Ever wonder how Uber attracts drivers in a new market? I have. I’ve wondered quite a bit about Uber’s economics, especially given their staggering valuation and ability to swoop into markets and establish a huge presence. I got a brief peek into how some of those economics may come together.
Please keep in mind that I have no facts to back this up. Just a story from an Uber driver. But, it’s certainly a plan that I would consider to launch a new market if I had deep pockets.
On a recent Uber ride on a trip in Ireland, the driver and I struck up a conversation, something I normally do with Uber drivers. I’m always curious how they like being an Uber driver, digging for nuggets about how the system works for them. Thus far in my trip it had been exceptionally difficult to score a ride with Uber. I was at a large conference (Web Summit) with 20,000 plus attendees, many of whom are quite accustomed to using Uber in their business travels. Further contributing to Uber scarcity was the fact that each conference attendee was offered a free ride with Uber by the conference organizers. That’s some serious scratch.
Add all that up and I couldn’t catch a cold, let alone a lowly taxi or a lofty Uber during my first day in Dublin. As the conference wore on, I finally ended up hitting the button and actually finding a black car available. After climbing in, I mentioned that I hadn’t been able to get an Uber my first 2 days in town. He shared with me that there still weren’t many Uber drivers in Dublin, something a few other drivers shared with me during my trip.
He went further, though, sharing with me that Uber had been guaranteeing the drivers 700 Euro a week since the service launched earlier this year and had promised that amount for roughly 2 years. He said he was averaging 300-400 Euro in fares and believed he was one of the more active drivers, having discussed it with others.
If we take that as fact, Uber is guaranteeing their Dubln drivers a salary around 35,000 Euro a year. Not a horrible wage, though there are all the expenses for the newer vehicles Uber requires. And, barring a complete flop in the marketplace, Uber really isn’t exposed to the whole 35,000 Euro. In this driver’s example, they’re on the hook for about half of that amount. I have no idea if this driver works more hours than an average Uber driver.
On its face, it seemed like a good strategy. Giving it some more thought, I’m still not 100% sure. I would have to believe Uber has requirements for how many hours the drivers work. And yet they were very scarce during the conference, especially later in the evening when folks were heading to the Night Summits (look in the dictionary, the definition is boondoggle, party). My driver seemed to back up part of this theory, saying he had noticed fellow drivers knocking off early. If these drivers were far away from hitting their guarantee for the week, they’d have little incentive to keep working, knowing the guarantee was in place.
It’s absolutely a solid strategy to tie up a market early. If you get all the drivers committed to Uber and you’re paying them it’s harder for a competitor to come in and steal drivers unless they have deeper pockets (unlikely at this point).
It’s a bit of hypothesis on my part, short on facts. But, if the formula is as my driver indicated, it sounds like Uber (and their customers) may benefit from different incentives, such as bonuses during citywide events or very busy periods. Additionally, they might consider a formula that either “clicks down” or “clicks up” based on a driver’s performance. After all, Uber wants to grow the network AND keep the drivers around. Having them out on the street as much as possible is the goal.
I asked my Uber driver who took me home when I landed in Virginia yesterday and he confirmed that Uber had subsidies in the DC market when they first started, though he says they don’t have them any longer to his knowledge (as a side note, I did not get harassed by cops this time).
Anyway, it’s still a subject I’m very interested in. I’d love to be in the board room for meetings when they discuss items like this. Since Uber isn’t a publicly held company, they don’t owe the public any information. They aren’t likely to help their competitors by divulging anything. For now, we’ll just have to guess.