The Business model of Uber – How uber makes money

Today, getting taxis from Uber or Ola has become very common for us. “The story of Uber is littered with scandals and controversy, at every single turn.” “This is more global, It’s diversified. By sharing scooters, Uber Green, air taxis, And even its own autonomous driving technology. I mean, look at Uber, you’re really betting on the future of transportation.” For those who don’t know much about Uber, they think that you call a taxi on the Uber app on your smartphone, and the taxi just comes to pick you up. They think that the company Uber must have sent the taxi. But it isn’t so. Uber doesn’t own taxis. Uber is merely a technology company, and a smartphone app, and it works by matching drivers and riders. The people who are willing to use their cars as taxis, and the people who wish to use taxis, riders. This app works by getting them together. Using normal taxis is much easier than this. You go out, hail a cab, without needing any apps for that. Uber’s role is prominent where taxis aren’t easily available. If you don’t have taxis around you, then you can call the taxi to your home through the smartphone. With one app. Before this, you had to call people. 

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The phone number of the taxis varied among different cities and countries. This one app simplified these. Additionally, it even gave some new people the opportunity to become taxi drivers. If someone wanted to earn more money by working part-time, they can use their personal car as a taxi. This opportunity wasn’t available before Uber. Normally, to become a taxi driver, one had to get many licences and permissions, depending upon the city and country you were in. Often, the car had to be registered in the commercial register. And one had to get a commercial license plate too. All the hassles related to it have now ended. And the extra costs involved in these formalities, have now been reduced. And because of this reduced cost, Uber could offer their taxi service at a lower price. Generally, in normal taxis, the fare is calculated by checking the meter, but Uber has its algorithm to tell us what would be the cost of the taxi ride. And this is was quite innovative at its time. Their calculations are somewhat like this. First is their base fare, depending upon the car you’re choosing in Uber, there’s Uber X, Uber XL, Uber Black, add to that, cost per minute multiplied by time, and cost per kilometre multiplied by time, the cost per minute and the cost per kilometre, is different for each location, as decided by Uber, because the cost of things differ from one country to another and one city to another, and then the sum of the three is multiplied by the Surge Multiplier. The cost that you arrive at by adding the three parts, will be multiplied by the Surge Multiplier. After that comes the booking fees and administration fees. This is charged by Uber for itself. to pass on the cost to Uber to the end-user. The concept of the surge multiplier and surge pricing is truly groundbreaking. The thing is, when Uber started out, they saw that there are some places that have many available drivers, but at some places, there are many riders, but there’s a lack of drivers. They wanted a solution to balance this. If there are more drivers at one location and more riders at another, the riders wouldn’t get a driver, and the drivers wouldn’t get riders. They wanted to match the too. They decided to do this with surge pricing. They divided the map into hexagons. and in each hexagon, they would check for areas that have more riders and the area with more drivers. In the hexagon where there are more riders than drivers, they would apply the surge multiplier in the price. Suppose this multiplier is 3x, then the price of the taxi ride would increase to three times. Thrice the price is quite high for the rider, but it is a motivation for the driver because they see the demand in the area, and think that giving a ride there would earn them thrice the price. That’s why the drivers would go to that area, that has more riders. So that the demand could be met. And the riders have the option too. If the riders want, they can pay a higher price and get Uber instantly. Or they can wait 10 minutes to half an hour, till the time more drivers reach the area, and the surge multiplier is reduced automatically, when the numbers of riders and drivers are balanced out. How does this thing look realistically? The hexagon shapes I told you about, for the drivers, they appear in shades of yellow, orange, and red. The areas that are bright red, have a higher surge, and a higher surge multiplier, so the drivers would get more money. Overall, this is the way the cost of an Uber ride is calculated. Of the final cost, 20%-25% of it is taken by Uber and the rest is paid to the driver. Recently, there have been controversies about this basic calculation. It was been said that Uber has come up with their own route-based pricing. That the roads and routes people travel by frequently, Uber increases the cost there so that the company can earn more. While ignoring this basic calculation. Some people had even accused them that Uber checks the phone’s battery of the users. That