In Quest of a Safer, Cheaper Uber. Is it Possible?
Love it or hate it, there is no question, Uber changed our lives.
Growing up in the ’80s, the one thing our parents would tell us was that under no circumstances were we to enter a stranger’s car. Then Uber came along, and well … as long as you get the ride through Uber, it’s fine.
Still, there’s no question that Uber has issues.
When asked which features they hate most about Uber, customers usually mention the following (some Uber/app-related and some driver-related):
The inability to update vital portions of a rider’s profile on the Uber app: this is related to the fact that the app became quite cumbersome over time and not very user-friendly.
Unprofessional and/or rude drivers.
The inability to book a trip on the app.
Drivers not showing up with a cancellation fee: this is related to both the app and the drivers, since the app may not show the right location, and drivers may also be a bit negligent in trying to locate customers.
Dropped off at incorrect locations (again a combination of the app and the drivers).
So beyond the app-related issues, which have increased over time due to additional complexity (multiple types of rides, multiple types of services), the rest are seemingly related to the drivers. But clearly, these problems don’t just stem from the drivers themselves but also touch on governance issues. Uber has been trying to curb driver behavior, while competing for drivers against Lyft and DoorDash, so there is a limit on how strict they can be. My experience with Uber has been largely positive in terms of handling unprofessional drivers, but getting into a dirty car or having a dangerous driver is not a rare occurrence. One issue (that is not usually mentioned as a complaint but is probably a general concern) is the fact that drivers are not actual employees but rather contractors. I have addressed this topic before, primarily regarding the California battleground.
And drivers have their own set of complaints:
“My Uber Navigation Provided Inaccurate Directions”: A few years ago, during an Uber ride with an engineer from the Uber mapping team, he admitted that their mapping service is not very good. Uber itself admitted that its in-app navigation sometimes provides inaccurate information.
“I Didn’t Receive an Accurate Payment”: Over time, Uber’s payments became harder for drivers to follow. In particular, missing cancellation and toll fees, and missing promotions or guaranteed payments.
“My Rider Made a Mess in My Vehicle”: Since drivers are not paid for their time between rides, any time they need to take to clean their car, or anything that may negatively affect the rating of the next customer increases stress and dissatisfaction.
Another common complaint from drivers is the uncertainty of pay and the feeling that Uber lured them in only to put economic pressure on them through low pay and poor working conditions when it needed to become profitable.
Uber and Lyft have lost massive amounts of money through the years, but Uber’s last earnings report was optimistic regarding the firm's ability to make money, and within the market overall. Given the large size of the on-demand mobility market, it’s not surprising that new ideas on how to disrpupt Uber or Lyft are on the rise.
Over the weekend, Bloomberg published an article on several new startups which try to address the exact issues outlined above. The new firms worth mentioning are Wridz, Empower, and Alto.
But first, I would like to address a frequently asked question: Is this a winner-takes-all market?
A winner-takes-all market must meet the following conditions:
Significant economies of scale (usually through network effects).
Customers with homogenous preferences.
A high multi-homing cost (i.e., the cost incurred from using multiple platforms simultaneously), for at least one side of the market.
Short answer: No.
Long answer: While the on-demand mobility market has strong network effects, and customers just want fast and cheap service, it has a low multi-homing cost. Both the drivers and the passengers can be on Uber and Lyft simultaneously, comparing prices, availability, and pay (for drivers).
If these startups can drive a wedge into such a market due to consistent dissatisfaction of one side, there is an opportunity to take a slice.
Wridz is trying to address issues on both the driver and the passenger side.
“We like to keep it simple. You pick up and we deliver 100% of the fare to you. That's right 100%. That's really 100%. We don't keep “booking fees”, “base fee”, or anything else.”
So how does the firm make money? It’s a subscription:
“You choose the region or regions you'd like to drive in. You pay a relatively small monthly subscription fee for your chosen region or regions. And, again, you keep 100% of the fare.”
According to some posts, it’s $55 per month for Houston, which sounds very reasonable.
What does the customer get?
“At Wridz you have peace of mind that your driver has undergone a significant screening process prior to driving for us. This includes an extensive background check, an interview process which include an in-person drug test…Drivers are continuously monitored. If a driver is charged with an offense, they will not be allowed to drive for Wridz until the issue is resolved.”
So deeper screening, but also constant driver monitoring (to see if anything changed in their criminal records, for example).
“At Wridz we strive to keep our fares approximately 10% lower than other ridesharing companies in the area.”
So the firm claims to be cheaper. This is possible given that the driver pays little to Wridz, so they are willing to get paid a lower amount.
Locating and Verifying Your Driver:
“You'll never again worry that you might not be getting into the vehicle with the driver assigned for your trip. Wridz has a unique CallingCard system to help you locate and identify your driver.”
The photos below show this system:
One thing I couldn’t find on their website but was mentioned in another article is:
“‘You'll be able to request your driver, so you will be able to develop relationships with your driver or your clientele,” he explained. For instance, passengers will be able to get the same driver to bring them to a weekly doctor visit, if they wish.”
So the firm tries to touch on the main complaints of both sides: divers like to get paid more (who doesn’t) and have more clarity on payments, passengers like to pay less (who doesn't) and get nicer and safer rides. I also like the “calling card” system, but I am not sure this will be a differentiator.
