UBER Case - case study PDF

Preview

Summary

case study...

Description

W16087

UBER: LEADING THE SHARING ECONOMY 1

Sayan Chatterjee and Kayleigh Fitch wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation

Version: 2016-03-22

Uber Technologies Inc. (Uber) was founded in 2009 and initially catered to a single market: San Francisco, California.2 The company’s original service was UberBLACK, which offered high-end transportation in luxury cars such as BMW 7s, Mercedes-Benz S550s, Lincoln Town Cars, and Cadillac Escalades. Uber subsequently introduced its UberX service, which was somewhat less exclusive and less expensive. The customers who used the aspirational UberBLACK service influenced riders to use UberX. By leveraging technology to build the foundation of its business model, Uber became a disruptive force in the taxi and limousine industry. It successfully stole market share from existing taxi operators by catering to a segment of unhappy and underserved consumers. Since its inception, Uber had successfully changed consumer behaviour and continued to expand its services into new cities. Uber’s expansion was not without controversy and conflict. In virtually every city it entered, municipal governments raised objections and created legal hurdles to the company’s success.3 In some cities, such as Miami, Uber failed to overcome these hurdles and was blocked from operating.4 In addition, the company attracted negative publicity when several of its drivers were exposed for their unprofessional behaviour.5 By 2014, Uber’s future was uncertain: had it developed a business model that would allow it to become the first global brand in the taxi and limousine industry? Or would regulatory and competitive pressures force it to diversify with other services? While confronting these questions, Uber was also planning its global expansion, which inevitably presented its own set of challenges.6 THE TAXI AND LIMOUSINE INDUSTRY

In 2013, the taxi and limousine business was a US$10.9 billion industry in the United States.7 Estimated industry growth was expected to be modest until 2018, with experts projecting the market to be worth $12.7 million by that time.8 The taxi industry was fragmented, with no national or global providers — rather, it was dominated by small, local players. There were more than 200,000 individual operators (or drivers),9 and the four largest taxi and limousine companies generated less than 3 per cent of the industry’s total revenue.10 In addition, the industry was geographically concentrated in urban centres — especially in the Northeastern United States and in California, which together accounted for 50 per cent of industry

Page 2

9B16M024

revenues.11 New entrants viewed cities such as New York, Los Angeles, and San Francisco as critical entry points to gain significant market share in the industry.12 Moderate growth in the United States meant there was an opportunity for a company that was able to expand beyond the United States to reach a larger-than-average size by growing quickly and capturing a greater slice of the taxi market share. For example, despite its lack of a significant geographic footprint, the United Kingdom’s taxi and limousine industry (worth approximately $14 billion) was larger than the entire U.S. market, with London comprising the majority of the U.K. market.13 Some estimated that the global market was worth approximately $100 billion.14 Thus, expansion beyond a single market offered a significant business opportunity.

THE PRE-UBER ENVIRONMENT

In the traditional taxi industry, nearly a quarter of all revenues were paid to taxi operators and regulators in the form of fees, with drivers receiving only about 67 per cent of earned revenue.15 In most markets, heavy industry regulation had historically protected taxi operators against new entrants. Local governments issued a set number of medallions (or permits), which were auctioned to taxi-leasing companies, often at exorbitant prices. Through this system, cities were able to regulate the taxi industry quite heavily.16 In line with these norms, the San Francisco taxi industry was heavily regulated and dominated by a few large operators.17 These companies leased a fixed number of taxi medallions that permitted drivers to operate a taxi in the city. Because the supply of medallions was limited, each medallion could cost up to $250,000.18 The taxi drivers holding the medallions accepted this cost because the regulated distribution of medallions in San Francisco made it difficult for new entrants to enter the market, thus protecting their industry. However, this lack of competition had led to a degradation of service. Customers had two primary complaints: taxi drivers were often late to pick up passengers and behaved rudely during the ride. Operators (the leasing companies) often ignored these concerns because the threat of competition from new entrants had already been removed and their bottom lines were not impacted by the quality of service. The existing arrangement created an industry that, according to David Autor (an economics professor at the Massachusetts Institute of Technology), was “characterized by high prices, low service, and no accountability. It was ripe for entry [by start-ups] because everybody hate[d] it.”19 In 2009, smartphone adoption was on the rise.20 A Pew Research Center report found that smartphone adoption had increased from 58 per cent in 2014 to 64 per cent in 2015 and was skewed towards younger, affluent, and educated persons.21 Moreover, San Francisco had one of the highest smartphone penetration rates in the United States, at 74 per cent.22 Affluent, tech-savvy consumers possessed a digital platform capable of delivering numerous app-based services that would not even have been possible just a few years prior — all in the palms of their hands. Smartphones offered companies the opportunity to change the way their businesses — and even entire industries — operated.23 One of these was the taxi and limousine industry. Travis Kalanick, chief executive officer of Uber, described the market opportunity: “The taxi industry has been ripe for disruption for decades. But only technology has allowed it to really kick in.”24 MARKET ENTRY PLAYBOOK

