It is a little bit dangerous to criticize the Uber business model nowadays – anyone who does so risks being called an obscurant. It is considered good form to admire UBER and to say that this is a business model of the future. There have been a lot of attempts to use this business model in different industries, such as car repair and house refurbishing, but only a few of them could raise sufficient funds and none of them are really profitable. Uber itself is still unprofitable. The 2016 loss was a staggering 2.8 billion dollars – even though the revenue of the company is constantly growing. It is unclear for the moment exactly why Travis Kalanik, Uber’s CEO, had to step down. There is no word in official statements about the loss (recently the company suffered a series of scandals which are allegedly the main reason for Kalanik’s resignation), but I believe that the financial results of the company had been one of the main topics of the long conversation between Kalanik and a group of investors which preceded his official farewell.
So, Uber doesn’t make any profit. And, as one of the former consultants for Uber said to the BBC’s Business Daily, “They don’t have a horizon to be profitable.” What is the reason? Is it safe to assume that the reason for the loss was the stunning pace of growth? Or does the problem dwell in the DNA of the business model itself? Let’s speculate about it.
Initially, Uber was invented and positioned as a C2C concept. In reality, it was just a mobile application to connect customers with drivers and get a small commission in return. If you need a ride, and a guy with a car doesn’t mind getting a couple of bucks on his way home from his office, then doesn’t the arrangement suit both parties? But it didn’t work (or at least almost didn’t work) in some countries. The idea looks very simple and attractive on the face of it, but there are a lot of questions that still remain unanswered.
Is the driver skilled and experienced enough? The C2C model lets anybody who has a driving license log into the system as a driver and start earning money. But how can I, as a customer, rest assured that the driver is good at what he is going to do? How long has he (or she) been a driver? When I call an “ordinary taxi”, at least I can probably be sure that they only hire professional drivers.
Is the Uber driver sober? When I call an ordinary taxi, I’m pretty sure they are aware of the risks. Of course, any driver (even a professional one) can get a drink as soon as they leave the office, but a lot of passengers believe that professional drivers do not want to lose their jobs and so they stay sober until the end of their shift.
Is the car itself sufficiently clean and comfortable? Is the driver polite and helpful? Of course, the app has a rating system, so if I am dissatisfied with the quality of service I can reduce the driver’s rating at the push of a button. Theoretically, it should lead to the perfect future scenario where all the bad drivers will be gradually expelled from the system because of their low ratings, leaving only the best ones. But reality is still far from that, even though the company has been working on some markets for several years.
Moreover, in some countries the system doesn’t work how its creators initially intended it to. Uber was invented as a C2C model which helps reduce prices by excluding professional cab companies from the chain. It was claimed that Uber doesn’t need professional cab companies and that in the near future it will “kill” them completely. But in Russia, for instance, Uber and its competitors (Gett and a local competitor, Yandex Taxi) are more likely to cooperate with cab companies then with private cars owners. Customers are not especially happy to be driven by amateurs or unchecked drivers in unchecked cabs. So in Russia, Uber is more like a big cab integrator than a pure C2C company. It collaborates with dozens of cab companies by helping them collect more orders. In return, they take the trouble to control the cleanliness of the cabs, the sobriety of the drivers and their professional skills and experience.
People have been inventing Uber-like ideas on different markets for as long as the Internet has existed. Some of the first websites served as catalogues with the intention of eliminating middlemen from the distribution chain, and later there were a number of attempts to re-invent the idea. The idea of connecting customers and suppliers online looked so easy and attractive that hundreds of companies all over the globe spent billions of dollars to establish “the first and the best” online stock markets and more sophisticated services to benefit from modern technologies. And the vast majority of them face the same problems:
Who is responsible for the quality, both legally and morally? For example, if I found a plumber via a mobile app, and he or she destroyed the plumbing system in my house, would the app be responsible for that? Typically, services like state that they are only a means to allow me and the plumber to find each other, so they are not accountable for the results of the plumber’s work. Even though I have paid him or her money via the app. But anyway, I will direct my anger (if the plumber is no good) at the app and will not probably use it again.
If, on the other hand, the plumber (or housekeeper or babysitter) was perfect, they often leave you their phone number and ask you to call them directly the next time you need them. They will offer you a discount for the direct call, and their fee will also be higher because they won’t have to pay any commission to the app. It is a win-win situation for you both. The app (or website) is the only one that loses out. Finding a good car repair centre is another example. If you did it once and were completely satisfied with the quality and the price, why would you bother to use an app to find them the next time? You will just call them directly.
There are so-called “rating systems” which let you evaluate the quality of the work (in Uber’s case the quality of the ride). It is strongly believed that such systems help kick bad contractors out of the system. But it only works in theory because it is presumed that each contractor acts as a so-called “economic agent”, which means that they work as decent professionals trying not only to keep their jobs but also to increase their status and wages. But in reality systems like Uber do not just attract professionals (in fact, Uber was deliberately invented as a disrupting idea, undermining the whole world of professional cab drivers). Some of them view Uber as a possibility to earn some extra money, but if they lose it, they are not especially upset. That’s why they don’t pay that much attention to their ratings. And even those who do care about their ratings do not always behave in a very professional manner. But if a customer uses an app to find a service and they are not satisfied with the quality, they typically blame the app – at least psychologically.
Sometimes the service itself is too sophisticated to be easily “uberized”. It is relatively easy to arrange a ride from your location to the airport without directly involving a human being (for instance, using a call centre operator), and just tapping the screen of your smartphone. But if you need to refurbish your flat or have a bespoke suit made, you have a lot to discuss with the service provider, and you can’t do it through the app. You can search for an executor using the app or a website, but afterwards you will have to discuss the details with them in person, which means that an app or a website will have some difficulties getting its commission.
The idea of a “customer-to-amateur” model, on which the Uber concept is based and which presumably helps make the service cheaper, is not always that attractive to customers. For instance, I prefer to have a professional, well-trained and experienced driver behind the steering wheel of the cab driving me from the airport.
And one of the main problems of all Uber-like services is that they usually position themselves as not only more convenient ways to obtain services but also as cheaper ones. From the beginning it was assumed that one fast and user-friendly mobile app could replace big, sluggish offices and that would help keep the prices of the services down. But in reality it always turns out that the cost of maintaining quality and ensuring a constant stream of work is much more than originally envisaged in the business-plan (if indeed there was one).
Up until now we haven’t seen large and profitable Uber-like ideas. And Uber itself will inevitably change when a new CEO comes on board or when its investors decide to ask for their money. But Kalanik’s main achievement was that he showed the world a new direction of business development, the way a modern company should work. And even though Uber will sink into oblivion (in the worst case scenario), the idea itself will gradually find its way to success.
SUBSCRIBE FOR OUR FEEDS!
Read us everyday – we publish a lot of interesting articles!