Overall, it’s a nice solution, but scaling is going to be hard. Onboarding new drivers with constant background checks is difficult and hard to automate.
The subscription fee is very low (the Bloomberg article mentioned $100 now), which means the firm will either need to raise a lot of money (which they claim they don’t plan to do) or scale very slowly. This is not trivial for an industry with network effects.
I am not sure if the ability to request your own driver is real, but if it is, it may lead to platform disintermediation. Drivers keep 100% of the fares, so it won’t be long before they start questioning the need to continue paying a third party altogether.
This model could be successful, but overall, it’s harder to scale, and not clear if it can ever be profitable, given the massive need to acquire customers and drivers.
In order to understand what it means to acquire a massive number of drivers and riders, let’s compare Uber’s process of driver and customer acquisition:
“The cost of acquiring drivers has been one of the most expensive parts of running Uber since its inception. In Uber’s early years, new drivers got sign-up bonuses as high as $2,000 or $5,000 just for completing a few rides on the app. Though its sales and marketing expenses dipped in Q3’20 to $924M as a result of Covid-19, it remains the second-largest cost for Uber after cost of revenue.”
In 2018, this cost was in the $3B range.
In 2022, customer acquisition is less of an issue for Uber, given its brand recognition, but during 2017-2018, the cost was between $32 to $47 per customer.
Any competitor trying to deliver the same availability will have to spend at this range per customer and per driver, even if they scale locally.
Again: one may question the need to scale, but unless you have a dense set of customers and drivers, customers have to wait for rides, and drivers have to be idle and wait for requests. No one likes waiting. The only way to avoid it is to acquire customers fast.
If the objective is to grow slowly, the focus should be on small and not very congested cities, where the cost of being idle is small since the drive to pick up the next passenger is not long. A driver can multi-home and wait for rides on Uber and Wridz, and choose the one that offers the best options.
Empower is similar. First, it’s also a subscription model (with a slightly higher price, at $199/month and pricing in the DC market).
One major difference is that drivers can set their own rates (and still get 100% of the fare).
The firm also guarantees that prices for passengers will be lower by about 20%. But how is that possible if drivers will be the ones setting the prices?
Drivers will set prices based on what they can get on Uber. Uber’s conversion from passenger prices to drivers’ pay is not as simple as it was in the past, but drivers know how much they will get paid for a ride based on the time of day and distance. They can use that as a base for their Empower pricing. If both a driver and a passenger multi-home, they will most likely choose Empower to execute the specific ride. So Empower can probably offer lower prices, and even with a lower density of customers and drivers, it can still offer lower prices and succeed in having traction.
But Uber offers options to keep drivers busy throughout the day (through the different Uber options, UberPool, and UberEats), ensuring they will remain on Uber and occasionally find a ride on Empower. The question is whether Empower will have enough time to find a ride for its drivers before Uber beats them to the punch.
Again, drivers don’t like being idle for too long, and neither do customers.
My take: a lot of funding is required (and the firm has raised around $10M so far). There’s some additional complexity (choosing prices), but none of the additional bells and whistles of Wridz’s driver safety, making it easier to scale (but also harder to guarantee that you won’t get a rude or dangerous driver).
Still, both Wridz and Empower use the gig economy model.
“Alto says it is the first ride-hailing provider to hire W-2 employee drivers. Each must pass background checks and get days of training. Alto also manages its own fleet of company-owned ‘elevated SUVs,’ which Alto currently buys from General Motors and Volkswagen…vehicles are cleaned between each ride and detailed between shifts. Trips are centrally dispatched and managed, and each vehicle has in-car and exterior video surveillance.”
So Alto is going upmarket: W-2 drivers for the morally conscious customers and cleaning between rides for those who hate getting into a dirty car on their way to an important appointment.
It’s not clear how the process works for drivers. It’s clear that drivers want clarity on how they get paid:
“When you drive with us, you don't have to buy a vehicle — we provide a luxury, safety-equipped vehicle for you. You don't have to pay for gas or vehicle maintenance (we take care of that, too!). Throw in guaranteed hourly income and employee benefits, and you've got an opportunity that's hard to pass up.”
Since the driver uses Alto’s car, the multi-homing threat is lower since driving for other ride-sharing firms will be near impossible.
Overall, this strikes me as a regular pre-Uber ride-hailing firm, but with technology to interact with customers and drivers. When I lived in New York in the pre-Uber era, firms like Carmel existed (and, to my surprise, still do). These are reliable services that work well for pre-scheduled trips where you want a professional driver, a clean car, at a guaranteed time. These are never really very scalable businesses. So Alto is a modern era, app-powered Carmel. There is nothing wrong with it, it’s just not very innovative or scalable.
In other words, I don’t think this is the future, but I like it as part of the future.
You need massive scale to offer good on-demand service with your own fleet. And indeed, the firm raised $59M.
Is the market for up-market mobility big enough to justify a VC-backed on-demand service that requires a lot of infrastructure and has a thin layer of tech? I don’t know. But VCs also backed WeWork and now Flow.
My take: The main benefit of these startups for us, as consumers (and drivers), is the constant pressure on Uber and Lyft (and DoorDash and Amazon) to improve. There are many ideas that these firms use that I would like Uber and Lyft to adopt, and in that sense, these are good initiatives. While the market is not a winner-takes-all, it will be hard for these firms to survive in the long run as independent, national players.