taxation and other laws. Some of the leadership behaviours (up to the now ex-CEO but not limited to him) have not helped to alleviate the bad image. While many people will look at the benefits they have using Uber and are not personally affected by the issues, things can turn south very rapidly, especially when there is a better substitute. MySpace went down in its self-inflicted maelstrom of negative externalities. MySpace had the highest annual traffic on the internet at a time when Facebook just started. MySpace’s ignorance of the issues provided an opportunity for Facebook which they amply capitalised on.
Especially for the drivers
Customer relationships to the supply side (the driver) will be mainly defined by what the platform does for them, examples are:
- The platform’s ability to generate income
- Acceptable hourly wages
- Manage issues (accidents, damages or issues affecting earnings)
- Support in the on-boarding process where required
- Acceptable working conditions (i.e. hours required for decent take-home pay)
- Fair allocation of rides *
- From Uber’s perspective: avoid groups of drivers to reduce risk of unionisation
* Some/many drivers prefer interacting with an automated app than interacting with the traditional dispatcher who often enough (ab)uses their role to give the lucrative rides to their favoured drivers.
Beyond the customer
To manage your customer relationships look also beyond your customers. This is especially true for Uber due to the resistance and continued negative coverage.
- Manage the social, communal, economic footprint/impacts of the platform
- Liaise with cities, communities, regulators and other groups as required
- Manage the platform’s image across the media and other relevant channels (workplace culture, leadership shadows)
- Manage serious incidents quickly (harassed passengers, serious accidents, etc) to avoid any viral coverage of it
Uber was addressing the obvious safety question directly on their home page for a long time. More recently, they have added a link to how they are helping cities in an equally prominent spot. Uber also prides itself of contracting people especially from the lower income areas of cities and thus providing more income and improve transport there. Further on, they are providing cities data captured from their rides that the city planners can use to solve transport problems (though some push for Uber to share even more data).
Channels for the initial awareness and customer acquisition can be:
- Campaigns: free vouchers when Uber enters a new cities (e.g. haded out at public transport stations)
- Free media coverage based on the novelty factor (new-joiners have often soared even after extensive negative coverage)
- Word of mouth
- Social media, people sharing
- Digital ad campaigns
- App stores (iOS, Android) – through high ratings, ads and being featured
Channels for the daily transactions:
- The best visible customer relations channel is Uber’s Facebook page (13m+ followers) with an almost instant response to most direct queries, remarkable (check for yourself)
- Most transactions are managed fully automatedly through an app
- Webpages allow for sign-up and address the biggest obstacles to joining (the process of joining itself, how it works, any safety concerns and the collaboration with cities/communities – see above)
- Uber uses emails & notifications to engage, stimulate participation; reinvigorate/recover (special offers, reminders, etc)
- Tiered customer support channels
- Automate customer support for high-volume, low severity issues (e.g. forgotten items) to be rapid
- Multi-tiered customer support (ability to contact a human) for more severe issues
For many online platforms, the biggest cost element are customer acquisition costs (CAC). This is not different for Uber (and its competitors Lyft and Didi). Uber has fought a long bitter war with Didi in China to win on the biggest market in the world. The weapon of choice were customer acquisition subsidies (on both sides the drivers and the passengers).
It is assumed that the ride-hailing industry is not going to be very much segmented (other than the location itself) which – as many experts believe – will mean the winner will take all of the market. (In more clearly segmented markets more than one winner can emerge, so the theory. The question what a segment is, is also not clear. Is Snapchat in the same or a different segment to Facebook?)
Uber’s cost elements are:
- Cost of customer acquisition, CAC: free vouchers, one-off subsidies, digital advertising, etc
- Weighted average cost of capital, WACC (can be ~25% for start-ups, for Uber this is anticipated to be far less)
- Development of new features, ongoing fine-tuning of algorithms, etc
- Legal case and settlement costs
- Lobbying, regulatory compliance
- Expansion to more cities and countries
- Infrastructure costs, computing power, bandwidth
- Customer support
- Insurance costs
- Research & development, e.g. autonomous vehicles
- Expansion to adjacent niches (UberEATS, etc) initially cash negative
- And more
Here we are getting to an interesting question. On the surface, Uber’s revenues are a mere percentage of the transaction fee of a ride. But the obvious question is how a ride plus a transaction fee (of 20-25%) is cheaper than a traditional taxi ride without transaction fees?
