Your Start-Up's Journey to Profitability - Learnings from "Pool" & "Surge" Concepts of Uber

We are often asked this question by start-up enthusiasts - when will company X turn profitable? And if they will, what will be the levers that will make it profitable?

The answers, however, is far more complex than the question. There are different visions that co-founders have for their companies. Ideally, any business should target reaching a milestone in terms of scale, and then just focus on becoming profitable. However, the conflict of scale v/s profits eats it up. 

Scale V/S Profits

This is a primary dilemma for any new-age disruptive start-up:

Do I focus on acquiring every potential customer first and then think of profitability out of those "customer assets"? OR Do I get to a large enough and well-defined scale, and then focus on making it profitable before expanding further?

This choice made here has led to a lot of start-up's becoming disproportionately sized and others shutting down shop.

1. Grow disproportionately, think of profits after crushing the competition: The one's who have grown [and are still growing] but are still not profitable, are now figuring out ways to make money out of the current as-is state. The biggest advantage they have - they are big, so big that they might be almost a monopoly business. Some examples in India are FlipKart and Oyo Rooms. They need to switch gears from customer acquisition and retention to transaction level profitability or find other means to turn profitable.

2. Grow to some extent, become profitable before growing further: On the other hand, their are some start-up's who are "scaling down" and shifting focus on making their business model profitable before expansion. This can be driven by both - right intentions OR investor pressure. Examples here are TinyOwl and Grofers. 

The choice to be made here depends on your vision - I would personally go for no. 2 as it gives far more visibility of your business. But is there a right mix of these two that exists?

Learnings from Uber 

Uber falls in both sets of companies - it believes in scaling up and becoming a monopoly in transportation business and then shift gears to become profitable. The major difference between Uber and other large companies is the clear vision of how this business will become profitable in the longer run. Let's break down Uber's "road to profit" for New Delhi in logical steps. 

1. Launch with a Bang: Uber launched its operations with Uber White where it sent Mercedes Benz E Class for pick-ups. Result: lot of word of mouth promotions and customers acquired. 
2. Systematically increase car availability: Then the focus shifted from Uber White to Uber Black - luxury to normal sedans. Driver acquisition became key for scaling up and we suddenly saw multiple Uber's available near us. Drivers were guaranteed payments even when they didn't get many passengers so Uber was making huge losses here during scaling up. Result: a confidence that we can now go and acquire customers.
3. Increase customer base through referral programs: Once the cab availability was optimal, Uber launched "first ride free" campaigns to get it's app referred by customers to friends. This Peer-to-Peer advertising led to higher acquisition costs so another top-up of losses after driver payments. Result: exponential increase in app downloads.
4. Get customers rolling: More people with free rides and great driver availability meant that people started "experiencing" Uber as a means of transport. Daily rides jumped and this gave Uber a lot of data to crunch and understand customer behaviour, major pick-up and drop destinations, customer and driver demographics, app usage statistics etc. This is a "great asset" for any start-up. Uber is one of the best examples of how data should be used in business. Result: Lot of customers using Uber and giving Uber great amount of data daily to plan its road to profitability. 
5. The road to profitability: Once customers replaced their usual means of transport (car, metro, bus etc.) with Uber, they became "dependent" on Uber. Uber could easily arrive at this conclusion by just analysing the data and segmenting its customers - one time riders, frequent riders, daily office riders, weekend party riders etc. This results in customer focused approach to make profits - the approach in New Delhi as of now is simple - Pool + Surge = Profits

Pool + Surge = Profits

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