In each new market it entered, Uber employed a playbook consisting of two key steps (among other things): (a) recruiting and training drivers, and (b) identifying influencers that would spread the word about Uber and its services.25

Page 3

9B16M024

Uber’s entry into Washington, D.C. was a prime example of its strategy. Uber hired a local manager, Rachel Holt, to oversee the launch. Holt followed Uber’s previously successful launch strategy, or “playbook,” in which she managed two teams that worked over six weeks to create a fully operational Uber presence in the city. The first team leveraged tactics like cold calling to car service and limousine companies to identify and recruit potential drivers. A second, separate team raised awareness through various tactics that led to Uber services becoming available in Washington. These promotional tactics included social media posts and engagement activities, an announcement on the company’s blog revealing that an Uber vehicle had been seen driving in the city, and even a VIP launch party.26 Uber identified key influencers (e.g., tech conference attendees) in each new city, offering them free rides and inviting them to promotional parties. These individuals were likely to discuss their experiences on social media, which created an effective word-of-mouth campaign.27 This strategy was so successful that Uber managed to establish brand recognition and a reputation with almost no formal advertising. However, Uber met with resistance from both city government officials and taxi drivers in just about every city it entered. Other than in its very first market, San Francisco (where Uber kept a very low profile), the company often escalated this resistance into highly visible conflicts.28 According to Kalanick: What we did in Chicago, what we do in all these cities, is reach out to all of our users and say, take action — email your councilperson, email the mayor. Uber riders are the most affluent, influential people in their cities. When we get to a critical mass, it becomes impossible to shut us down.29 One tactic that Uber encouraged was for city residents (both potential drivers and passengers) to email legislators or publicly tweet about Uber using hashtags such as #UberDenverLove.30

HOW UBER WORKED FOR DRIVERS

Uber encouraged prospective drivers to apply online, and then selected a short list of promising prospects for face-to-face interviews.31 During the interviews, prospective drivers were tested on their local knowledge and grasp of the geography of the city that they would be serving. In the future, Uber planned to administer this test on an iPad, impose a time limit, and include more detailed questions.32 Next, selected drivers were given a dedicated login for Uber’s software and trained on how to access and use it. In some cases, drivers were also provided with an iPhone.33 Uber’s software was unique: its foundation was an algorithm that matched drivers to passengers while setting prices in real time. Uber also helped its drivers increase their asset utilization.34 Drivers only made money when transporting customers, so Uber designed its application to help drivers predict demand and locate customers quickly and easily using a heat map that identified clusters of potential users when surge pricing was activated.35 The real-time algorithm embedded in the application’s dispatch functionality calculated a standard fare, based partly on distance and partly on time, in order to fairly price different types of trips.36 During periods of high demand, Uber raised fares (called surge pricing) to control demand and avoid “zeroes” — times when cars were entirely unavailable.37 Drivers received a yield-management system that not only priced dynamically, but created a seamless payment experience by charging the rider’s credit card automatically. Once the driver had passed a test, Uber worked out the liability issues and devised a fair financial split between the driver and the parent company (the driver received 80 to 95 per cent of the ride fare).38 Uber claimed that its UberX drivers made more than $90,000 per year in New York City.39 However, this had been challenged by other reports. More accurately, it was estimated that without surge pricing, Uber drivers made, on average, $19 per hour (compared to $12.90 per hour for cab drivers and chauffeurs). In

Page 4

9B16M024

addition, drivers that worked for more hours each week (e.g., 35 to 49) earned a higher hourly wage. This, coupled with the flexibility of setting one’s own schedule, made driving for Uber an attractive proposition.40

WHY USERS FOUND UBER ATTRACTIVE

Uber had started with a narrow focus on San Francisco,41 a city that had historically embraced technological innovation. The company also focused on business travellers, for whom convenience while travelling was important.42 This target customer was typically a heavy social media user who was likely to rave about great new products and services to their friends and co-workers via social media and other forms of wordof-mouth advertising.43 The following were the most common reasons a target customer might use Uber.

Making an Important Meeting (or Appointment) During Rush Hour (or a High-Traffic Period)

When urgent commitments required that customers reach their destination on time, riders were willing to pay more.44 With Uber, the passenger could simply hail a ride using the app on his or her phone. That same app would also tell the user the approximate location of the vehicle and the estimated pick-up time. As the driver travelled toward the passenger, the passenger could actually follow the movement of the vehicle on the app. Once the driver arrived at the designated pick-up location, they would simply touch the “Arriving Now” button in the Uber application. Uber’s goal was for the passenger to be inside the car within three minutes after the driver signalled their arrival. If for some reason the passenger had not arrived and entered the vehicle within three minutes, the driver would phone the passenger. After another 17 minutes, the driver would call the passenger once more. If the passenger had not entered by then, the driver would cancel the ride and move on to the next passenger.45 Luxury and Exclusivity

A ride in an Uber car was much more upscale than a taxi ride, offering more luxury features and greater comfort.46 However, using Uber did not require the advanced planning that was necessary to use a limousine service. Some people would use Uber to spontaneously hail a ride that would impress others on their arrival (e.g., for an important business meeting).47 Eliminate Uncertainty and Discomfort

