Uber is a multi-sided platform for ride-sharing. Potential passengers connect with taxi drivers using a smartphone app where gps location sharing, pickup timing (typically within 8 minutes of request), and payment are all executed online. No money exchanges hands.
Drivers qualify to pick up riders after completing some basic paperwork and training, which may or may not include driving, credit, and background checks (each platform does it slightly differently).
In 2012, Uber opened up their driver community to include non-professional drivers who download the app and registered their cars. Based on discussions with drivers, almost anyone can become a driver.
Opening up in this way was a defensive move to contend with platforms such as Lyft, a simlar peer-to-peer (P2P) model which relies on a donation-based fee system. Since their release, Lyft has posed the most significant threat to Uber’s dominance. For many riders, the personality of Lyft drivers is enough to warrant a premium price for rides.
Despite the rivalries these platforms can agree on one thing: get drivers. A universal rule among ride-sharing P2P platforms is that without drivers the platform is useless. Customers will log out very quickly and won’t return if they have a poor initial experience finding a ride.
Because of the importance of drivers, they are heavily subsidized by the platforms. Advertisements aimed at recruiting drivers are more common than ads for passengers. This makes sense based on platform dynamics – drivers provide the ‘supply’ to these platforms while also sharing a bulk of the risks. For example, passengers are covered under the driver’s personal insurance policy after pickup which is causing some legal issues now. Despite the risks, this type of on demand work is highly attractive for many drivers. Pay can surpass $35 per hour.
Now that we agree that drivers are very important to these platforms, lets look at the strategies they use to recruit for their respective driver communities. Uber, for example, can be ruthless. Their strategy is three part:
- Offer incentives to lure drivers away from Lyft (and other competing platforms). For example: cash for gas, volume bonuses, hazard pay during holidays and during inclement weather, etc. .
- Marketing – “Shave the Stache” and “Don’t Pay a Premium for a Fist-Bump” campaigns clearly highlight their anti-Lyft intentions. Uber recruiters also pay for ride-alongs with Lyft drivers to get their ear for a recruiting pitch. Uber recruiters have also admitted to calling drivers on other platforms directly
- Sabotage – Mischievous employees at Uber have admitted to calling in and canceling hundreds of pickup-requests in order to distract drivers on other platforms to potentially steal away customer and users alike
This mix of monetary and plain-dirty tactics is also being used by others; Lyft also tugs at drivers’ economic and emotional heartstrings. First, to build a critical mass of drivers in a new city, Lyft will offer guaranteed fares for drivers. The driver is paid an attractive minimum base rate for every ride he or she picks up, regardless of distance traveled or time spent on the ride. Why do they do this? Knowing their hourly earnings potential up front helps new drivers overcome the fears associated with picking up total strangers in their personal cars. Lyft runs these types of campaigns for a year or so until the community grows large enough to easily surpass demand.
On the emotional side, Lyft pushes for connections between drivers, riders, and the platform itself – fist bump greetings among strangers are encouraged to facilitate conversation. For Lyft drivers, self expression is the name of the game. Being unique is encouraged. This serves to attract friendlier and more interesting drivers, which then attracts like-minded riders. Lyft hopes to generate positive cross-side network effects in this regard.
Once the driver community in a city reaches critical mass, Lyft does away with the fixed payments for drivers and raised prices on for riders. In Boston in 2014, end-user prices went up 20% when Lyft did away with fixed fares for drivers.
This changes the strategy for drivers to a competitive model. In such a platform, better drivers are attracted to the platform in hopes of using their high ranking to bring in more fares than mediocre drivers – it works. Bad drivers are slowly incentivized to leave the platform which serves to improve the average user experience and allows Lyft to keep prices high. It’s this dynamic, accomplished with the design of the network effects themselves, that is most dangerous for Uber’s profitable growth over the next 5 years.
What are the bigger implications of platform dynamics among ride-sharing platforms? Taxi companies everywhere are terrified. Cabbies in New York City pay in excess of $1 million per vehicle for registration while an Uber driver pays nothing, at least not yet. That said, the threat of government regulation is tangible for each of these platforms. It will certainly be a long road ahead…
-Chris Kluesener, Open Innovation Central.