Uber is an On-demand Taxi booking service that has changed the way of transportation using taxis. Initially, people had to look out physically for the taxi options, search for the proper service provider, rates for the services, etc. But, after the launch of the Uber app, people can now simply select the source, destination, number of people traveling, time of travel, preferred vehicle, etc., and they will find their ride ready at their doorstep at the scheduled time. These services are presently offered in 60 countries and 900 metropolitan areas across the globe.
Nobody is unaware of Uber and Uber’s services. Hence, considering those services, any start-up entrepreneur, before thinking of starting a similar business, may have a doubt regarding the business model of Uber and revenue model of Uber, i.e., how does it make money and generate revenue?
This is because of the success of the Uber business model, which has developed a brand new field for start-ups, which is known as On-Demand Services.
Hence, being an entrepreneur, if one understands the business model of Uber, it will be helpful in modeling the start-up business plans and hence will also play an essential role in the growth of the business.
Before taking a deep dive into the Uber business model let us visit some facts and figures about the company so that we can get a clear picture of what we are looking for.
Starting from the early days when Uber was just a start-up to becoming a multi-million dollar company, here is what you should know about Uber.
History of Uber:
The company was started by Garrett Camp, Oscar Salazar, and Travis Kalanick in March 2009. The company was situated in San Francisco in the USA, working under the legal name of Uber Technologies Inc. The company received a total funding of 24.2 billion USD as of October 2018, major investors being Softbank Vision Fund, Tencent Holdings, Toyota Motor Corporation, etc. The current valuation of the company holds around 120 billion USD, according to various sources.
In the initial phase of the start-up, Uber was called Uber Cabs, which hailed cars for taxi services.
How Uber Works?
Not only Uber has served as the taxi service application, but it has now started with all sorts of services like on-demand food delivery, trucking, etc. Hence, the services offered in the Uber territories are being expanded day by day.
Let us take the sample of Uber’s taxi sharing services and see how it generates the revenue, and we shall come to know about how other services have defined the business model of Uber.
Once in a lifetime, if you have hired a taxi for traveling, you might have provided the driver with the bill in the form of cash once the journey concludes. Hence, the only source of the taxi service provider is the amount received from the customer at the end of every journey, whether longer or shorter. The same is the case with Uber. It has a no different model than this. The model takes the charges from the customer according to the services offered to him.
So basically, Uber acts as an interface between the Passengers and the Drivers, where the passengers are the demand generators. In contrast, the drivers act as demand suppliers, all this making possible via an online platform.
On Uber, passengers are able to:
- Book the cab as per their demand and convenience
- Track the driver and the cab on a real-time basis
- Predict the ETAs for the services based on records.
- Enjoy the ride using online payment methods, and hence not worrying about the cash
- The ride is available at the pre-scheduled time, and hence the passenger no need to wait for the taxi for a longer time.
- The charges are upfront
- There are options provided for booking multiple rides with the same driver and same passenger.
On the other hand, the drivers would be able to:
- Have the flexible duty hours and also they can drive their cab on their own terms
- Will be able to generate more income
- No longer wait for the next ride as they will be notified of a new ride once their ride is concluded.
- Train themselves as per the norms defined by Uber
- Assistance is provided to them if they wish to get an automotive loan to purchase a new car.
- Get better-routed trips.
Uber Business Model Canvas:
Considering the advantages offered to the passengers and the drivers, let us have a summary of the features provided by Uber, as per the Uber Business model canvas:
Track Your Rides on a Real-Time Basis:
The passenger can share the cab’s information on a real-time basis with its near and dear ones by merely selecting the Send Status option. The people with whom the location is shared will be notified via an SMS that will link the location where the ride located right now and the cab and driver details.
Plan Your Rides at Prior
Now you can schedule a ride before the journey time by providing the journey date and time, and at that period, you will find the ride ready for you.
Add Multiple Destinations for Drop Off:
In case you need to purchase something from a shop that comes in between the source and destination of your ride, you can request the multiple drop-off option in the App to let your driver know where you want to halt for the mentioned amount of time.
Split the Fair Easily:
In case the passenger has opted for the carpool system, then they can split the fair easily through the App itself, and all the passengers can individually pay their share to the driver via online payment mode.
Uber’s Revenue Model:
The revenue model defined by Uber is said to be a unique one as the company does not depend on only one factor for generating the revenue. There are multiple factors in which the revenue model of Uber is dependent on.
These include the commission on trips, surge pricing, charges collected when a ride is canceled, advertising other products, etc.
But, mostly 20% of the revenue is generated only from the passengers’ fares, whereas the other 80% provided to the drivers.
In the fourth quarter of 2020, Uber rides worldwide reached only 1.4 billion passengers. This compares with 1.9 billion visits in the fourth quarter of 2019, representing a 24% year-on-year decrease due to COVID-19 pandemic.
Let Us See These Factors in Detail:
Commission collected on every trip:
Uber takes approximately 25% of the total amount, which is charged from passengers, and the rest, 75%, goes to the driver. Its rival company, Lyft, has a ratio of 20% and 80%, respectively.
Mostly, these percentage values depend on the city and the demand for taxis, and the number of users in the city.
There are certain algorithms that increase the value of the charges to be levied on the customer when the demands of the rides increase. This is generally observed when the city traffic increases at peak hours, mostly when the offices close or colleges shut. These peak hours come with a hike in the cab prices, and hence there is an increase in the revenue of the company too.
Premium app memberships:
There are certain offers that the App provides to its users, like selecting the type of vehicle to travel, for example, SUV or sedan instead of the hatchback, choosing the driver, etc. These functionalities are available to the users who have registered for a monthly or yearly subscription, and they have paid some amount for this registration. Hence, this also acts as a part of the revenue for Uber.
If there is any cancellation from the passenger’s side once the ride is confirmed, then the customer loses some predefined percentage of the amount paid by them. Hence, this is also a part of the revenue generation technique, where the ride canceled, and the money is also not lost fully.
Lease the vehicles:
Uber also provides a facility to lease its cars to the people who do not have one and hence generates income from it.
Advertising on the App:
Since there are a large number of users on Uber, it provides a platform for other businesses to advertise their applications on Uber by charging them accordingly and hence have become a good source of income for Uber.
Strength of Uber Business Model:
Let us see why this model has become this successful:
1. Brand Recognition
Uber is known for its quality services across the globe, which is because of its dynamic business strategy, creating a Win-Win situation for drivers, passengers as well as the company.
2. Lower investment
Due to multiple revenue-generating factors, the company has to invest very little, whereas the returns are higher.
3. Prime focus is on the satisfaction of its customers
The services offered by Uber take customer satisfaction as the most prioritized factor. If the customers are satisfied, they will repeatedly opt for the services and also refer to their near and dear ones. Hence, the revenue generated will go on increasing.
4. Flexible prices for services
The charges levied by the company are nominal as compared to the other service providers, and hence most of the time, a customer chooses Uber for on-demand services.
5. Constantly growing Economy
This economy has likely seen any crisis or recession and hence has become an increasingly growing economy.
In this blog, we came across the factors that showed us how Uber earns money. We hope this information becomes helpful for the start-up entrepreneurs who are planning to start their business in the travel and services industry.
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