Uber Business Model – An Exponential Business Model
Uber business model – an exponential model that has changed the way business models are built around industries.
To many people Uber is a mystery, to others it is a miracle. And still to some others, it is one of the greatest innovations ever. They wonder how an ordinary mobile App would be able to revolutionize on-demand transportation and is today earning more than leading transportation companies in the world – yet it doesn’t actually own even a single cab.
In fact, Uber’s business model has become so successful and popular that it has given birth to a new startup economy known as on-demand economy. Truth is that there was hardly any such thing as on-demand economy before the coming of Uber. But today, having a deeper understanding of Uber’s on-demand business model can play a pivotal role in modeling your own on-demand startup business idea. And that is irrespective of the industry you are playing. What Uber has done in on-demand transport sector can be (and is already been) replicated across other sectors.
From my extensive knowledge of studying and developing business models, I will share all you need to know about Uber business model.
What Is Uber’s business model? How does Uber work? How does Uber make money? What is Uber’s business Strategy? Why is Uber so successful? These and many other questions are ever in the lips of people about the ‘magical’ growth of Uber. So let’s take a look at the foundation of it all – the Uber business model. From understanding the business model it will be easy to see how they make money and why it is so successful.
But before we make a costly assumption in jumping direct to Uber business model, let’s even answer the elementary question. What is Uber?
What is Uber?
Uber, full name as Uber Technologies, Inc. is an American car hailing company which allows users to book a car and a driver to move them to their destinations in similar manner as a taxi. Uber is a merger of transportation and technology at its best. This is because it is a transportation company driven by technology using a simple mobile app.
This model has made Uber the on-demand transport solution of choice across the world. And its user base has been growing exponentially. It has grown by over 107 million users in just a space of 6 years. In fact, in 2021 118 million people used Uber. And that represents an increase of 26% on 2020 figures.
It is a two-sided marketplace and platform business model that primarily connects drivers and riders. So by downloading the Mobile App in your device you can be able to order a ride anywhere and anytime. This though is as long as the service is available in that location.
There are many exciting innovations in the Uber business model. But one of them that appeals to a great deal of customers is that Uber offers customers an upfront and a transparent pricing service, while also offering safe and convenient ride.
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Uber Business Model – The Service Segments
But Uber is no longer just the on-demand cab hailing service we used to know. Though that is how it started, but today it has evolved. And the pandemic of 2020 and 2021 even further shifted the focus, at least in terms of revenue and service offering. The business has branched into other services beyond just car hailing services. For example it now have a delivery segment (an on-demand food delivery) and also Uber Freight (an on-demand trucking service).
So let’s take a look and the three major service segments of Uber and how the on-demand economy business model applies to them all.
Uber Mobility (formerly Uber Rides)
This is the flagship service of Uber. That was the original idea – ride-hailing business, when Travis Kalanick & Garrett Camp first conceived it. It is that service segment that connects consumers with drivers who provide rides using a range of different types of vehicles.
This used to be the primary source of revenue for Uber, but that is no longer the case (more on this shortly).
The segment also includes activities related to Uber’s financial partnerships and transit offerings.
FYI: Uber as a company doesn’t own a single vehicle neither does it transport anyone. Their job is to connect individuals with vehicles
Uber Delivery (formerly Uber Eats)
Just like Uber Mobility, the business model is the same, but the service differs. Uber’s Delivery segment provides a platform for consumers to search for food and discover local restaurants, order meals, and either pick-up the meal at the restaurant or have it delivered to them at home or in the office. In some regions/countries, the service also offers delivery for groceries, alcohol, convenience store items, and other select goods.
However, the main service here is delivery of ready food from restaurants. Once again just like in the case of the Uber Mobility, Uber is at the middle as a facilitator while restaurant owners and individuals searching for restaurant of choice comes together to transact. With Uber only providing the meeting point – trusted platform for service.
Uber Freight
Once again, the business model is the same as the other Uber service segments. Uber’s Freight segment provides a platform that connects carriers with shippers. Just like Uber Mobility, it offers carriers upfront and transparent pricing in addition to the ability to book a shipment.
This segment also includes transportation management and other logistics services.
Uber Business Model – How Uber Works?
For the purpose of simplicity, in this blog post, I will restrict my analysis to Uber’s flagship business of car hailing – that is the mobility service segment. But first, I will explain the business model before heading to how it makes money.
Uber works as a digital two-way platform, connecting passengers in need of a ride to move from point X to point Y with drivers that are willing to serve them for a fee. Did you notice the emphasis on the terms ‘willing’ and ‘for a fee”? Yes, there are millions of vehicles on the roads but only those who are willing and ready to accept Uber’s terms can be part of this model. Also, they are coming on board to serve you for a fee – so it is not going to be a free ride when you order one.
In this model, the“Passengers” generate the demand and the “Drivers” supply the demand.
Wow! that sounds interesting! So the business is actually between the passengers and the drivers.
So what does Uber do then?
Like we have noted earlier, “Uber” only acts as the marketplace to facilitate all these in a seamlessly manner and on a mobile platform.
Through its model, Uber has been able to generate strong value propositions for both passengers and drivers to get onboard on its platform. And do I need to mention it that this model has created a very serious disruption in the taxi/cab industry.
FYI: The drivers here are not Uber’s staff and they are not working for Uber. They can be considered as full-fledged entrepreneurs working for themselves on their own terms. Uber only provided them with the digital platform through which they can get customers.
