Ridesharing’s Race to the Bottom is at a Turning Point | A Growth Marketer’s Independent Study

When Uber and Lyft set out to enter the $20B taxi and limousine service market, no one expected them to profoundly impact it in such a short time. Like many of us, I loved the experience of hailing a ride at my fingertips, and enjoying a better ride experience whether paying less than or more than a taxi. The experience alone was enough to make the switch to Uber or Lyft. Riders were willing to pay anywhere from competitive pricing all the way to the ridiculously high-surge pricing. In other words, ride sharing is a fairly (but not completely) inelastic service where any price increase or drop will not fundamentally change the demand for it. Users made the switch from taxis because on average, prices were lower than a taxi, and the ease of use and overall experience were unmatched. However, in 2016 the race to the bottom began when Uber cut its rates to win drivers over from Lyft.? While Lyft initially resisted, they eventually capitulated and lowered their base rates for ‘per mile’ and 'per minute’ by 29% and 62% respectively. Consumers were happy to pay for cheaper rides but drivers' earnings were much lower.

Driver Retention Rate is now <5%:

Growth marketers tend to look at the entire customer lifecycle from acquisition to retention. It is reported that the (1-year) driver attrition for ride-sharing companies is greater than 95%. In other words, less than 5% of drivers stay on more than a year, some say it is even lower, closer to 3%. That number is surprisingly low, and if it were 15-20% some might pause but 5%? The driver growth/retention teams at Uber/Lyft must be immensely challenged by this statistic. There are now offers of $800 or more to refer drivers who sign-up, with most drivers working less than 15 hrs per week and a rough calculated guess suggests it would be close to four months to break even based on average-driver gross earnings. I have no visibility into the marketing metrics of Uber or Lyft but let’s focus on the low retention rate and whether there is a solution to increase it. We are now out of COVID and the demand for rides is at pre-pandemic levels yet there is a shortage of drivers that is resulting in higher fares during peak times. Why is this important? My hypothesis is that overall, the economics do not make sense for the drivers and with fewer drivers available, riders end up paying more during peak periods.

Created my own independent study to better understand the economics:

To better understand this situation, I conducted my own interviews and set out on the road as a driver (selecting Lyft by random coin toss) in one of the busiest markets, the San Francisco Bay Area. I modeled my own independent study to understand the economics of being a ride-share driver. I had doubts that I could make a profit driving a gas-guzzling SUV with gas prices exceeding $6 per gallon. My intention, however, was to run a study, an experiment not to earn money. Therefore, to make the this study more relevant, I adjusted my costs to those of a hybrid (all adjusted costs associated with gas, maintenance, depreciation, etc). My region consisted of San Francisco, East Bay, and the Peninsula. I did various shift combinations, including morning, midday, and evening time frames, 7 days a week.

Despite driver claims that they are are able to earn over $30/hr, it is not as easy to earn a consistently strong hourly rate, the low driver retention rate makes sense:

I first interviewed several drivers and my findings were all over the place. Several said they can earn up to a total net hourly rate of $27/hr (all-in) if they drive up to 12 hours a day, often sleeping in the car. They reason that this 12-hour shift strategy maximizes the opportunity to earn during the short periods when peak rates hit. On the contrary, other drivers state they are barely making minimum wage. How can there be such a disparity in earnings potential for the exact same job?

As a driver, I confirmed that driving longer shifts was more profitable than driving part-time. I earned up to 25% more per hour working 8hr shifts on average, but I was never able to hit a net earnings rate of $27/hr. Choosing to work either the morning/evening shifts definitely paid off earning 27.7% more per hour than mid-day shifts. My all-in average net hourly earnings while working different shifts was $21.49 (I chose to work more morning and evening shifts than mid-day ones). Total net earnings is also highly dependent on both tips and bonus pricing combined. They both accounted for 29% of my total earnings. The challenge is, tips are unpredictable and peak pricing occurs in small windows. The peak periods are typically weekday mornings 6am-9am and afternoon evenings 5pm - 8pm. For example, in the morning shift, bonus/peak rates averaged 13.92% of my total earnings. However, during the highest periods of demand (6am-9am), bonus/peak rates actually represented 26% of my ride earnings. During the rest of the morning shift before and after the peak period, bonus/peak rates represented 11%. In other words, drivers have a small window to make higher average hourly earnings

