Uber Business Model | How does Uber Make Money?

by GK March 27, 2019

As one of the most successful and controversial startups in Silicon Valley, the Uber business plan took the poorly organized traditional taxi business by the storms. It offered a more accessible and comfortable ride-sharing organization to the customers and evolved it into a perfect replacement of the traditional counterpart.

Despite the fact that Uber is the biggest ride-sharing business on the planet today, it was not easy to surpass the traditional market. To understand better how does Uber make money, and how Uber business model set up a milestone for few of the biggest apps and services today, we will look into the costs and revenue channels of the company. Further, we will inspect the take ways and discuss if a similar model would do the same justice to your own Uber-like business.

What is Uber and how does it work?

Uber is an on-demand ride-sharing service that organizes individual or shared taxi rides. The organization occurs following a two-sided marketplace business model, which takes buyers and sellers of service to the same platform through an arbitrator like a website or a mobile app. In return, it collects a fee from each sale made by the sellers.

It simply follows the concept of providing an easier, faster, and more comfortable method of connecting buyers to the sellers and earning from the commissions paid by each party in return.

You can make a loose comparison of the Uber business model with a traditional shopping mall. A shopping mall is a place where everyone knows they would find the shops they are looking for. That’s why everyone visits a mall and sellers set their shops there.

Similarly, Uber is a shopping mall of taxi services where everyone knows they would get a ride on demand. Both customers and sellers join this platform with their own set of needs and expectations.

The Uber Business Model

Uber business model was not a new concept. In fact, the traditional radio taxi services for ride booking through a phone call had a similar business model. The only difference Uber business brought was a more comfortable, scalable, and discoverable media – the internet.

Hence, instead of limiting customers to a phone call, the business gave a more diverse way where customers could not only book a ride but also got different other options to choose from. Moreover, it offered the USP of providing faster pickups, more taxis on the road, and potentially cheaper prices. Uber business plan fitted completely to an ideal marketplace business model.

The basic comprehension- Uber do not own the taxis it offers to the customers. Instead, it connects the taxis drivers with cars to the customers who need a ride. Its fundamental concept lies behind how Uber makes money by offering a medium of connectivity. Let’s break the Uber business model to get a clear comprehension-

Uber Key partners – The Company shares its revenue with these entities –

  • Taxi Drivers with vehicles
  • Payment Processors
  • Map API vendors
  • Investors

Uber Target Audience – The key customers of the company’s business-

  • All those looking for a taxi ride on the road
  • All those looking for a taxi on the doors steps
  • All those preferring public over private transport
  • All those not owning a car and traveling by public transport
  • All those looking for superior taxi vehicles with additional cost

Uber key resources– The Company’s assets that make the business model feasible-

  • Tech platforms- websites and mobile apps
  • Tech devices – Smartphones and computers
  • Tech supports- Internet, API vendors
  • Human resources- In-house employees and skilled drivers

Uber business USP for customers– Pros that make Uber a perfect substitute for Taxis-

  • Ample ride availabilities
  • Faster ride booking
  • Faster ride pickup
  • Multiple payment options-cash or cashless
  • Grander choices- economical to premium options
  • 24×7 ride availability
  • Customer support
  • Feedback mechanism- reviews and rating

Uber business USP for drivers– Pros that make Uber a perfect marketplace for Taxis drivers-

  • The additional source of income
  • Flexible working schedules
  • Easy ride booking
  • Easy payouts

How does Uber platform work?

Following is how Uber works using a 4-step on-demand marketplace business model:

Step 1: Cab request

Customers looking for a taxi ride using one of Uber’s touch points (mobile apps or website) to create a demand. Customers can request an immediate ride or can book a cab for some time later.

Note: Customers can choose from an array of multiple choices of the cabs available in the area. For example, dedicated rides, shared rides, economical rides, premium rides, type of vehicle etc. With each type of ride, customers get the corresponding range of services and maximum passengers allowed.

Step 2: Matching

As soon as the customer confirms the request, a notification is sent to the nearest driver in the locality. If the driver accepts the request, the ride will be booked. However, if it is rejected, the request moves to another driver in the locality.

Note: Drivers use another Uber mobile app to accept the rides and manage their driver profile. Uber uses a matching algorithm that considers multiple factors while sending the request to a particular driver. Nearest locality, Reviews, and Ratings are a few of them.

Step 3: Ride

Once accepted the customers get the notification with the details of the cab and the driver. The app or the website uses its MAP API to let customers have a real-time track of the location of the approaching cab.

Note: The driver starts the meter from his/her Uber driver app as soon as you sit in the cab. You can also track the live ride on the map in real-time on your Uber app. The map also shows the set route for your journey.

Step 4: Payment & Feedback

Once you complete the ride, the app notifies you of the same with other information like final ride cost, option to rate the driver and provide feedback of the experience.

Note: Though the cost of the ride is shown while making the request itself, Uber decides the final fare and shows it to the customers and the driver (only in cash payment options) once ride is completed. In most of its operational locations, Uber gives both cash and cashless payment options.

