Uber is a smartphone app that connects passengers with drivers. Passengers can monitor the cab’s position, car number and driver details on their smartphones. Uber makes money by charging a commission on each ride, as well as charging a cancellation fee. The company also owns a fleet of cars catering to customer demand and the needs of drivers.
Traditional taxi cabs have been an integral part of public commuting for decades now. Like every sector of human urbanization, this technology was in dire need of an upgrade. With taxi cabs, there was no guarantee of availability, which really limited its potential.
The vacuum was finally fulfilled by taxi services like Uber. Since its launch in 2012, Uber has become the most recognized alternative to traditional taxi cabs.
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Uber was founded by Travis Kalanick and Garett Camp in San Francisco, United States. Boasting more than 8 million users, it is responsible for more than 1 million cab rides every day.
Uber is one of those rare tech companies in the world that has been valued at over $50 Billion. Uber has already received an equity funding of $8.2 Billion and is available in more than 60 countries. The business model of Uber has made it possible for people to simply tap their smartphone and have a cab arrive at their location in the shortest possible time.
Uber caused a taxi revolution all around the world and here’s how it did it.
How does Uber work for passengers
- The passenger is introduced to Uber with a smartphone app, which lets them request a cab based on their desired preferences. These preferences are made on the basis of luxury, fare rates and car type.
- Once a driver accepts the request, the passenger is able to monitor the cab’s position, car number and driver details on their smartphones. This is revolutionary both from a safety point of view, as well as for transparency. The ride starts when the passenger enters the car.
- After the passenger is dropped off at his or her destination, payments can be made either by cash or online.
- Rating the driver is an important part of the business model, as it informs other passengers about the trustworthiness or quality of the driver.
The passenger experience is just one facet of the total organization and the relationship between the passenger and the driver is symbiotic.
How does Uber work for drivers
- A driver is supposed to register with the company and prove their ability as a good driver. They go through a training process that enables them to get comfortable with the rules of the organization.
- When a driver is activated for fare requests by logging into their smartphone app, a request is received by the driver from a nearby passenger based on their preferences.
- They can either accept it or pass it on to other nearby drivers.
- If they accept the request, they receive the passenger contact info and the pickup location.
- After the passenger is picked up, the cab service is virtually the same as a traditional cab.
- After the drop is made, the driver is also required to rate the passengers. Uber does not disclose this to the passengers directly, but every driver gets to see your rating before they decide to pick you up. The intent of rating passengers is to protect future drivers from having to deal with rude, violent, aggressive, and drunken/impaired passengers.
If your rating drops substantially below 4.5/5, Uber can sanction you by barring you from using the service temporarily or permanently.
How does Uber make money?
The cash collected by each journey is the only source of revenue for a traditional cab company, and Uber is no different. That might not seem very revolutionary, seeing that Uber has marketed itself as a cheaper alternative to traditional cabs, but this model still ends up being quite sustainable.
- What a cab service needs most is knowledge. That knowledge is derived directly by observing the users, both the passengers and drivers. The information on ‘dead miles’ that a driver must sit through without any customers is very valuable to the company, because it relays information about traffic patterns and taxi demands. These miles are useless to the drivers, since they are not compensated if their car is not catering to a customer. A third party would have to spend a handsome amount of money just to obtain the same information that Uber does every single day.
- Trip commissions constitute the most obvious source of income for Uber. They generally range from around 15%-30% based on the price segment for that type of cab, experience of the driver, and age of market.
- ‘Surge Pricing’ is the second-largest revenue line for Uber after the normal Trip Commissions. This surge pricing is levied primarily when the demand for cabs outrun the supply or number of cabs. In order to make the most profit, Uber automatically declares a suitable price based on an algorithm. Interestingly, the driver earns the same amount of cash as he would have without the Surge. Even though the taxes are doubled, Uber ends up making about 40% more than they would have with normal fares by implementing a 2x Surge.
- Uber also takes money from the drivers as ‘Listing Fees’ when they first officially register.
- Uber also owns a fleet of cars catering to customer demand and the needs of drivers. The cars might be leased out to drivers for a weekly/daily fee, or they can be loaned out to companies that rent cars.
- Uber subtracts a Trip cancellation fees in case a passenger decides to cancel a trip at the expense of the driver’s ability to get a new passenger.
- Huge interest payments can be earned by Uber by urging customers to keep ready-to-pay money in online wallets.
- Uber pays its drivers as private contractors and not as full-time employees with benefits, thus avoiding extra expenditure, which is a mandatory loss for most traditional corporations.
In order to maximally optimize their available fleets of cars and drivers, Uber has different car models with different price segments to cater to everyone’s needs and desires. The per kilometer charges for each segment are different, both while waiting and during trips. Also, fares are different for late-night travel, pooling etc.
Outside of its car travel services, Uber also offers transportation through bikes, truck transport and even helicopters and jets in some cities. Furthermore, Uber has not limited itself solely to transport services.
How does UberEats work?
Uber makes use of its available fleet to deliver food to interested customers with no added cost of owning/hiring vehicles running on the road 24×7.
The customer experience is different based on two options offered by the company. They could either have a limited Menu delivered to them in the shortest amount of time possible, called ‘Instant Delivery’, or they could have a wide selection of Menu items delivered to them at a prefixed longer time, which is called ‘Real Time Ordering’. Instant Delivery is made possible since Uber has a wide customer base and the limited Menu can be stacked up in hot bags, ready to be delivered at a moment’s notice.
In other cases, Uber works similar to any other food delivery company, with the added advantage that many drivers are always available nearby. UberEats also creates a revenue flow via advertisement fees that a restaurant pays for affiliation.
In spite of all the added advantages, UberEats still has a long way to go before it becomes sustainable enough to justify its existence. Once the competition from other services disappears, charges will increase and the discounts will disappear.
A Monetary History of the United States, 1867â€“1960 (National Bureau of Economic Research Publications)