it checks the battery level. If the user’s phone has a low battery, they increase the price for the user. Because people are more desperate when their phones are running on low battery, to get a taxi as soon as possible. So they are willing to pay more. “It claims that rideshare services like Uber, raise their prices, relative to your battery level. Well, since this tweet, a few articles have popped up. They reinforce the idea that Uber actually changes the cost of the trip based on your phone’s battery.” Although Uber has denied this. They have said that they don’t do this. But if we return to our overall model, this model proved very successful for Uber. Uber expanded their model in many countries. But what about the countries where most people don’t own their own cars? People can’t afford to drive cars. There would be a scarcity of drivers in those countries. What could be done in such countries? For such countries, Uber decided that they have to give cars to people someway or the other. They can either give loans to people with which they’ll buy cars themselves. Or, they could give them cars on a lease. They could rent them. With this, Uber started their program Uber Xchange. Under the Uber Xchange program, if you don’t own a car, and you want to become a driver for Uber, then you can lease a car from Uber. And you’d have to pay a weekly rent to Uber. You can use their cars to earn, And hopefully, you’ll earn so much, that you can pay off the rent and you have some profits left with you. Unfortunately for Uber, this program wasn’t very successful. They stopped this program in 2018. Because it was getting troublesome for Uber to manage so many resources. Uber was simply a technology company, just an app. Uber didn’t own their cars. But for the Uber Xchange program, they had to own the cars. They had to buy the cars and keep them, so that they could be leased. This was troublesome for them. And it cost a lot too. They weren’t able to manage it properly. That’s why they decided to stop it, and, being a technology company, to focus solely on the app. To grow their business model through it. But the problem didn’t end. So for the new solution, Uber adopted a new program. The Fleet Model. Uber thought that many people have multiple cars. There are companies that own several cars. Especially car rental companies. In such cases, their cars aren’t in use at all times. Just imagine if a person has 3 or 4 cars, most of the time the cars are parked without being used. These people and companies that own multiple idle cars, are called Fleet Owners by Uber. Because they have a fleet of cars. They decided to connect the fleet owners with the drivers. So that the drivers can use their idle cars, to earn for themselves. The fleet owners would basically rent out their cars to the drivers. So that, once again, Uber could become the platform through which the drivers and fleet owners could connect with each other. This is how the Uber Marketplace began. The fleet owners, could rent their cars to the drivers. To the drivers who don’t have their own cars. The fleet model could work in two ways. First is where the fleet owners rent out their cars to the drivers. And each week the driver has to pay rent to the fleet owners. And the Uber earnings goes to the driver. The second model is when the fleet owners hire their own drivers. The fleet owners could hire some drivers on a monthly salary, and the earnings from Uber, is kept by the fleet owners for themselves. Both these models are very common in India. For Uber India, the largest fleet owner in India is a company called Everest Fleet. They have thousands of cars that they lease out to the Uber drivers. Do you know what the most interesting thing is? I hope you’ve understood what I have explained till now, and let’s think a step further now. What would happen when these fleet owners, don’t buy their own cars, instead, they ask the common people to invest in them for buying cars or the fleet owners get the fleet on lease, and give them to the drivers on a sub-lease? Do you get what I’m trying to say? Suppose you need to buy a car, and it costs ₹600,000. But you don’t have ₹600k to buy the car, so you get your 9 friends together, you and each of your friends invest ₹60k to buy this ₹600k car together. And then you use the car to become an Uber driver and to earn through Uber. And because 9 of your friends helped you to buy the car, you pay them the rent for each week. The pre-defined rent. You say that you will pay this rent weekly for 3 years. This is known as Fractional Investing. Normally, when you invest in a large asset, suppose you buy a home, you buy that home on your own. But if 10 friends come together to invest in a property, in the same property, the same house, it is known as Factional Investing. Once can get fractional investment in properties as well as in assets. Like the example of the cars. Imagine this on a large scale. To summarise this, Uber’s Business Model is something like this. Where people own their own cars, there, Uber is a platform or an app that connects drivers with riders. But in countries where most people don’t own cars, there, Uber is a platform that connects fleet owners with drivers. These fleet owners could be