Business Model Canvas Uber [2020 update]

Since Uber had its IPO, we have publicly available revenue data. We see strong revenue growth rates. They are tapering but Uber has also launched a number of new business segments which may be able to achieve high growth rates. The two biggest ones are Uber Eats and Uber Freight.
Then, there are the autonomous vehicle endeavours that will change everything (but I will argue in unpredictable ways).

The details behind the revenue model

Uber charges a 25% service fee on all rides (Uber Eats is different). An interesting question is how a ride plus a transaction fee is still cheaper than a traditional taxi ride?

Uber’s business model would not work if their rides were not considerably cheaper than a taxi ride such that even with the addition of the Uber commission it still remains noticeably cheaper than the comparable taxi ride.

The answer is that the cost structures are very different. Add to that the differences by country and even on a state, city/municipality level.

There have been many attempts to compare the cost base like the one I have linked to above. It is not easy to harmonise cost bases across different driver types. As mentioned, there are casual drivers and permanent full-time drivers.

The drivers’ cost base is in Uber’s revenue section because it’s not Uber’s cost base. The drivers’ cost base determines how much of the gross booking value Uber can convert into net adjusted revenue (the gap between gross booking and net adjusted revenue or “take rate”).

I think the best way to look at this is on a qualitative basis rather than a quantitative basis.

