Uber is constantly trying to expand its influence in the American economy and is battling every roadway against taxis and Lyft. With its previous megalomaniac tendencies in check from SoftBank’s involvement, and the new CEO Dara Khosrowshahi, there still seems to loom the shadow of Kalanick.
This recent bid to introduce the Ride Pass subscription in six key cities in the US at the extremely unusual price of $14 (or $24 in LA) is sending ripples of awe among the many rideshare clients who are constantly seeking a “free ride.”
Questions are asked from raised eyebrow investors trying to make out what hot Khosrowshahi on the head to let such a pricing combination occur. $14 for a month of unlimited riding? The driver gets paid in full for a normal ride? Is Uber spending its easy gained money again? How does this help in making profits before the 2019 IPO?
Well, let’s take a look at the psychology of big data.
Uber USA Market
The current status of Uber in the US market is around 65% and was shrinking until SoftBank urged Uber to leave Asia and focus on the home base. With Didi Xuching attacking from the south, Uber needed to create a solid backbone of income from at least one stable source, and nothing beats the home counties.
Lyft has been gradually growing, and it reached a 65% share this year, which is now under fire from the new Uber subscription plan. Why? Because Lyfts price is $299, which is a fair price for 15 rides of $15.
However, Uber is not into playing fair and is seeking a way to steal a chunk of the market back from Lyft, and to do so needs to use some clever corporate juggling.
Big Numbers Take Longer to Turn
What Uber is doing, is playing the long game gambit. It’s relying on psychology with a touch of common economic sense. Consider this scenario:
Khosrowshahi: How do we increase our client base and revenue?
Kalanick’s Ghost: Use investors’ money to pay drivers for supplying free fares to clients
Khosrowshahi: How does that generate more revenue?
Kalanick’s Ghost: It won’t work at first, but after you steal a large chunk of customers, such as 10%, you can then restructure the pricing to meet the specific use per client, and provide a more lucrative price for Uber, that will meet the client’s approval?
Khosrowshahi: OH, I get it, you mean that after we spend a few million, we raise the price to make it profitable, and then the clients that use the service will decide whether the new price is still cheaper than the Lyft one and stay on with us. Those that don’t travel enough will leave the subscription, those that use it a lot will stay on with the new price and the ones in the middle will remain undecided.
Kalanick’s Ghost: Correct, you see what you get is a minimum 10% increase in the market share, which is billions of annual dollars, after you raise the prices based on a customized algorithm that sets the new price to meet ride habits, you end up losing perhaps 20% of freeloaders, and another 20% will be undecided, s count them out, but 60% of the 10% stay with you. Essentially, you regain 6% of the market with a further 2% translated into daily use and not subscription use.
The Ghost in the System
What is described above is a fantasy discussion that outlines the psychology of the subscription attack on the market. I doubt if this conversation ever took place, but the core concept of the subscription price shows us that this is the kind of thought process behind the decision to take such a bold step back into the world of “paying drivers” out of investor income and not from actual rides.
The Bottom Line
Uber is about to spend a few million on paying drivers across the US for taking clients on “free” rides that are subscribed to at $14 a month. Unlimited rides that will take a chunk out of Uber’s stash However, this is not a situation that will last a long time. I expect that very shortly after Uber has taken back a larger % of the market (at least 10%), they will then up the prices based on an algorithmic performance that shows a median line. This line will split the new clients into three groups, those that accept the new price, those that reject it and the few that will remain undecided and most probably stay with Uber but not on a subscription basis. As such, presto, before the IPO, Uber can claim they raised their US coverage by X%, and generate a monthly revenue that will lead to profitable income.
…and you thought that Kalanick’s influence was gone!