So, here is how it works in 10 easy steps:
- You need a ride
- You open the Uber App on your device and search a ride
- You see a ride, confirm the details of the vehicle (name of driver, type of vehicle, price of trip)
- You order a ride from the Uber app on your mobile device
- Using geofencing, Uber scans through and in microseconds discovers an available driver closest to your location
- Then it immediately notifies the driver that you are available for pick up (with your exact location provided)
- The driver drives down to meet you there
- You confirm that is the ride you booked
- You hop in and the rider takes you to your destination safely and conveniently
- The app calculates your fare and without any form of argument nor negotiation you see it and pay
Uber Business Model – Value Proposition
Just like I mentioned in the preceding section, Uber is able to generate a very powerful value proposition that appeals equally to both drivers and passengers. And that is one of the things that has made Uber very successful. So here are the value proposition for both drivers and passengers.
Uber’s Value Proposition for Passengers
- On-demand cab bookings (Convenient)
- Real-time tracking
- Accurate Estimated Time of Arrival (ETA)
- Cashless rides
- Lower wait time for a ride
- Upfront pricing
- Multiple ride options
Uber’s Value Propositions for Drivers
- Flexibility to drive on their own terms
- Better income
- Lower idle time to get new rides
- Training sessions
- Assistance in getting vehicle loans
- Better trip allocation
Uber Business Model – How They Make Money
Uber’s revenue model is based on charging commissions. We all know that for every passenger a driver picks using the Uber platform Uber takes 20% to 25% of the pay.
Many people often assume that this is the company’s only source of income. But it is NOT. Uber also makes money through other sources.Once again, for the sake of simplicity I will share how Uber makes money just from the mobility service segment.
1. Trip Commissions
Uber provides the drivers on its platform with a robust supply of ride requests to accept, fulfill, and make income. While a passenger makes a booking he pays the equivalent amount for that trip either through card or cash. And for each of such payment Uber takes her commission while the rest goes to the driver.
2. Surge Pricing
The algorithm behind the Uber mobile app is very power and very complex. It has a way of calculating the distance for each ride, the time spent and even the estimated fuel consumption. And from that it will arrive at the price. But it also monitors how many people are trying to order ride per time and the number of vehicles available to serve that number. From that analysis it is able to know when the demand is higher than the supply.
Now, here is the catch, from this Uber is able to come up with a novel concept known as surge pricing.
FYI: Surge pricing is also used in other businesses and other industries but its popularity will always be credited to Uber.
So how the surge pricing works is that whenever there is a higher demand for cabs than what can be served at that moment (for example, at the airport after a flight lands or a major conference just dismissed at a venue and everyone need to leave at the same time), the fare goes up based on a surge price calculation algorithm.
Some drivers will quickly move to the surge region to earn more (and this increases the supply) and the extra passengers are able to get ride in good time. This way Uber is able to manage the demand-supply mismatch situation better.
Drivers make more money, Uber makes more money and customers are satisfied even though they have to pay more.
3. Premium Rides
Uber offers multiple ride options, from affordable hatchbacks to luxury sedans and SUVs. The profit margin for premium rides are much higher and helps Uber make more than their average revenue.
4. Leasing to Drivers
Uber runs a vehicle leasing program in many of its target countries to help new drivers get onboard faster. Drivers have to pay an upfront security deposit for the vehicle and payments are automatically deducted on a weekly basis from the driver’s earnings.
5. Brand Partnerships/Advertising
Uber is a very popular app with millions of active users. This makes it a good option for major brands to do promotions. Though the revenue from this isn’t that much yet, but with time it will still become a major source income.
Uber Business Model – The Revenue Distribution
We earlier listed the three major service segments that Uber focuses. You might want to ask, does Uber make money from each of those service segments? The answer is yes. Uber makes billions of dollars from all three service segments annually.
A look at the 2021 revenue declaration shows their earning as follows:
Mobility – $6.9 billion
Delivery – $8.36 billion
Freight – $2.1 billion
Others – $8 million
Total – $17.45 Billion
I would want to believe you noticed something a bit strange from the figures above! Mobility is the flagship service and is expected to be the cash cow of the brand. Well, it has always been. But the pandemic changed a lot of things about the Uber business model. The most notable of them been the spike in the demand of Uber delivery. As you can see from the chart above, the delivery accounted for 48% of Uber’s revenue in 2021. In fact, the revenue from that service segment grew by 114% (from $3.9B in 2020 to $8.36B in 2021) as against the 14.2% growth of the mobility segment.
Uber Revenue Distribution by Region
The US & Canada are still responsible for the majority of Uber’s revenue. For example, in 2021, Uber made $17.4 billion. Out of that amount $10 billion came from those two countries. That is over 50% of the total revenue from just two countries. Europe, Middle East & Africa (EMEA) together forms another business region which accounts for 18% of the total revenue. Asia-Pacific contributes 16% while Latin America (LATAM) contributes the least with 8%.
Uber Business Model – Why it is So Successful
Today Uber is a very big success, ut that success didn’t come by chance. Here are some of the reasons:
- It has a very strong value proposition for both passengers and drivers
- It keeps its price moderate – Uber charges are lower than a typical taxi/cab company or operator
- There is transparency in the pricing model
- It started with innovation and has continued to innovate
- It was built for scalability from day one
- The business model is a lean model that doesn’t require so much overheads
- It made the most of technology in solving everyday real-world problem
Uber Business Model – Before We Go
The on-demand economy has become a very popular business model today but that is thanks to Uber. Uber’s success in many ways started a chain reaction with hundreds of on-demand also known as Uber for “X” startups been launched been launched across different industries. Even the on-demand transport service app has also multiplied with Uber staying ahead of competition.
Many people might want to say that Uber is enjoying first mover advantage and that is true, but the success of Uber owes more to just first mover advantage.
With this analysis of the Uber business model I believe you are better equipped as you think through your own idea and the business model to adopt. And of course you know that the importance of business model for a business can never be over emphasized.
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