In Part I of II, senior contributor John Ince covers the thorny subject of if Uber and Lyft will ever raise rates. It almost seems inevitable: to keep drivers, investors, and regulators happy, Uber and Lyft will have to raise rates, right? John covers the six reasons why he believes Uber and Lyft will have to raise rates eventually, and stay tuned for Part II on Wednesday, when he covers why they may not end up raising rates.
It all seems so simple – with one bold stroke Uber and/or Lyft could solve two of their most vexing problems. They could radically improve their profitability picture AND curry favor with drivers. All they need to do is raise fares.
In other words, incrementally Uber and Lyft have reduced the base pay rate for drivers by over 100%. They’ve offset that pay reduction with various bonuses all of which extract an extra pound of control from the drivers. To earn the bonuses they have to drive during certain hours, or in certain place or accept certain kinds of rides like pool and Lyft Line.
So will the companies raise prices or not? There are defensible arguments both for staying the same on fares and for raising fares.
In this two part series, I present both sides of the argument. In today’s post, I outline the reasons for raising fares. In the second part on Friday, I will outline the reasons for keeping fares where they are or even dropping them.
Why Will Rideshare Companies Eventually Raise Fares?
Here are six reasons why Uber and Lyft will eventually raise fares.
1. The support of the driver community is vital to the companies’ success
If Uber and Lyft want to retain the support of the driver community, they need to provide some tangible evidence to the drivers that this gig can be worth their while. All our surveys put driver pay right at the top of their priority list – and driver pay is a direct function of price cuts or price increases. Our own Harry had words of warning for the companies when he wrote in a blog post,
January 8 is starting to be one of the worst days on the calendar for me. The last two years in a row, Uber has announced vicious fare cuts in cities across the country on this day. In 2015, they cut rates in 48 cities and in 2016, they cut rates in 80 cities (with 20 more to come to make it an even 100). Obviously it’s a natural reaction to be angry but now that a couple weeks have gone by, I wanted to examine what these cuts mean for drivers, whether it still makes sense to drive for Uber and what your other options may be…..
2. Currently the companies are pricing their service below its cost to spur growth
In the reality enhanced world of Silicon Valley, growth is the holy grail. Investors are all looking for the home run, so companies swing for the fences by subsidizing user acquisition at the expense of short term profitability.
In other words passengers are getting more for the service than what they’re paying. The numbers just don’t pan out for companies or drivers now. Uber and Lyft aren’t covering their corporate overhead. Some drivers are in a minimum wage situation after pay for their gas, car maintenance, insurance etc. When costs are factored in, both drivers and the companies are in a tenuous financial position.
The problem for Uber and Lyft is that the companies can’t scale as efficiently as, say, a Facebook, Google or Twitter because Uber and Lyft are not pure digital companies. It costs Facebook nothing to add a user. It costs Uber and Lyft a lot to recruit a driver or entice a passenger to try the service.
Uber and Lyft entice the passengers by pricing the service below its cost to appease the growth-minded Silicon Valley investors. But growth (i.e. marketing) is more expensive in a business like ridesharing than it is in a purely digital company. Facebook was able to maintain an astronomical growth rate primarily because customer acquisition and maintenance is so cheap. Incentivizing existing drivers to get out on the road is fairly significant. Uber and Lyft know that they must offer drivers bonuses like the weekly per ride bonus or the surge bonus – which now seems in jeopardy (see below).
3. Reality will set in and ambitions will be scaled back
With Uber relentlessly moving toward competition with public transit, and away from its roots as “Everybody’s Private Driver”, I have to believe that the numbers will eventually sink in. Public transit doesn’t make money and someone inside Uber and Lyft will eventually realize it’s a losing game.
From both financial and public health standpoint, Uber and Lyft will eventually realize they can’t be everything to everybody and they will scale back their ambitions. They will recalibrate and return to their roots as a premium service and get out of the competition with subways and buses because ridesharing, for all its benefits, is not as space-efficient as public transit. An Uber or Lyft holds at most 4-6 people while a bus holds 60 and a subway holds 600.
Uber and Lyft are responding to this criticism by doing everything they can to get more people into existing rideshare vehicles. They’re now dropping fares to ridiculously low rates on UberPOOL, Uber Express and Lyft Line. That can’t last. It’s simply unsustainable – witness Uber’s astounding quarterly losses.
4. Regulators will put more financial pressure and demand fees from Uber and Lyft
Municipal governments all over the world are challenging Uber and Lyft on their modes of operation. They’re demanding statistics on congestion and many cities are now developing game plans to penalize the rideshare companies and/or their drivers. If cities start charging drivers fees (like San Francisco’s business license fee) drivers will eventually stop driving for the companies – unless they start making more per trip.
5. Investors will demand it
Uber and Lyft can’t indefinitely continue to show losses of the magnitude they have shown in the last few years and maintain the interest of investors. Uber, in particular, is under the financial microscope now that Uber CEO Dara Khosrowshahi has officially placed his stake in the ground for a late 2019 IPO.
Uber now has a time line. They have to find a way to make investors believe this could be a profitable investment or the IPO will be a dud. Yes, the SoftBank deal provided an early and extremely profitable exit for many of the early investors and early employees of Uber. But when you start getting into IPO territory, where public reporting is mandatory, then you need hard numbers to show you’re on a clear path to profitability.
6. The better drivers will bail and the overall quality of service will decline
Rideshare companies will eventually realize the quality of service is declining as fares go lower. Drivers will start to realize that lower fares means more problem passengers. The drivers who are doing this as a part time gig will start to feel that it’s not worth all the hassles of dealing with drunks and increasingly sketchy or even dangerous passengers.
Since Uber has started scaling back on surge prices, there is less incentive for drivers to work. It’s like the companies took away the hope of winning a jackpot surge ride. None other than former Uber CEO Travis Kalanick himself made this point on a Facebook post in December 2013,
“Higher prices are required in order to get cars on the road and keep them on the road during the busiest times,”
One interesting thing to consider, however, is what if Uber raises rates but doesn’t pass on the increased fares to the drivers? This will solve the investor and regulator problems, plus the service itself will no longer be below cost. The only missing part of this fare-puzzle will be the drivers… but who cares about the drivers?
Let’s say Uber does raise rates and doesn’t pass them along to drivers, solving some of the issues mentioned above. However, if passengers are charged more and still get inferior service (from the good drivers bailing for lack of increased pay), then Uber could still be in trouble – only this time with passengers. Why would you choose to use a service regularly when your driver is rude or doesn’t know his/her way around the city? Some may argue “cheap and reliable” will always win, but if Uber raises prices on passengers, it’s not so cheap anymore. And maybe not as reliable.
TK was wrong on a lot of things, but he was right on this. It may take time to sink in during the new DK regime, but when they get the fact that prices simply must go up – it will be like the light bulb went on.
So what do you think? Will Uber and Lyft raise prices? To get the other view, check out Part B of this article on Wednesday.
-John @ RSG