How Uber makes money?

You must have used a traditional cab’s service. Do you remember how you paid cash to the cab driver after finishing your ride? That cash itself is the only source of revenue for the cab driver (not considering his other part-time jobs).

Uber‘s ride-sharing business is no different. This is exactly how Uber makes money from customers. However, what that made the Uber business model so successful is its unique way to offer choices for every class and level of customers. It changed the notion that Taxi services are only for those who do not own a car or in desperate need for a ride in an emergency.

Services for everyone

What are the different types of Uber rides you have used? I can tell, you do not know about all. Uber has not limited its target audience to a particular segment of customers. Instead, it offers vehicle types and cost plans for every segment of users.

  • If you are looking for cheap taxi rides- shared rides and economical rides with Uber x are for you.
  • If you are looking for superior rides- primes and luxury rides with premium vehicles are for you.
  • If you like traveling in black cars- Uber Black is for you.
  • If you are looking for a taxi that can accommodate your big family- Uber SUVs are for you.
  • If you are confined to the wheelchairs- Wheelchair accessible rides are for you.

From price, accessibility, physical accommodate, to premium and luxury choices, Uber has not confined its services to a particular segment. It has presented its services to everyone from every class, level, and accessibility.

Surge Pricing Model

Dynamic fares according to various situations and aspects is a critical entity of the Uber business model and how it makes money. It simply follows the demand to supply ratio and uses a dedicated algorithm to automatically increase or decrease the per-mile prices. For this, it takes various aspects into consideration, like-

-Number of Uber drivers available

-Number of requests in a time-frame

There is one more aspect, which I think they surely apply but not reveal. I am talking about the dynamic competition research. The aspect that defines the fares based on how much other competitive service are charging during a time-frame. So I think Uber and others use these aspects while applying the surge-charges. Otherwise, customers would just go for the alternatives during the surge hours.

Uber for extended targeting

Uber has not limited itself to the taxi rides alone. It has applied the same business model to extend its reach to other un-traditional rides like Uber boats, Uber helicopters, Uber bike taxis, Commercial trucks etc. Depending on the geographic accessibility and demand of the services, Uber has covered an array of ride options to add new revenue streams to its primary business model.

Takeaways from the Success of Uber Business Model

The reasons for the success of Uber business plan can’t be stated in a single article. However, I think we can outline the primary aspects and comprehend the factors that led to the Uber’s success.

  • It capitalized on the problems with traditional taxis: The kind of comfort and ease you get while booking an Uber ride is alone enough to drive more and more customers to it. Contrastingly, the traditional local taxi services were so unorganized on the streets. I am sure you must have faced problems with the wait time, high rates, and inconvenience of booking a ride. There was no control on the price and you were left with no other option. However, the worst factor was the non-availability of the taxis during peak hours.
  • It started with loss through a futuristic vision: The early days for Uber were way too tough. It went into great losses. People were still not comfortable with online bookings. The company knew the scenario but still continued with a futuristic vision. They adopted two main ways to gain the market.

One- they offered mass discounts and free rides making Uber way too cheaper than the traditional rides. Two- they offered mass incentives (80% of the earnings) to the Uber drivers and even cheaper loans to buy cars, encouraging new people to buy cars and join Uber.

Two things happened after that. One-People started using Uber and demand grew. Tow- more drivers joined Uber with their own cars (even with multiple cars) to earn more incentives.

It was a futuristic investment that laid to the mass grown popularity of the platform. As a result, we see Uber as what it is today –the largest ride-sharing company on the globe.

  • Word of mouth advertising– With all those free rides, massive incentives to drivers, and cheaper car loans, Uber was gaining the word-of-mouth popularity. Early users who adopted Uber for taxi booking began to talk about the free rides with app sharing. People started sharing the app and accumulating free rides. Drivers started recommending Uber taxi contracts to their acquaintances when they asked how do you make money with Uber. As a result, the Uber business model grew exponentially from both the ends as more people joined the platform with their corresponding goals.
  • 24×7 availability- It was one of the biggest problems with traditional taxis. In the cities and small towns with good nightlife, it was tough to get a cab late at night. With 24x 7 availability, Uber did not only capitalize on the night lives but also opened a new era for an array of other utilities like can for late night flight, cab when you are too drunk to drive your car after club parties, a known face to travel an unknown place (business trips or tours), and door to door pick up and drop in bad weather conditions. Today, people can trust Uber for a door-to-door ride at any time, at any place, and in any weather condition.

Uber’s less ownership model by not owning any car, but still being known as a cab service provider is one of its biggest takeaways.  It chose the industry and understood its problems to capitalize on. It also went into great losses and still does in the places of new launches. However, when you know, you have a solid business plan and futuristic business model, you can trust your instincts and persuade your investors. This is what we should learn from the Uber business model and Uber revenue generation model. Opportunities do not come to you; you have to look out for them. To start a business with less ownership model held from the two-sides, you have to treat your initial customers like royalty and key partners (drivers) as a vital part of your business.

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