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smallgovt

Can't Uber become profitable by raising prices and lowering costs?

They have $40B in gross rideshare bookings and $3B in real losses for 2018.

Let's assume 20% of their costs are fixed and 80% are variable.

What might happen if they raise prices by 10%?

Gross bookings drop by 20% / Revenue per booking increase by 10% => $35.2B in gross bookings

Variable costs drop by 30% (due to lower driver acquisition costs since they're oversupplied) => $24B in variable costs

Fixed costs stay the same => $8.6B

That nets $2.6B profit. My numbers are estimations, but it wouldn't surprise me if they could reach profitability without SDC's.

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I'm not sure why you think 20% of costs are fixed and 80% are variable, or that the elasticity figures are what you suggest they are.

Realistically, Uber has a higher cost basis than a taxi because taxis cut down on insurance and fleet expenses through pooling. As such, Uber is not really able to beat them on price. There's no evidence to support the idea that people are willing to pay more than taxis to use Uber or Lyft. Customers have virtually zero loyalty and so do drivers. If Uber raised prices by 10% and Lyft didn't, wouldn't bookings decrease further? Why do you think it'd by just 20%?

Your napkin math makes sense given your numbers but we don't have any data to back them up.

Re: SDCs, didn't a leaked internal study of theirs a few years back indicate that SDCs wouldn't move their margins by more than 5%?

> I'm not sure why you think 20% of costs are fixed and 80% are variable

This was based off the "Core Platform Financial and Operating Model" chart in their S-1, which states 75% of gross revenue is attributable to driver compensation. So, I imagine 80% is the low end.

> I'm not sure why you think the elasticity figures are what you suggest they are

I'm not sure on the elasticity figures. It's a guess based on running many pricing tests for my own business in the consumer services space.

> If Uber raised prices by 10% and Lyft didn't, wouldn't bookings decrease further?

This could be solved by acquiring them for $20B (or less, now).

> Realistically, Uber has a higher cost basis than a taxi because taxis cut down on insurance and fleet expenses through pooling.

I don't have too much insight into the taxi business, but in San Francisco, Uber Pool is substantially cheaper (<50%) than taxi fares.

Again, I'm not saying my numbers are right -- only that it's plausible they can be profitable without SDC's.

The thing about Driver compensation is that it’s not just their take-home pay, it’s what they have to pay to maintain their vehicle and gas. They’re already barely making minimum-wage when you factor in these costs, at some point you can’t get more blood out of the stone. Point taken re pool though it isn’t something everyone will do.

>Realistically, Uber has a higher cost basis than a taxi because taxis cut down on insurance and fleet expenses through pooling.

But Uber's price / taxis' price is wider than Uber's revenue / Uber's costs. Uber addresses various problems with taxis:

- driver certification: the brokenness of taxi certification arguably created Uber, via unreasonable constraints on the number of taxis in many jurisdictions

- availability: Uber's surge pricing may suck, but it's more fair than random price gouging by drivers at odd times in weird places

- rider pooling: you don't have to pass a hailing rider to combine trips; there's an algorithm for that

- verification: fake taxis used to be a serious problem, but Uber (usually) gives you the license plate # of your driver

Also, with regard to fleet expenses, Uber is arguably taking advantage of decaying capital that would have gone to waste. The cost of a car is often quoted in cents per mile, but that's not quite accurate. A car that sits in a garage will eventually fail; the lifespan of a car is limited by time as well as distance. Many people weren't driving their cars as far as they could in the time that they had -- and in my experience, Uber drivers tend to drive in the machine-gentlest way they possibly can (sometimes annoyingly so -- but why wouldn't they?). The use of own cars potentially yields a significant savings over a dedicated fleet. (Likewise, Uber "pools" the cost of insurance on the taxi with the cost of insurance on the own car.)

Your thesis is supported by their financial statements. Their costs are indicative of a company focused on growth. As revenues continue to grow the can scale back marketing and administrative costs as a percentage of revenue to make profits potential. This company has a lot of potential based on the numbers alone... the real problem is the uncertainty in the market for ride and the tech

If we're just making up numbers why not assume you'll only drop gross bookings by 0%, or increase bookings even!

Anything can be made profitable if you just invent numbers.

They aren't pulled out of thin air. They're best estimates. If you disagree, what do you think their unit model would transform into if they acquired lyft for $20B in stock and raised prices by 10%? Why?

you cannot really play with it like that, users have an expectation how much something will cost and if they dont feel that its right you can drop a lot. from my own experience price increase if just on its own of 10% can decease sales by more then 20%. and i assume uber had such ideas and has been simulating them, and I'm sure they are testing it out with smaller but not noticeable increases. let's see how that works for them.

> if you disagree, riddle me something entirely different

The given numbers are not ridiculous, so it's just as fair to assume they can reach profitability as to assume they can't.

Becoming profitable at the cost of growth. I think the market would punish that. The story of growth company is what drives high multiples to sales/profit. If that changes to a mature company analysts will start thinking about measuring by P/E.

you sound like a CEO.

this analysis is... insane. your numbers aren't estimations, they're just nonsense. a state of oversupplied drivers is not at equilibrium, the drivers are going to leave until they're not supplied anymore. oops, now you have to acquire drivers again.

so, so much dunning-kruger

Interesting. Is "sound like a CEO" meant to be an insult? On a site meant for startup founders? Weird.

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