How Uber Works
By: Mohammad Rameel Ajmal
Tags: How It Works, Business Model, Structure, Uber

Ahead of the recent Initial Public Offering by Lyft, Uber Technologies Inc. recently moved a step closer to its own mammoth Initial Public Offering (IPO), seeking to raise $10 billion in a deal that could value the ride-hailing giant at $120 billion.

(Photo by Thought Catalog on Unsplash)

Uber Technologies Inc. is a transportation network company headquartered in San Francisco, California. Uber offers services including peer-to-peer ride-sharing, ride service hailing, food delivery, and bicycle-sharing. The company has operations in 785 metropolitan areas worldwide. While attending a tech conference in Paris, Garrett Camp found the cab-calling procedure an enormous inconvenience, leading him to come up with the idea of Uber. A few years down the road, Uber has been clocked as one of the highest valued startups in the world. Let’s break down how this ride-hailing service reinvented the wheel for the competitive transportation industry without owning even a single car.

In Pakistan, Uber offers rickshaw rides. (Photo by Ravi Sharma on Unsplash)

Open the application and choose a ride — standard, luxury, or, in Pakistan, a rickshaw. Afterwards, you rate the driver, and he or she rates you. The calculation is simple. Start with the regular base fare. Add the per minute rate multiplied by the time spent in the car. Then, add the distance times the per mile rate (all of which depends on the city you’re travelling in). A $30 ride in Manhattan would cost less than $10 in Pakistan. Conclusively, you add the booking fee and possibly airport, toll, cancellation, cleaning, or lost item fee. In matters of an excess in demand, you multiply that by a surge price, often between one and two times the actual price, or on New Year’s Eve of 2011, seven times the actual price. Uber uses machine learning to determine how much you’re willing to pay based on your route and history. Technology allowed Uber to take out the most outdated, inefficient industry and completely reinvent the wheel. Uber drivers’ ability to work without licensed medallions knocked the taxi-service industry out of the market.

“The ability for drivers to work without licensed medallions knocked the taxi-service industry out of the market.” (Photo by Hans Vivek on Unsplash)

The fact that Uber considers its employees as workers rather than individual contractors does put a dent in its model. Each driver must pay for his or her own car, depreciation, gas, insurance, and many other supplementary add-ons. Add the tax and the costs above, and the profit the drivers receive doesn’t remain too enormous. While Uber maintains its costs and generates immense revenue almost every year, they have still faced a profit problem over the years.

On paper, Uber has the perfect business model: all perk and no work. Its network of drivers dominates the globe and it need not buy a single gallon of fuel for the vehicles. Ironically, the problem is not the company’s legality issues or the controversies surrounding it. The real issue lies in the holes in its business model. Network effort refers to a phenomenon whereby a product or service gains additional value as more people use it. A friend of a friend uses Facebook, so your friend does, too. When your friend uses Facebook, so do you. Unfortunately, the effect is minimal and regional when it comes to Uber. More drivers in the U.S. never guarantees more drivers in Beijing, so profit increases in specific regions are cut out by cost increases in others, thereby creating an almost negative effect on the company. This effect led to Uber losing millions in a short time frame. Every city is a new chicken-and-egg problem. Drivers need riders before they’ll drive, and riders need drivers before they’ll ride. Thus, the company is aiming to work on self-driven cars to make the business model sustainable: remove the drivers, remove the money-eating machine. Its efforts are limited due to the the need to compete with a few major tech giants’ strategies currently standing in the way, such as Google’s technology and GM’s auto-expertise.

(Photo by Austin Distel on Unsplash)

Uber has chosen to list its shares on the NYSE, and the IPO will value the company at $120 billion. Furthermore, a virtual monopoly in the MENA region after Uber’s $3.1 billion acquisition of Careem will make its stock even more attractive. Such a game plan displays Uber’s competitive strategy to tackle competitors such as Lyft and Careem to develop market share dominance. All of this, coupled with Uber’s ability to invest in technology and its brilliance in staying consistent, will provide an ultimate foundation for the gigantic business to always stay on top.