Uber’s business model would obviously not work if the rides they provide would not be considerably cheaper than a taxi ride so that even with the addition of the Uber commission it still remains somewhat cheaper than the comparable taxi ride.
Where do these savings come from that enable Uber to be cheaper than taxis even when extracting value for themselves? That is the real question behind Uber’s revenues. Here are the answers. Be aware that differ somewhat for different countries and even within the same country, there are differences on state level and further on city/county level (welcome to the patchwork called taxi regulations).
Comparison to taxis
- Utilising existing assets:
- Most commonly, drivers utilise their own cars.
- Some drivers buy a car using Uber facilitated loans (through 3rd parties).
- Yet other drivers lease/rent a car facilitated by Uber (Uber-ready).
- With this, Uber spends no capital costs on these assets, has no associated cost of capital (=interest charge) and no ongoing depreciation charges.
- Drivers using their own car will in the long run (beyond one vehicle lifecycle) expect to have at least some coverage of the capital costs plus the cost of capital.
- Divers leasing or financing will see the impact more immediately and want to feel they have acceptable take-home pay.
- Take into account though that many independent taxi drivers also have to finance their own vehicle plus pay astronomical licensing costs (see below) that Uber drivers don’t have to pay.
- Avoidance of unnecessary licensing fees:
- In some (or maybe even in many?) countries there are astronomically high licensing fees that add no value to the customer (nor to the driver). Uber is free of these artificial barriers to entry that limit supply and drive prices higher. Examples:
- In New York City you will find so called taxi medallions. They come at a price point of >$500,000. Further, they are being traded on a marketplace. In boom times these have been bid up to $1,000,000.
- Here in Australia, the taxi plates cost around $300,000. A productivity commission established by the government has found that these schemes offer no benefit to the consumer. The drivers have to work them off for decades to come.
- In the Australian case, this equated to an average of $2.37 (inflation adjusted) for the consumer for an 8km trip. This alone is a saving that a regular passenger will notice immediately.
- Nothing has changed in the 18 years since the productivity report delivered these clear findings.
- Employee entitlements:
- Uber engages drivers as contractors. Thus they do not accrue annual/sick leave, nor do they contribute to social security, pensions or other entitlement.
- There are some savings here compared to taxi companies. But there are vast differences between countries what taxi drivers are entitled to.
- This is obviously one of the most contentious aspects of the Uber business model. But it is not black and white as it is often portrayed. Neither is this discussion is not limited to Uber. It affects most of what has been titled “gig-economy” and I will dedicate a separate article to this topic sometime in the next few months.
- Economies of scale: Uber has started negotiating lower
- insurance and
- interest rates (for car financing) for their drives.
- This is something that will be difficult for taxis to get to the same scale. And I expect that Uber will take it further from here (but hopefully doesn’t repeat the mistakes that early mining companies made in the mid-1900s … more another time, probably).
The most important insight should be that the revenue is not just a transaction cost. The question will always be if a platform can create enough cumulative value for its participants so that it can extract sufficient value for itself.
Too many articles tell you that Uber’s revenue model is a transaction fee on the rides. Well, that is true. But also very shallow. If you want to become a recognised innovation expert, you need to know the kind of stuff I have just covered. Don’t forget to sign up for future articles!
I have covered the platform business model that fuels Uber extensively in 6 long articles before.
Check out here for how Uber fits into the sharing economy.
If you are interested in the more generic Platform Business Model Canvas check here. You can apply it on many platform businesses or their core parts, such as Google, Facebook, Alibaba, Airbnb and many others.
Platform Business Model Canvas Uber
Here is how Uber’s Business Model Canvas looks like.
I genuinely hope you have gained a lot of new insights on Uber’s business model. Most articles on Uber barely scratch the surface. I have attempted to give you the big picture but and the details behind it as well.
You have gained lots of knowledge that you can transfer on your own innovation ideas. Don’t worry if you don’t have a really concrete innovation idea yet. Knowledge often takes a long time to work its way up to the conscious mind and it will surface at an unexpected moment and help you to develop innovation ideas you will be proud of. I am deeply convinced of this.
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