individuals As I told you in the beginning, there used to be taxis then. If someone wanted to become a taxi driver, they had to undergo many commercial registrations get commercial licence plates, a special driving licence was needed, the taxi drivers had to get regular checks too, there was a lot of bureaucracy, and it used to cost a lot. The biggest advantage that Uber had was that when people started using their own cars as taxis, they didn’t need to go through all this bureaucracy. They didn’t need to get commercial registrations, they didn’t need a special driving licence, so all the expenses towards it disappeared. Because of this, Uber could keep its prices low. The cost of a taxi ride was reduced by Uber compared to that of a normal taxi. And the Uber driver could earn more money, that compared to a normal taxi driver. Initially, that is. But just think about it. If normal people could use their personal cars as a taxi, through Uber, and they don’t need any commercial registration, no need for a special driving licence, but the actual taxi drivers have to get these. They have to incur more expenses. So isn’t this a loophole in the system? Due to this reason, people filed cases against Uber. was bypassing all these rules and laws. In some countries, obviously. Because the laws applicable differ from country to country. In many countries, there were court cases against Uber because of this. In 2010, when the San Francisco City Authority filed a case against Uber claiming that they are running their taxi services illegally. At the time, the name of the company was UberCabs. In response to the case, Uber said that they aren’t operating taxi services. They decided to change the name of their company. They removed the ‘Cabs’ from UberCabs, and the name of the company became Uber. They claimed that they are simply a technology company. That they aren’t a transport company and don’t deal with taxis. They simply provide an online platform. This argument worked in many countries. Courts in several countries stated that their argument made sense. That Uber was right, and they should be allowed to function as they were. But in many countries this argument didn’t sit well. The courts in several countries stated that Uber isn’t a technology company, instead, Uber is a transport company. In 2017, the top court of the European Union passed the judgement that Uber is actually a transport company. They left it up to the individual countries how they decide to deal with it. Let’s look at some examples. In Bulgaria, if someone wanted to drive a taxi, they needed a professional driver’s licence, needed to undergo registration, and they needed an operating licence. When there were court cases against Uber, requesting that Uber be held to the same standards Uber saw that it would be too expensive, and the costs couldn’t be kept low. Uber then exited Bulgaria. Uber said that they wouldn’t provide their services in Bulgaria. In April 2017, in Denmark, the authorities said that the normal taxis have meters in them. And if Uber wanted to run their taxis too, they would have to work with the meter. And it is the government that decided the fare by the meter. Now, Uber couldn’t determine the fare on their own. Uber couldn’t work with these restrictions, so Uber exited Denmark. The same thing happened to Uber in Germany as well. Uber was asked that if a driver got into an accident while driving, who would bear the ensuing expenses? Normally, if an employee of the company gets into an accident, the company keeps its employees insured. But in this case, the workers were working as independent contractors. The poor drivers that were working to increase their earnings somewhat, would have to bear the expenses of any accident they get into. It’s very unfair. In response to this, at some places, Uber has started to employ the drivers giving them insurance, a good salary, and are getting them the correct licence. As a taxi driver normally gets. And then they operate their services. Talking about India, Uber had to face a lot of legal challenges. After a 2014 rape case in a car operated by Uber, the government banned Uber. Saying that Uber can neither ensure the safety of the passengers nor can it protect the drivers properly. This ban was overturned in the High Court one year later. But the authorities remained wary of Uber. The Uber drivers work 12-13 hours a day often. They are overworked and aren’t provided proper insurance, and they aren’t even treated as proper employees. That’s why the government has enforced new rules recently, for services like Uber and Ola. Uber is ordered to provide insurance cover for all their drivers. They can’t increase their surge pricing by more than 1.5x. And the cut that they take, cannot be more than 20%. So that 80% of all earnings go to the driver. Additionally, no driver could be worked for more than 12 hours. Friends, this was the Business Model Uber employs worldwide. There can be 2 ways to see this. On one hand, people can say that, Uber is a company that brought major disruption to the technology and the existing system, making it more convenient and cheaper for people to get taxi rides, and the existing taxi system, Uber brought a much needed revolution to that.