Uber has been making significant upgrades to the driver experience over the past few months, but one thing missing from all of these announcements is a rate increase. Tipping and additional destination filters will have a positive effect on a driver’s bottom line, but they don’t address the core issue for many people: drivers just aren’t paid enough.
Uber and Lyft cut rates 3 years in a row from 2014-2016, so drivers are making less today than they ever have. While Uber has always claimed lower rates mean higher utilization and thus higher earnings for drivers, I have never bought that argument. Lowering rates helps Uber grow its market share, but it also means more dissatisfied drivers and higher churn rates since drivers care most about pay and flexibility.
Uber has been able to make it work with lower rates because there is a learning curve for drivers and the company is able to spend heavily on recruiting new drivers to replace those that are quitting. But with losses in the billions of dollars a year, that model isn’t sustainable forever.
And while a lot of the positive changes Uber is making as part of the 180 Days of Change campaign are a good thing, the real question is are they enough? If Uber is going to tout driving as a revolutionary new employment opportunity and wants more satisfied drivers, shouldn’t they be paying the average driver more than minimum wage?
Why Does Uber Want Lower Rates?
Uber was competing against taxis when they first launched in 2012-13, but these days, it’s hardly a competition. Uber is 60-70% cheaper per mile than a taxi in cities like Los Angeles and San Francisco and provides a superior customer experience.
Uber has gained massive market share from taxis during that time, but taxis still have some inherent advantages, like the ability to accept street-hails and line up at taxi stands. So lowering rates further isn’t going to help drive taxis out of business any more than what’s already been done.
Rideshare passengers do care about price though, and when Uber lowers rates, passengers take more trips. So it should be clear that the main reason Uber has continually lowered rates is to grow their market share. Most Uber passengers use the service casually these days, but if the cost continues to come down, you might see consumers ditching their cars in favor of taking Uber everywhere they go. And that would turn the casual user (1-2 trips per week) into someone who relies on Uber every time they need to leave the house (20-30 trips per week).
Uber could raise rates at any point, but that would slow their growth, and now they’ve also got Lyft to deal with. Uber dominates Lyft when it comes to metrics like number of rides per day (8 million to 1 million) and valuation ($70 billion to $7.5 billion) but Lyft is still competitive with Uber in a lot of major markets. Since passengers are so price sensitive, if Uber raises rates and Lyft doesn’t, they will lose market share fast.
How Much are Drivers Making Today?
In January of 2017, we surveyed over 1,100 drivers and they reported earning an average of $17 per hour before expenses. After taking into account a driver’s expenses (average cost of $0.32/mile), the net payout to a driver drops to around $11 per hour. So the average driver isn’t making a lot and that’s a big reason why so many of them end up quitting. But since there’s a learning curve and a lot of vehicle expenses (increased oil change frequency, brakes, etc) are delayed for 3-6 months, it may be a while before drivers realize how much they’re ‘really earning’.
Uber has reported half of all drivers quit after just one year and while Uber’s 180 Days of Change might get them to stick around a little longer, that level of churn isn’t sustainable forever. Now that Xchange is on the chopping block, there’s only so many able bodied workers with eligible vehicles out there, so Uber’s eventually going to have to pay existing drivers more in order to get them to stick around.
What Expectations Does Uber Set?
Uber touts driving for the company as a revolutionary and innovative type of job. I’m sure you’ve heard or seen the marketing slogans that say ‘Be Your Own Boss’ or ‘Get Your Side Hustle On’ and although they don’t make specific income claims anymore, Uber is definitely framing it as something more than your regular old retail job.
This works well in recruiting new drivers, but you also have a lot of new drivers coming in with lofty expectations. One of the biggest complaints I hear from new drivers is that they aren’t making enough money and if their expectations were a bit more realistic, I think they may stick around a lot longer. A driver’s first few months probably won’t be too lucrative since it’s more about learning the system and experimenting with the best times and places that fit with your schedule. But if you’re expecting to make $20 an hour from day one, you’re probably going to be disappointed.
Uber Pay vs Other Industries
If we look at the typical service job working for a company like McDonald’s or Walmart, there aren’t a whole lot of major barriers to entry. You’ll have to go through the application and interview process and maybe some training, but you don’t need to bring much to the table other than yourself.
With Uber, there’s an online background check, but you also need a smartphone and an eligible vehicle which creates a bigger barrier to entry. Additionally, there’s a lot more responsibility as an Uber driver since you are transporting people around and their lives are literally in your hands.
Where it gets complicated though is that with typical service or retail jobs, everyone makes about the same amount of money. Baristas at Starbucks make an average of $9.54 per hour but with Uber, there’s a wide variation in pay depending on where and when you drive and even how savvy of a driver you are.
If the average Uber driver is earning around $11 per hour after expenses, that means there are a whole bunch of people above that amount and a whole bunch of people below that amount. Uber doesn’t exactly advertise that you can make below minimum wage, but for some drivers, that’s a real possibility.
What Should Uber Drivers Make?
It’s tough to say how much Uber should pay its drivers, but I think we can all agree it should be more. We know the rates they’re paying today are not sustainable since they’re losing so much money every year, but how much should they go up? You could argue that it’s up to the market to decide since no one is forcing you to work for Uber, but the company is also subsidizing a lot of their current losses with investor money, so it’s not quite a fair fight. Also, I think if Uber’s going to posture driving as the Ultimate Side Hustle, they need to pay the average driver accordingly.
Since the barrier to entry for driving and the level of responsibility is greater than your typical retail or service job, I think drivers should be paid a premium. Right now, drivers earn around 70 to 80 cents per mile depending on the city, but I think that number should be about 25-75% higher.
If we assume that an increase in rates would lead to a similar increase in earnings, that would put the average driver’s earnings after expenses at around $13.75-$19.25 per hour. I think that range represents a fair amount for the work that a driver puts in.
Due to the nature of the job, I don’t think you can avoid some people driving for Uber and making less than minimum wage. If you’re only going to drive Tuesday through Thursday in the afternoon when demand is at its lowest, you’re not going to make a ton. But the average driver shouldn’t be near minimum wage after taking into account expenses. Uber touts this job as something a whole lot more than a minimum wage type job, so the pay for the average driver should reflect that.
But Drivers Can Still Make More
If there’s one thing I’ve learned from talking with tens of thousands of drivers about their experience over the years, it doesn’t pay to be just average. A lot of drivers get into this line of work excited and ready to work hard, but they just don’t earn what they were expecting. And when you start to add in the increased maintenance and depreciation on your vehicle, a lot of drivers eventually see that it’s not worth it financially for them to continue to drive.
In order to make this job work, you really need to be above average. As a driver, I can’t control what Uber is going to pay me, but I can control when, where and how I drive. And those factors can have a surprisingly big impact on your earnings. I know there are drivers out there who just want to be average and get paid well ,but I don’t see that happening any time soon. So why not take matters into your own hands in the mean time?
Readers, what do you think about driver pay? What do you consider “fair” given how much, when, and where you drive?
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-Harry @ RSG