Being a ride-share driver is a difficult proposition for those who are looking to work in order to replace or supplement income, over 52% cite driving as needing to cover gaps or changes in income and over 42% of lower-income drivers are using this as their primary job.? It is unknown how many drivers are willing to endure long shifts and overnights in the car to maximize full earnings potential. Given these circumstances, drivers are finding other job opportunities that pay similar hourly rates with benefits and closer proximity to their home. To consistently deliver a strong force of drivers, earning potential needs to be higher than it is. Ride-share drivers used to earn a solid income, but they no-longer do when factoring in the cost of operation, commuting, increased? short-duration rides, quality of life, and lower base rates.

Riders are paying more during peak periods than before and cite declining quality in ride experiences:

If riders are paying up to 40% more during peak periods why aren’t there more drivers to meet the demand? Peak periods are the highest of the high rates that any rider will pay but here lies the challenge, many drivers are commuting in from out of the area and are not going to travel long distances just to work those short peak periods and fewer are realistically able to pull-off 12 hour shifts. COVID was a reason at one point that kept drivers off the road but it is much more than that, they are earning less and as a result there are fewer drivers available making those peak periods much more expensive. During my experience as a driver, riders in San Francisco during peak periods had to wait up to 25 minutes for me to arrive as I completed other rides. Thirty to 40% higher fares and delayed pick-up times do not equate to a positive experience for riders. Furthermore, most riders I interviewed conveyed that the quality of drivers has declined (for both Lyft and Uber) with car cleanliness and negative driver disposition being the most common complaints.

The value of ride sharing is discounted:

As mentioned earlier, both Uber and Lyft slashed their rates in 2016 and while consumers benefited, drivers did not. The rates do not make sense. Simply put, the ride-sharing value for riders is higher than the value associated with driver earnings. Riders are finding it cheaper to use ride sharing than owning a car, which is acceptable depending on how much you would be driving otherwise. Keep in mind, in some cases the opportunity cost of using public transportation exceeds that of ride sharing. This wasn’t part of my study until several of my rides involved transports that were out of the way for me as the service provider. I often took workers to their job location that happened to be just a few miles from their home. On several trips, I lost money after the cost of the ride exceeded the earned income based on how far I needed to drive to get to the pick-up and re-position for subsequent rides. A rider revealed to me that he saves more by using Uber or Lyft than taking the bus to work.? Keep in mind that the rider’s ride-sharing fare ($5.00) in this scenario was marginally higher than the cost of the bus ($2.25). In this case, the ride-sharing customer doesn’t need to walk to the bus stop, wait and then ride the bus that takes 5x longer than riding in a car. For just $2.75 more than the bus, this person can reach work 32 minutes faster and ultimately work more hours in the week.? Using a conservative minimum wage rate of ($15/hr) in Oakland, people can earn >$9 more by starting their shift sooner. My gross driver earnings (excluding costs) for that ride were just $3.75. Low margin rides have become a persistent issue for drivers since 2016.

In this table, I illustrate three trips that I completed as a driver and then replicated as a passenger in a cab. As expected, I paid 50% higher than that of using Uber or Lyft. Keep in mind that taxi unions offer benefits to drivers which is exactly what the Department of Labor wants to explore for drivers of ride-sharing companies. ?Department of Labor recently proposed regulation (NPRM) redefining how to classify employees and independent contractors under the Fair Labor Standards Act. The government intervention on whether independent contractors should be considered full time employees is a misguided approach to solving the economics of a industry predicated on part-time workers. If the government does pass regulation, we could see rates for ride sharing increase 50% or more and not just during peak periods.

