Research Of The Factors Of Uber Company’S Competitive Advantage
How does one take a technology that is already in place, incorporate it with new ones and create a service used by 75 million people worldwide? That is the case for Uber – a taxi service provided through the use of a mobile application that creates a two-sided market on-demand by connecting those who want to go somewhere with the people that can get them there. Previously, when there was a demand from someone to take a cab they would have to go outside and face uncertainty of how long they would have to wait, whether there would be any taxis in the area, how much it would cost and even who their driver would be. Nowadays, that uncertainty is minimized by the use of Big Data and machine-learning techniques and all you need to do as a consumer is let Uber know you want a cab. This paper aims to analyze the technology used by Uber and the reasons behind the company’s competitive advantage.
Uber was first launched in 2009 in San Francisco. Currently, it is active in 78 countries worldwide with an estimated 15 million average daily rides. The service started with the idea of using a phone application to connect riders with drivers. The technology uses geolocation – it identifies the customer’s location and connects him with an available driver simultaneously providing the driver with the best route. The idea being to make the service efficient and remove the uncertainties people normally face when hailing a cab on the street. The application manages several functions at once - the ride allocation, fare rates calculation, payments and the relationship between Uber and its drivers. There are a number of reasons for Uber’s huge success and its competitive advantage rooted in the use of technology in a new type of business concept.
Uber operates in the “sharing economy” – a term signifying the notion of turning a once underused asset owned by an individual into a source of income. The concept of the sharing economy along with the use of new technology such as phone applications and Big Data among others, makes it possible to easily connect those with an underused asset, in this case a self-owned car, with people willing to pay to use it, the riders. Historically, taxi drivers have faced imperfect competition due to the number of other options riders have such as buses, subways and personal vehicles. However, ride-sharing companies such as Uber are considered to be direct competitors to the traditional taxi service. Furthermore, competition is higher due to the restrictions most cities pose on the amount of operational taxis which can lead to unmet demand and higher prices. Also, there is difficulty and cost associated with acquiring a taxi license. Uber operates in such a way that it circumvents these entry barriers - the company itself does not own any of the cars, and the drivers are merely people who own a car and connect through the app with people who need a ride. The drivers do not need a taxi license, they only have to own a Private Hire Vehicle license.
Another factor that increases Uber’s competitive advantage when compared to traditional taxi companies comes from the possibility to build a relationship with the consumers and thus develop a reputation for the quality of its service. This is achieved through the use of the application which allows for consumers to easily rate drivers creating an immediate feedback loop. Uber can therefore easily monitor and if needed “punish” drivers – if they fall below a certain rating, they are not offered more rides so effectively they are being fired. Therefore, the rating creates a strong incentive for drivers to provide a high-quality experience for the consumers. Furthermore, drivers are also able to rate riders creating a two-way communication with the goal of ensuring a pleasant experience for both sides by keeping them accountable for their behavior. Without the use of the application, it is hard if not impossible for taxi drivers to communicate and build a relationship with clients to secure a reputation of high-quality service, due to the one-off character of hailing a cab on the street. An additional factor contributing to Uber’s success is the hassle-free payment option, made possible by the use of the application, where a rider gets charged for the trip on his/her credit card and can get in and out of the cab without having to worry about the payment. In recent years, Uber has added a cash option for payments as a strategic move for engaging with consumers in emerging countries where the majority of the population use cash and do not own a credit card. The way in which Uber calculates fares differs from the traditional taxi service. When a customer opens the Uber application and selects the location he/she wants to go to, few things happen simultaneously. A base fare rate is calculated based on price per mile and per minute, a fixed fee and a minimum total fare. Since 2016, Uber holds a patent on a Big Data informed surge pricing.
Also known as dynamic pricing, this is the other component in the fare rate calculation that differentiates Uber’s prices from standard taxis. Algorithms track traffic conditions and journey times in real-time and in situations where there is high demand in fixed geographic areas a surge multiplier is imposed on the base fare rate. The reason for this is to ensure there is enough supply to meet demand. From Figure 1, we can see that without a surge multiplier, the way in which standard cabs work, whenever there is an increase in demand without an increase in price a shortage of supply occurs. This results in a loss of efficiency indicated by the green triangle. However, with surge pricing the higher demand causes an increase in price which leads to a supply that is now sufficient. Therefore, the technology works in such a way that it ensures drivers meet demand especially when there are peaks in ride requests. A study by Chen and Sheldon (2015) found that this is indeed the case – Uber drivers work longer hours and complete more rides in times of surge pricing. Therefore, there is an increase in overall efficiency in the market caused by the use of the ride-sharing application as well as the surge algorithm. This also results in competitive advantage for the company as riders are now aware that even when there are peaks in demand there will be cars available. An aspect worth considering is that not everyone who opens the app in times of surge pricing will choose to book a ride. However, surge pricing is still considered as efficient since the rides are allocated to the consumers who value them higher than the rest and are willing to pay the price.
