Among the pioneers of the gig economy, rideshare services Uber and Lyft remain among the most closely watched service businesses. Uber in particular has grown in recognition to the point of becoming a verb; businesses designing service-based products are said to be leading the “uberization” of the economy. When it was reported in 2017 that 34% of the U.S. workforce were gig workers, companies like Uber and Airbnb scaled up, growing in influence with seemingly no obstacles in their path.
When the pandemic shifted the world, every business had to navigate a tremendous curveball, ridesharing companies included. As bookings and revenue plunged, Uber was forced to cut 6,700 jobs, representing about a quarter of its staff, within the first month of lockdown.
But even pre-Covid, Uber and Lyft were struggling to turn a profit, a battle in which they are both still deeply entrenched today. Unpacking the reasons behind their prolonged financial gloom reveals a two-sided business model that is unsustainable and broken.
Expansion: Too Fast Too Soon
Coming out of the gate with a bang, Uber went live in New York in 2011 as part of their national expansion. Only months later, the company launched in Paris, followed by London. Investors and employees were surprised by the aggressive pace. Today, the rideshare company operates in 68 countries, with the large majority of Uber rides taking place outside the U.S. It was also recently announced that the company is entering a joint venture in South Korea with SK Telecom to hit the Korean market. Likewise, Lyft launched in 2012, expanding to 60 U.S. cities just two years later, and expanding internationally a few years after that.
On the surface, it sounds like a double success story. Two gig-based startups take the rideshare market by storm, both expanding globally, each sprinting to an IPO, which they did in 2019. But over the last two years, holes in the fast lane approach have come clearly to light.
While both Uber and Lyft regularly report year-over-year revenue increases, the cost of business for each tracks in parallel, consistently netting a loss. Uber Technologies, for example, is forecasted to show a cost of sales claiming 45% to 50% of revenue in the next few years; Lyft was reporting similar numbers even before Covid.
One glaring expense for the largest rideshare companies is marketing, primarily directed at attracting new drivers. Uber’s retention rate has been estimated by at least one analysis as four percent, meaning only a small fraction of drivers stay on after one year. While company leadership says a high churn rate is an expected side effect of their part-time, gig-based design, constant marketing aimed at driver acquisition has remained a significant financial drain.
In addition to recruiting new drivers, both Uber and Lyft have spent literally billions of dollars funding incentive payments to retain the drivers they have. Those incentives added to staggering financial losses for both companies without placating drivers, many of whom have protested around the country to draw attention to low wages.
As major rideshare players continue to report losses to Wall Street, a micro view reveals that both players in the two-sided business — riders, and drivers — come up financially short.
Rider fare is made up of a base rate, a booking fee, tolls and surcharges, and any route-based adjustments. Surge pricing, a key part of the Uber model, ramps up rates when and where demand outpaces supply. While riders aren’t happy about taking the hit, dynamic pricing supports Uber’s ability to hire contractors working flexible hours, a cost-savings over set schedules.
No matter the fare, drivers don’t see nearly as much of that money as one would think. Once fees and commissions are taken out, a driver’s cut can take up to a 35 percent hit, pushing drivers to work longer hours to make more money. Without a culture that supports and values drivers, turnover continues to churn.
All rideshare apps use similar technologies (location frameworks, GPS, etc.), which means scaling the industry will rely less on advancing operational technology and more on using tech capabilities to improve user experience. By refining UX design, for example, companies can support fee transparency, an issue that has dogged larger rideshare companies since the industry boomed. Experience-based technologies with something to offer both rider and driver, rather than bells and whistles, will serve both sides of the industry better.
It’s time to step back and reimagine the rideshare ecosystem. When aggressive expansion leads to large-scale financial losses and the consistent dissatisfaction of the people your business depends upon, drivers and riders, the model is broken. The time is right for competitors to merge onto the highway and claim a lane.
About the Author
James Whitaker is the founder of CueRide, an Atlanta-based rideshare company. CueRide’s mission is to disrupt the rideshare industry by providing a driver-centric model that puts transparency out front, giving riders and drivers a no-surprises experience around logistics and fees. A lifelong entrepreneur since age 15, Whitaker believes passion should fuel business ventures and client relations, and company culture is as important as a strong bottom line, and all endeavors should make room to give back to the community. He is always ready to discuss the finer points of the rideshare industry and what CueRide is doing to change it.