The taxi wars are ongoing, with the battlefields expanding to Europe and Asia. Unless there is a huge legal ‘push- back’ by regulators; the mobile app based new entrant, Uber, seems set to win. Its colossal valuation is predicated on that outcome. The taxi war and Uber’s successes are a compelling case study and prove Nobel Prize winner Coase’s Theorem, as researched by Justin Jenk.
The use of mobile apps in the taxi industry is a text book example of success at many levels. The elements include: implementing disruptive technology; reshaping a whole industry; designing a user experience from the consumer’s perspective in a regulated industry; building a business with digital elements (and the smartphone at its core); creating credible digital brands as well as generating value across the business system. While Uber is the catalysts of this disruption its competitors and incumbents have benefited; but most of all consumers (user-passenger-riders). The mobile app taxi service now meets the requirements of a successful digital company: delivering functional emotional and social needs in one offering in a growing and viable manner.
Ossified taxi industry
The current taxi services found in most countries and cities are: regulated; monopolistic; hierarchical and ossified. They are based on licensed taxis charging metered tariffs with street hail/cash payments. It is an industry of city markets subject to entrenched player, local policies and politics. The taxi industry has resisted change. Over the last decades, some incumbents have slowly tried to bolt-on digital services, such as credit card payments and telephone bookings, but the effects have remained incremental. In Sweden, the authorities went as far as liberalizing fares to provide a stimulus for change. While the monopoly was broken (i.e. Taxi Stockholm) and capacity increased complaints of poor quality have sky-rocketed due to the practices of “pirate” operators. Taxi Stockholm and Taxi 020 merely upgraded their booking systems and passively followed functional improvements (e.g. credit card payments and automated booking systems).
Uber has reinvented the taxi experience and delivers
Uber is in the process of reshaping the industry and creating value for its stakeholders. It has done so by addressing rider’s Key Buying Factors (KBFs) and completely re-imagining the whole experience of a taxi journey, based on the much criticized San Francisco taxi market. Uber has solved a universal problem of all taxi customers (e.g. hailing, payment, journey comfort and per/post waiting time) in a customer driven, regulatory savvy and asset-light manner. Uber has made the taxi journey a seamless and enjoyable experience, reducing overall journey times as well as average fares (vs metered alternatives), adding in the occasional “wow” factor that generates word-of-mouth referrals, social ratings and loyalty – leading to increased rides and revenues. Uber has then scaled its offering for share positions as well as local market efficiencies; then expanded to other cities. Currently, Uber is rolling out its offering to 200 cities in 45 countries.
New York City – a battlefield
An assessment of the New York City taxi market provides insights to the changes underway and best practices. If Uber is the “Darth Vader” of the industry, then Hailo is the “plumber’s mate” and Lyft is one’s “BFF”. Uber’s strategy can be described as “lifestyle”. Its app is best in class (always in the top 5). It is a 2 button intuitive app allowing for seamless and efficient booking, tracking, pickup, payment and rating (both passenger and driver!) with a better quality taxi ride at competitive and variable prices. Uber has adapted ‘off the shelf’ technology that allows riders to match their requirements with independent, but Uber vetted, drivers and allows for easy payment. A rider feels a ‘cut above the rest’. This feeling is reinforced by ‘surprise & delight’ events (such as X-boxes in the taxis, or kittens on National Kitten Day, or free ice creams). The strong word-of-mouth and rating system has got celebrity endorsements. Hailo, by contrast has approached the problem from the licensed driver’s end. It seeks to make it easier for riders to hail licensed, metered cabs yet at standard metered fares. This “wholesale” approach has not proven attractive with NYC’s 40,000 cabbies. Lyft, with its “sharing” strategy, has tapped into the social and open-source culture of the digital age. It empowers riders by networking with any participating driver. Service levels are above those of incumbents. Lyft has the added cache of meeting numerous social issues. Yet Uber, with its firm grasps of digital marketing, out performs and out-manouvers mobile app competitors and incumbents on many levels. As with any local market, Uber matches prices and service through a combination of “surge pricing” and regular fares of its UberBlack as well as a lower, UberX, service. In addition it promotes trial and loyalty with free rides and cash inducement for referrals of new passengers as well as poaching/switching of rival drivers. Hailo, the London spawned competitor, has been forced to exit the NYC market; given the lack of appeal amongst drivers, a me-too consumer experience and in the face of “astronomic” communications costs. In just four years Uber now has an equal share of market to the incumbent metered yellow cab fleet.