Furthermore, the Uber application offers various categories of vehicles each of which is priced differently based on the quality of the car and/or additional service and not based on a difference in the distance or time of the trip. Examples start from cheaper options like UberPool (sharing the ride with others), UberX and UberXL to pricier ones like UberExec - “premium rides in high-end cars”. In certain countries, there are more options to choose from like UberPet, UberAssist and even UberChopper, the last of which allows you to hire a helicopter. Consumers therefore have more choice and are able to select a price range and service that suits their needs closer than standard taxis. Using the application, the riders self-select themselves in the different categories providing huge amounts of data for the company on customer preferences. Using Big Data to try and estimate each consumer’s willingness to pay, Uber is moving towards perfect price discrimination where every consumer pays exactly what the service is worth to them. A study in 2016 by Cohen et al. (2016) on consumer surplus focused on four U. S cities where Uber is active using the data available from the company on individual-level observations. What the authors find is that consumer demand for Uber rides is inelastic in the short-term even when close substitutes to Uber’s services exist such as Lyft (Uber’s closest competitor), standard taxis or other forms of public transportation. Therefore, large price changes for the service do not affect the quantity of rides demanded in a great extent.
Over the years Uber has been active, there has been a lot of controversy followed by public debate on the technology behind Uber and the actions of those in charge of the company. From its implementation, the surge pricing algorithm has been critiqued by the public for charging extremely high prices on occasions where access to affordable transport is especially needed. Recently, the company has agreed to limit the surge multiplier in cases of natural disasters or local emergencies. Although research finds that surge pricing alleviates a supply shortage when compared to non-surge pricing, this is an example where Uber decided to adapt the technology to the consumers demands. Apart from this, the company is heavily criticized on the way it selects and approves drivers. A number of occasions are recorded where Uber drivers have committed offences towards their passengers – notably, in New Delhi a woman was sexually assaulted, and there were two occasions in the U. S where drivers physically harmed riders. In the traditional taxi business, drivers pass numerous background checks before receiving their license to ensure safety for the passengers. In the ride-sharing market, the process of becoming a driver is quite straightforward in part due to the use of the application as a way to circumvent the necessity of being a licensed professional.
Uber made changes in the app, caused by the critique on their drivers, to try and bring more transparency on who the selected driver is by showing a photo, name, license and phone number and a SOS option to alert local police enforcement in case of emergency. Still, even with these measures when taking into account the vast amount of drivers Uber has - currently 3 million - as well as the concept of Uber working not as an employer but a mediator, these limit the extent to which the company can actively control the drivers. Due to the nature of the role the company holds – providing the connection between the rider and the driver – Uber drivers are considered as independent contractors which implies different set of rights for the providers of the service. The company has been blamed numerous times for lack of transparency on the way it calculates what percentage it receives from the provided service and exactly what percentage that is. Since the app does not provide more detailed information on their payments some drivers have started using different methods to try and see what percentage they actually get paid in the end. In these past days, drivers have started protests in the UK with the aim to receive better pay and working conditions. If this persists without actions from the company, it might be the case that drivers switch onto other competitors or even stop being drivers on ride-sharing platforms which can result in loss of competitive advantage for the company due to a lack of supply. Since its creation, Uber has transformed the traditional capital-intensive taxi industry into a high-tech business. Owning a taxi company requires a lot of initial investment in order to acquire enough vehicles, and it also requires capital for their maintenance as well as for employees’ salary.
Uber’s business model circumvents these costs by working with independent contractors, the drivers, and its costs are mainly in maintaining and developing its software to secure a competitive advantage. Unsurprisingly, success like the one Uber has had in the taxi business entices others to try and do the same (or something similar) to maybe make such a profit for themselves. This trend now known as “Uberification” has created rivals such as Lyft, Grab and Ola among others. In order for the company to be ahead of the curve, it needs to constantly resolve problems with and develop its software further. Nevertheless, every technology presents problems for society in general and for specific individuals, and Uber is no exception. However, a question could be asked whether the technology should be blamed or the people that create it.
