Ubers and taxis: at first glance, they seem very similar. Both provide rides for hire in privately-owned motor vehicles. Yet Uber has achieved rapid adoption in urban areas, competing fiercely with taxis in a battle for market share. What makes the two business models different from one another?
App-based ride-hailing allows Uber drivers to pick up riders with much greater frequency, by more efficient matching of customers with routes. The precision and flexibility of smartphone-based ride hailing can bring drivers right to customer origins and take customers precisely to their destinations. This unprecedented pick-up and drop-off flexibility leads to a reduction in time the driver spends in an empty vehicle. Because ride-share drivers can carry passengers more frequently, they earn more revenue per mile on average, and in turn a virtuous cycle arises where more revenue-per-mile feeds into lower prices, more riders, better utilization, and so on. The pillars of the sharing economy—excess capacity, urbanism, and smartphones—enable a much greater utilization rate and thus a much denser pairing of supply and demand.
The difference in business structure enhances the ability of ride-hailing drivers to offer lower prices, attract more riders, reduce empty-vehicle driving time, and enhance utilization, thus spurring the virtuous cycle onward.
Another difference lies in business structure. Typically, taxis have had a monopoly on licenses for selling rides in a private vehicle in cities. Taxi owners have had to navigate a costly application process and in many cities a strict quota on the number of taxis. But ride-sharing drivers do not need to undergo the same cumbersome red-tape: They work as independent contractors for the parent ride-share company and essentially run their own quasi-franchise businesses. This difference in business structure further enhances the ability of drivers to offer lower prices, attract more riders, reduce empty-vehicle driving time, and enhance utilization, thus spurring the virtuous cycle onward.
Driver and rider interviews
To uncover these insights, I interviewed, anecdotally, many riders, taxi drivers, Uber drivers, and Lyft drivers, during two years of research in Austin, Texas; Washington DC; New York City; Boston; San Francisco; Seattle; Portland, Oregon; and Indianapolis, Indiana. These conversations represent a variety of types and sizes of U.S. urban areas, in different regions, with different local cultures, holding different amounts of population. While not a systematic statistical inquiry with random stratified samples, certain consistent patterns emerged from the conversations across this diversity of settings.
Why do traditional taxis often decline suburban pickups?
These interviews revealed an interesting clue: Many taxi customers indicated that traditional taxis often refuse to pick up passengers in low-density suburban areas. Although taxi companies may agree, when a customer calls, to dispatch a taxi for a ride requested from a suburban location, often no driver will accept the ride from the dispatcher, leaving the potential rider (who has already been assured by the phone rep of being sold a ride) waiting around, “stood up.”
The taxi fleet’s drivers may view the suburban pickup as profitable.
Although such a pattern clearly undermines customer trust, taxi drivers may have an underlying micro-economic motivation: Perhaps none of the taxi fleet’s drivers view the suburban pickup as profitable. Marginal cost may outweigh marginal revenue. Picking up a passenger in a distant suburb may require a long journey of 20 to 30 minutes with an empty vehicle to fetch the customer. During the time the vehicle is empty, no revenue is earned to cover the cost of fuel and depreciation. Moreover, if the customer requires a drop-off in yet another distant suburb, the driver may be left “economically stranded” after the drop-off. If there are no nearby rides to pick up in the destination suburb, then the taxi driver may have to drive yet again a long distance with an empty vehicle to reach the next customer, in the process burning more fuel and incurring more wear-and-tear without any offsetting revenue.
Analogy to “first-mile” and “last-mile” transit problem
With taxis, the “final mile” burden falls heavily on the taxi driver—the provider of the service—instead of the customer.
In fact, this drivers’ dilemma represents another version of the “first mile” and “last mile” problem faced by public transit, whereby riders will typically not walk more than a mile to/from their origin or destination. With taxis, the “final mile” burden falls heavily on the taxi driver—the provider of the service—instead of the customer, adding significant cost and uncertainty for taxi drivers. If taxis need to travel too far for their riders, it may become non-economical to offer certain rides, even if technically the origin and destination for these rides both lie within the assigned region of the driver. Consequently, taxis may prefer to stick to high-volume routes, such as to/from the airport, because they can be assured of minimal empty-vehicle time, leaving all other routes underserved.
What’s different for Uber and Lyft? App-based precision reduces empty-vehicle time
By contrast, Uber and Lyft drivers report experiencing significantly less “down time” than a traditional taxi driver. The app-based ride-hailing algorithms seem, anecdotally, to ensure that the driver can usually find the next ride near where she or he has dropped off the previous ride. This minimizes non-revenue-earning time, instead enabling the vehicle to spend more time in motion with a fare-paying passenger inside. According to many drivers, Uber ride requests are often either continuous or separated by less than five minutes. Many Uber drivers commented that they notice very short wait times between rides. For example, an Uber driver in the Boston metro area, who picked me up at a city-center location for a trip to a suburban location half an hour away, indicated that it is rare that he has to wait more than 15 minutes for his next ride request in the Boston metro area.
More frequent rides means lower prices per ride: Enhanced financial sustainability
The upshot for consumers is the way in which customer convenience and versatility lead to lower prices for riders as well as more consistent revenues for drivers.
The upshot for consumers, as well as for business model sustainability, is the way in which customer convenience and versatility lead to lower prices for riders as well as more consistent revenues for drivers, creating a self-sustaining virtuous cycle. A steadier stream of app-based rides means that fares for similar distances may often drop far below that of a taxi, especially for UberPool and LyftLine carpool services, which in some cases charge less than public transit (let alone taxis) for a quicker, more direct ride. Such a combination of unprecedented ride benefits—point-to-point service in a privately owned and operated vehicle—and competitively low price has never really occurred before.
The benefits of ride-sharing, for both consumers and operators, raises the question whether a fundamentally new form of transportation has been invented. Another article in The Fuse explored the role of paradigm changes every half-century in American transportation. What will ride-sharing look like by the year 2050? Can it include yet additional advantages to become the predominant form of personal transportation? The challenge in reaching wider ridership will involve overcoming difficulties similar to those faced by traditional taxis: How can riders and drivers be efficiently paired such that drivers have a steady enough stream of rides to offer competitive prices and earn a sustainable profit? Can this edge be maintained not only in city centers, but also in distant suburbs?
Substitute or complement?
For now, though, it is clear that ride-sharing offers significant enhancements over traditional taxis. At what point does it become accurate to say that ride-sharing is a substitute, not a complement, to traditional taxis? How great of a distinction needs to exist? This is a gentler version of the question about paradigm change, in that a genuinely new consumer choice may exist even in the absence of a universally-adopted shift. It does appear that app-based ride-hailing provides enough of a competitive edge to fundamentally alter incentives of supply and demand, and to thus create a substitute, and not a complement, for traditional taxis.
At what point does it become accurate to say that ride-sharing is a substitute, not a complement, to traditional taxis?
Taxis, of course, may choose to adjust their offering once they recognize this changing dynamic, and the final word has not yet been said on the eventual outcome of competition between taxis and Uber. How will the interaction between taxis and ride-sharing play out over time? Will competition erode the differences between the two models, until no real difference remains? Or will the recent emergence of a choice between taxis and ride-sharing be seen in future decades to have represented essential first steps towards a new paradigm?