While 41% of surveyed ride-share users say they prefer prices to be the same with no change, 65.5% say they would still use ride sharing if prices increase by 20%-30%:

I conducted a survey through (Facebook/LinkedIn/Reddit/Interviews) to get a broader sense of how much more users would or wouldn’t be willing to pay. Most people, when asked how much more they would be willing to pay, 41% said they would prefer no increase, over 49% said they would be willing to pay a 15%-20% increase and 10% would accept a 25%-30% increase. When asked about continuing to use ride sharing if prices increased by 20%-30%, 65.5% of those surveyed said they would still choose to ride.

Other key insights from survey:

• 15% of respondents say they use ride sharing as their primary means of transportation and 50% of these respondents say they would still use ride sharing if prices increased 20%-30%. (I find this surprising as any increase here could surpass the cost of owning/leasing a car or certainly using public transportation).
• 14% of respondents who said they’d be fine with a 15% increase, said they would not use ride sharing if prices increased beyond that.

?Given that 65% say that they would still use ride sharing if prices increased, indicates there is a steeper elasticity (low elasticity) curve with ride sharing that we might think. Many of us were happy to use Uber and Lyft prior to 2016 before the per mile rates dropped 29% so it seems that there would not be a lot of push back on an increase in rates. However, much has changed since 2016, behaviors have shifted, the economy is near recession, etc. The other lingering question would be, even with a rate increase, would that fundamentally shift driver behavior? With such a steep gap between ride sharing and taxi fares, there seems to be room for a rate increase that would not have a significant impact on demand and would attract more drivers. The increased availability of drivers during peak periods would actually lower pricing during peak periods.

Lyft did make a legitimate attempt to increase driver earnings:

On November 1, 2022, Lyft announced their modified earnings model for drivers. I applaud them for making these changes, and some of these were on my list of recommendations to Lyft. As of these recent updates, Lyft drivers now can view destination and earnings opportunities for each ride before accepting it, and drivers will be paid for the time in between pick-ups. I had the opportunity to drive these past few weeks to evaluate the new earnings structure. There was a slight increase in my average total earnings per hour, but it was only 9.7%, which is still a step in the right direction.

?Final Thoughts:

If the base rates had been 20% higher, my average total net earnings per hour would have been close to $27. Tips would have still represented a significant component to my earnings. A 20% increase in the base rate would reduce the dependency on tips, which for many are predictably low and unreliable. Would a rate increase fundamentally change driver behavior? An increase in the base rate should get drivers back out driving, resulting in more driver availability and a reduction in peak pricing.

If no changes are made, specifically changes that are mutually beneficial for both drivers and riders, it is possible that the government will have the impetus to pass regulations that will change the industry landscape, resulting in price increases of 50% or more. Would I still use ride sharing if prices matched those of cabs? Yes I would because the experience is still better than trying to hail a taxi. At the same time, I do believe government intervention will negatively impact the industry overall. Rates will be much higher, there will be fewer drivers because most will not want to drive full-time, and wait times may increase beyond where they are now especially during peak periods. Changes are inevitable and no one can predict what they actually will be.? Reasonable change is to increase the base rate by at least 20%, which would still be lower than the base rates prior to the reduction in 2016.

This study was time-consuming and highly rewarding. It was a unique way to connect with the community. I have a long list of stories to share at parties and probably could write a book of my experiences. If time permits, I will still drive to continue collecting data and update my study. Here’s to enjoying good conversation if you happen to catch a ride with me. I guarantee five-star service!?

#lyft #uber #ridesharing #gigeconomy #gigworkers #gigwork #growthmarketing #departmentoflabor

Reference Articles:

1. Uber trying to Kill Lyft by Lowering Prices
2. The State of Gig Work in 2021
3. 12 hour work days: The day in the life of an Uber Rideshare driver
4. The Department of Labor’s proposed regulation redefining how to classify gig workers