Uber taps into the winning fundamentals: (Nobel prize theory, Best marketing and Harvard Business School practices)
Nobel Prize winner Coase’s dream of social utility at minimal costs may well become a reality in the Big Apple’s taxi market. The essential skill of Uber has been to deliver a superlative customers service(based on a two touch, best in class mobile app, real-time booking tracking and responsiveness, productive payments), in association with improved journey comfort, an asset/investment light business model, ‘pull-through’ consumer communication and managing the regulatory jungle to meet the competitive threat. Incumbents, as is often the case with entrenched players in a regulated market, have not tried to adapt nor adopt their practices to provide a better customer service but rather sought legal redress. Uber’s undoubted achievements do not necessarily mean that it will be successful everywhere or forever. Regulatory issues remain unresolved as well as safety as well as insurance implications for riders. An important element of Uber’s advantage would be removed if the regulators in any given jurisdiction choose to level the playing field. Also the dot.com boom was characterized by nascent transformations that were unsustainable. Yet Uber has set a new standard and continues to redefine its chosen business segments with accruing benefits. Uber’ recent claim to provide one million new jobs is entirely keeping with its wow communications. In Washington DC its entry was tactical, providing employment for underutilized drivers. Yet other city forays (i.e. into Canada) remain mired in regulatory challenges. Using Ryanair’s tactics it negotiates with city authorities before entry. Taking its cue from the master marketeer, Coca Colas, Uber is now targeting critical car logistics “moments” for its step-out growth. It sees itself as delivery & logistics service in car-restricted “occasions” (such as night clubs, school pick-ups, events, holidays). Uber has cleared at least two of the three characteristics of “disruptive innovation” as defined by Harvard Business School’s Professor Christensen.
- Uber has created a clear margin advantage (by a combination of growth revenue costs and investment levels.
- Uber has created a sustainable business system advantage that other are finding difficult to match.
- Yet is the momentum such that it will force “asymmetry of choice”; and see an exit of players and consolidation of capacity? Or will regulators change the rules of Uber’s success and reform local markets?
Valuations are Uber
The Uber story is amazing. Currently, the estimated post-money valuation of US$40 billion may seem the latest example of a quintessential bubble – another tulip in the making! Yet one needs to reflect on matters with its customer-oriented growth. While Uber was founded in Spring 2009 it launched in June 2010 in San Francisco. By January 2011 it only had 6,000 users who had made 20,000 trips. Uber is now present in 130 cities worldwide and aiming at 200. Its brand was owner-created but has gone through three iterations to its current sleek black and silver exclusive look with a reinforcing USP. The cache of summoning a car & chauffeur one would like to have, but the 98% can’t, is compelling; fueling word-of-mouth and social likes. The success of Uber has been an improved service and better than expected fulfillment with an unrivalled ‘surprise & delight’ parallel campaign to drive consumer loyalty and referral. The company’s growth, success and performance have seen multiple funding rounds in the billions (e.g. Google Ventures). Uber is aiming for gross revenues of US$ 10 billion medium term. With its 80:20 share model, is on track to generate revenues of US$2.0 billion medium term, based on five established city markets. So while a US$ 40 billion valuation seems outrageous when you boil down all the numbers and ratios it is in line with other successful IPOs. Harvard seems convinced. Is that a self-fulfilling prophecy or just the nature of the market? Uber’s challenge will be to ride the wave and explore step-outs. Even with only ‘owning’ five large markets Uber has been a success. Hubris may be its biggest threat! Still early days, watch this space!
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Justin Jenk is the founder and Managing Partner of Raktas – we offer solutions where decision-makers face complex issues with regard to capturing value from growth and restructuring opportunities. Justin is a business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se