Uber. Crazy founder. Amazing IPO, one of the biggest of all time.
Lots of leadership and culture changes. Uber has been in the news, and for many people that
are watching this video, I would be shocked if you haven't taken an Uber somewhere
in the world. For me, I'm super glad that they exist. But I have a different question
today. Will their business ever work? And, you might be surprised at my answer. I'm
going to tease this out in four parts. We walk through this, first of all we talk about
what kind of business Uber is in. Second of all, we talk about what it will take for Uber
to succeed in that kind of business. Third, we're gunna talk about whether Uber is
doing the things it will take to succeed. And fourth, we're gunna talk about if this
is a problem worth fixing. I'm Jenny Rae, the Managing Director of Management Consulted,
we're a group of ex- McKinsey, Bain, and BCG consultants, who train people in case
studies to prepare people for consulting interviews. We also train corporations on thinking and
communicating more clearly. I'm really excited to walk you through Uber today because
this is one of THE most popular businesses of our generation. First of all, what kind
of business is Uber in? We break this down into two types. Is it a fixed cost business,
or is it a variable cost business? Uber IPO'd as a fixed cost business, as a software business
rate. But Uber, is a variable cost business. Every time you or I take an Uber, Uber has
a cost to that. They have to pay the driver. They have a percentage of the fees that they
are able to gather, but they have to pay the driver. Therefore, Uber is a viable cost business.
Number two, what does it take to succeed in a variable cost business? Variable cost businesses
that succeed focus on either radical cost cutting, ie- they pay their drivers less.
Or, premium pricing. They are able to capture a higher delta because of brand loyalty. And,
number three, is Uber doing that? Well, they're not. They're not able to. Because a driver
has very low switching costs when they're working for Uber. They're not beholden
to their platform, they're not in an Uber car, they're in their own car. And so,
they can just decide whether Uber or Lyft today is paying higher rates and where they're
going to get their next ride from. And that can change in a ten to twenty second period.
In addition, the ability to price higher is limited by other competitors such as Lyft.
Other competitors that are foreign, for example in other markets like Didi. These other competitors
provide a price ceiling, what customers are willing to pay. Why? Because I also as a customer
have very low switching cost in choosing between Uber and Lyft. And I don't have loyalty
to the brand of Uber where I say, "You know what, the Uber experience is going to
be better." Uber can't even control their brand, because they don't control
their drivers. And they don't control the experience. So Uber has this dual problem,
they're in a variable cost business, but they can't pay people less, because they're
just going to leave their platform. They can't charge more because nobody is willing
to pay a super premium on an Uber car, over a Lyft or another alternative. And therefore,
I think number four, can Uber fix this? The answer is "No". Now God love 'em,
they're trying. They're working on a number of initiatives internally, where they
are focusing on rewards and sustainability. Rewards and sustainability is one way that
you can drive people to pay more for the same product, just based on their brand affinity.
And they're doing things like, premium airport pickup. Great. Maybe people will be
will to pay more for that. I don't think it's going to be at the scale they need.
On the drivers side, they're trying nothing. They can't. They can't lose drivers,
because then they don't even have a product to sell in the first place. So I think Uber
has unfortunately, an unsustainable business model. Such a cool idea, I really wish it
would work. But I don't think we'll see them around forever. Thanks for watching,
this is Jenny Rae from Management Consulted. You can view us on www.managementconsulted.com,
on social, or make sure you subscribe to our YouTube channel.