Comparison to taxis

Qualitative comparison of the driver cost base compared to taxis

• Utilising existing assets (depreciation / lease costs):
  • Most commonly, drivers utilise their own, pre-existing cars
    • With this, Uber spends no capital costs on these assets, has no associated cost of capital (or WACC) and no ongoing depreciation charges
    • For the driver, it is an opportunity to get some contribution towards what normally would be an asset parked for 95% of its time. And they still have the personal utility that they bought the car for
    • Drivers who may have bought a more expensive car for the purpose of driving for Uber would expect to have at least some coverage of the incremental capital costs (principal) and the cost of capital (interest). Though I am not sure if many track this kind of stuff
    • Drivers will expect coverage of incremental operating and maintenance/servicing cost
    • There is another benefit for Uber cars in that they most likely achieve higher utilisation than taxis due to Uber’s technology. Driving around until one picks up a customer is simply not as efficient. Having a taxi-central is slightly better but will certainly not close the gap. Add to this, that Uber provides incentives to drivers to adjust supply and demand (and they are working on doing this preemptively)
    • Ultimately, Uber (and their customers) profit from higher utilisation of an existing asset in this case
  • It is different if a driver buys or leases a car for the purpose of working for Uber
    • Uber offers to help prospective drivers to get a car
    • For a while, they were running their own car leasing business. But this was shut down when it turned out to be far more expensive than they thought (WSJ reports this to have been 18x more expensive). Some will say that this is telling but I will not further comment on it
    • Uber also got fined by the FTC in 2017 in the context of financing a car for the purposes of generating income which was inflated: “The FTC alleges that Uber claimed on its website that UberX drivers’ annual median income was more than $90,000 in New York and over $74,000 in San Francisco. The FTC alleges, however, that drivers’ annual median income was actually $61,000 in New York and $53,000 in San Francisco.”
    • These drivers have the “benefit” of real-time costing (all costs are variable). They are likely to calculate their net hourly wage quite differently
    • On a cost basis comparison, note that many independent taxi drivers also have to finance their own vehicle plus pay (for) license costs (see below) that Uber drivers don’t incur (NYC Uber vehicles now have a TLC fee imposed as well)
  • Depreciation costs (and resale value / terminal value in accounting terms) are closely linked to the above and also complicated
  • In summary, in case 1 (using pre-existing cars in addition to personal utility), Uber drivers have a cost advantage to traditional taxi drivers/private chauffeurs. In case 2 (lease to drive), they have a comparable cost base (though there is some subjectivity involved in terms of personal utility of the vehicle in times not used for earning money). Essentially, we can assume lower input costs for Uber on this aspect on aggregate
• Operational & maintenance costs:
  • Both taxis and Uber drivers have much of the same costs, such as petrol, insurance, servicing, cleaning, tyres, general wear and tear, phone. It seems in some countries, taxi drivers have higher insurance costs due to regulation
  • One could argue that these costs are lower on a revenue generation basis because Uber vehicles will be better utilised (hence don’t drive around empty, yet consuming fuel and generating wear & tear)
  • Let’s still assume that, by and large, these input costs are quite similar for Uber and taxis
• License fees:
  • In some (or maybe even in many?) countries, there are license fees for operating taxis which go to the government/municipality
  • In New York City and Chicago, you will find so-called taxi medallions (TLC). Here in Australia, there are the so-called taxi plates
  • In whichever form they come, some of these schemes are very expensive. In Chicago and Australia in the vicinity of $300,000 (lifetime but they can be sold on). In New York City, the medallions were traded for over $1,000,000 at some stage in 2013. Moreover, they are being traded on respective marketplaces, thus subject to speculation and price volatility
  • Here in Australia, the taxi plates cost around $300,000. A productivity commission established by the government has found that these schemes offer no benefit to the consumer. The drivers have to work them off for decades to come. In the Australian case, this equated to an average of $2.37 (inflation-adjusted) for the consumer for an 8km trip. This alone is a saving that a regular passenger would notice immediately
  • The story of taxi medallions is jumbled and saddening for the average taxi driver. For all the bad reporting about Uber, it is remarkable how little attention is placed on the fundamental flaws of the medallion system. Here is a 2018 article stating how the medallion price has crashed from some $1.3m to $160k. Here is a May 2020 article that suggests all existing NYC medallions to be revalued at $250k
  • In the US, the Fair Trading Commission (FTC) also saw little justification for the medallion scheme (FTC report, 1984)
  • These are high fees that add no value to the customer (nor to the driver). Uber is free of these artificial barriers to entry that limit supply and drive prices higher. As mentioned, NYC has introduced a TLC fee for for-hire Uber vehicles
  • Nothing has changed (in Australia) in the 18 years since the productivity report delivered these clear findings
  • Nothing has changed in the US in the 35 years since the FTC findings. Worse yet, the number of medallions in New York City today is lower than it was in 1937 when the medallions were introduced and this despite increasing population and mobility needs and traffic
  • Barry Ritholtz (a regular Bloomberg investor-columnist) explains “How the TLC & Medallion Owners Created Uber“ (note, it’s an opinion piece)
• Employee entitlements:
  • Uber engages drivers as contractors. Thus, they do not accrue annual/sick leave, nor do they contribute to social security, pensions or other entitlement
  • There are some savings here compared to taxi companies. But there are vast differences between countries what taxi drivers are entitled to
  • This is obviously one of the most contentious aspects of the Uber business model. But it is not black and white as it is often portrayed. Neither is this discussion is not limited to Uber. I have covered this in more detail here. In any case, Uber is trialling affordable sickness, injury, life insurance partnerships for their drivers
  • I believe that casual drivers will be more interested in maximising short-term cash flow because they see driving for Uber as temporary. Permanent full-time drivers may have a different view. One 2017 article states that only 4% of drivers remain on the platform after one year. I am not sure if this number is correct. I have also read that this number is at 20% (more later)
  • Certainly, some cost savings here for Uber but it’s not clear how much
• Taxes:
  • There are some interesting points here
  • Most interestingly, it seems in many countries Uber drivers can claim mileage (i.e. tax deductions for business-related kilometres), here: US and here Australia
  • This can tip the comparison considerably. Let’s do a high-level calculation. Let’s say one can travel at 20m/h (yes, miles) in city traffic (this should be an ok estimate for many cities). Now, let’s say the driver is utilised 75% of the time. This makes 15m per hour. The standard IRS mileage deduction is $0.52c/m. This calculates to $7.8 per hour. Now, let’s assume the driver net wage per hour is $18/h (this is at the high-end – remember some say it’s closer to $10/h). Even at the high end ($18/h), some 43% of net income comes from tax deductions (I’m sure you can calculate this percentage for the case of $10/h). I.e. taxpayers foot a considerable amount of this
  • One can see that this is contentious. Sure, taxis get the same tax break. But taxis companies are fully based in the country that they get the tax break in. Thus, the money stays in the local economy (country level view). The criticism will be that a taxpayer in, say Australia, will indirectly pay corporations overseas (the more tax subsidies there are, the less Uber needs to give the driver). Uber will say that the consumer will benefit in terms of lower costs for the ride. It will remain contentious until a productivity commission looks into this
  • Both Uber drivers and taxis pay GST and some other taxes
  • From a cost base perspective, taxis and Uber drivers appear to be on a similar footing with the big caveat of mileage needing a more detailed analysis
• Economies of scale:
  • One of the potentially most interesting cost savings comes from Uber’s ability to achieve better prices for their drivers’ input costs.
    • fuel,
    • maintenance,
    • insurance,
    • phone and
    • many other things
  • Uber staggers the benefits depending on the activity of the drivers. Those that drive more, can achieve more savings. There are discount levels from bronze to platinum.
  • Note that some of the 3rd party discounts are also available to the provider’s retail base, e.g. their loyalty members. In some cases, the Uber-obtained discount may be higher or the driver can join the program without membership fees or incurring other expenses to get the discounts. It is definitely an economic benefit for drivers and a strengthening of Uber’s business model in that scale can lead to lower unit cost.

You can see how complex the matter is. It’s not about solving this for Uber. The message is that as an innovator you should be aware of these kinds of considerations.

I also wanted to raise this, because I have seen ridiculously simple “unit cost” calculations for Uber on “serious” business management portals.

The most important insight should be that the revenue is not just the sum of transaction fees. The question will always be if a platform can create enough cumulative value for its participants so that it can capture value for itself.