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How Uber is driving down the cost of transportation

A few days ago, Bill Gurley – who is an investor in Uber – wrote a really fascinating blog post called, Uber’s New BHAG (Big Hairy Audacious Goal): UberPool. Bill doesn’t update his blog very often, but when he does it’s incredible stuff.

I’ve touched on UberPool briefly before. But basically it’s a true “ride sharing” service where people with overlapping routes can easily share the same car – much like people do today informally. The obvious advantage of this is cost. It’s cheaper to share.

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What’s most fascinating about this service though is how it fits into Uber’s larger mission to drive transportation costs down. And there’s a specific reason for that (via Bill Gurley):

When Uber launched its low-cost UberX offering in the summer of 2012, the company quickly realized that the demand for its transportation services is HIGHLY elastic. As the company achieved lower and lower per-ride price points, the demand for rides increased dramatically. A lower price point delivered a much better value proposition to the consumer, yet still remained a great business decision due to the remarkable increase in demand.

So what Uber quickly figured out was that if they could increase the utilization rate for drivers (the time actually spent with passengers), they could charge consumers lower prices while at the same time maintaining driver salaries. Prices went down, but volume went up.

One way to do that is to obviously decrease driver downtime by improving liquidity on the marketplace. But another way is to simply increase the number of passengers being transported at one time. Hence the creation of UberPool.

But it doesn’t stop there.

Because of all the transportation data that Uber now has (the company has a data group called the “math department”), they can fairly accurately predict what a price cut will do to their ridership levels. This allows them to “forward invest” their capital in new services – such as UberPool – before they even have the revenue from the anticipated increase in ridership.

So what does this all mean?

It means that Uber is going to get cheaper and cheaper and cheaper. Uber is trying to get to what they call “The Perpetual Ride”, which basically means that drivers will always have customers (100% utilization). That’s quite a goal, but it would mean the absolute lowest prices for consumers (barring any other changes to their cost structure). 

Dirt cheap transportation is a pretty compelling value proposition, which is why I continue to believe that cities should be hard at work trying to figure out how to harness this transportation shift.

If you’re interested in this topic, I would encourage you to give Bill Gurley’s blog post a read.

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