Eliminating uncertainty was very important, especially among conference attendees and business travellers in large cities. Uber’s appeal was about more than just making a meeting on time — it was also about feeling comfortable knowing that your ride would arrive, rather than being stuck in the uncomfortable position of hailing a taxi from a random corner or waiting for a taxi that never came even after it had been called.48

Page 5

9B16M024

PRICING MECHANISM

Uber used a dynamic pricing model that was tied to real-time supply and demand. The company’s profit depended on its ability to leverage supply and demand constraints to increase prices when demand exceeded supply — for example, between Friday evening and Saturday morning in areas frequented by young people.49 The firm employed a prediction algorithm and heat maps to predict expected demand at different times of the day.50 The prediction algorithm analyzed how many times prospective riders had their apps open and which vehicles were available in order to optimize supply and demand. The result was “shorter waits for riders and busier, more efficient days for drivers.”51 However, there were instances in which the algorithm’s analysis and subsequent impact on surge pricing caused a negative public perception. On New Year’s Eve in 2013, numerous customer complaints on social media received significant attention when Uber passengers were charged six times the normal price because of bad weather.52 “While I’m glad I’m home safely, the $107 charge for my @Uber to drive 1.5 miles last night seems insanely excessive,” tweeted Aubrey Sabala, Facebook’s former head of consumer marketing. Later that night, Uber executed a manual override of the surge pricing logic in response, and even refunded some ride fares.53 Though this was an extreme example in which surge pricing backfired, Uber still operated with the general assumption that its customers felt that surge pricing was worth guaranteed service — despite increases during peak demand times when guaranteed rides were most valuable.54 Still, it was clear that Uber needed to find a way to more closely monitor and react to excessively dramatic surge pricing.55 Otherwise, it could risk offending and even losing the loyal customers it depended on for repeat business and word-of-mouth marketing. Despite this challenge, Uber suggested that dynamic pricing would ultimately be beneficial for riders, especially in the long term. It argued that higher prices got more drivers on the road, and more drivers on the road helped to meet the demand quicker, thus lowering the prices back to normal.56 Uber stated that this was because as more drivers gravitated to clusters where there was more demand than supply, the demand curve would flatten, and ride prices would come back down to a generally acceptable rate. This actually seemed to have happened in San Francisco.57 Fluctuations in the typical fare that a driver could earn supported Uber’s argument. “In the beginning it was like gold,” said Uber driver Marcos Costa, aged 24, on a particularly slow Presidents’ Day weekend. He said that riders now paid about $40 for one common route that used to cost them $70.58 DISRUPTIVE BUSINESS MODEL

According to its own definition, Uber was a technology company — not a taxi or limousine company.59 Uber did not own a fleet of cars, employ drivers, have a maintenance department, employ dispatchers, or invest significant capital funds to secure medallions or permits to operate in a district. Uber used a proprietary smartphone application to connect individuals in need of a ride with a driver who could offer that service. The company took a piece of the transaction fee for its service, but the driver who owned and operated the car received the majority of the fare. In most markets, this model allowed Uber to circumvent bureaucratic regulations — like expensive medallions — which had long been a barrier to entry. This was because it neither owned its fleet of cars nor employed drivers directly — it simply provided the technology to match demand for rides with drivers that could supply them. However, the company was not successful in circumventing regulations in all markets.

Page 6

9B16M024

When Uber was founded in 2009, its assets were simple: a sales team, a quality mobile application, and an excellent public relations team. The company leveraged the attributes of its smartphone application to deliver a customer service experience that met (and often exceeded) the needs of the tech-savvy traveller and grew awareness for its brand almost entirely through earned media and social media.60 Uber identified two key, intersecting opportunities: complacency within the taxi and limousine industry and a segment of the population of young, tech-savvy travellers that wanted a different experience. Uber then developed technology that acted as the foundation of a business model that would allow it to win business in this unserved market segment. Since 2009, the company’s growth had demonstrated its ability to identify the correct target market (see Exhibit 1). The business model enabled it to deliver a consistent and high-quality experience. Uber created a loyal and returning customer base, with customers using the service for everything from daily errands and commutes to special occasions.61 The company maintained this consistency by capturing and responding to real-time customer feedback. The app prompted riders to rate their drivers after the ride was complete. The rating system signalled to riders that their driver was accountable for a positive experience. A poor customer rating or series of ratings was not ignored and could ultimately result in a driver being removed from the Uber network.62 This feedback system not only weeded out problem drivers, but was a method for creating a deeper sense of engagement among Uber passengers. For example, one Uber customer had submitted driver feedback using her mobile device after a disappointing experience by stating, “help with luggage would have been nice.” Uber quickly responded to her feedback with the following message: Oh, no. I am so sorry we didn’t bring you the 5-star Uber experience that we aim[ed] for this time [. . .] I will make sure our operations team checks in with your driver about his attitude and professionalism. If there’s anything specific we should know about to follow up on, please ...