Here’s how Uber—a taxi company that came into India just a year ago—is successfully challenging local market leaders to lower their prices through astute tech play.
Three months ago, The Association of Radio Taxis, that includes local market leaders like Meru cabs, Easy Cabs and Mega Cabs had joined hands to file a complaint against Uber in the Supreme Court of India for FEMA violations. The San Francisco-based company announced last week it has been granted a month-long extension by RBI to migrate to a new payment method to comply with Indian tax laws.
From a non-descript start-up five years ago to a phenomenal rise into global leadership, Uber’s success is hailed in some quarters and despised in others. But the fact remains that its disruptive business model has forced both Indian cab service operators and consumers to sit up and take notice of it.
[Read more: Sharing startups struck it big and struck out in 2013]
Where Uber Has Nailed It
Uber’s core competency is it allows customers to quickly hail cabs via its mobile app and pay with a credit card, taking seedy fare haggling with cabbies out of the picture. The app binds the user’s device with a geography and successfully displays point-to-point directions to the driver, making real-time cab tracking and seamless demand servicing a reality.
Apart from the credit card payment bit, Uber sounds uncannily similar to any other taxi service. Yet, Uber has been dramatically lowering its taxi fares sending the Indian cab market into a frenzy. Here’s why: Uber is a platform.
A platform is a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers. In Uber's case, it connects drivers with people who need a ride.
“Uber's disruption is brilliant in its simplicity,” says Manu Rekhi, director at Inventus Capital Partners that has invested in and works closely with a number of early stage companies in the eCommerce and transportation industries, like RedBus and Savaari. “Uber is leveraging technology to connect riders with people who have an underutilized asset—cars. Its effectiveness comes from connecting both supply and demand seamlessly.”
Less Risky - “A platform business is structured differently than Uber’s indigenous counterparts. What Ola and Meru Cabs operate on are basically once-dominant linear businesses of the 20th century,” says Nick Johnson, an expert from Applico, a company that helps platform businesses on strategy, design, and development. “Compared to a linear business, a platform faces much less risk of exposure - as defined by total fixed and quasi-fixed costs like payroll. A trait Uber proudly displays by allowing its drivers to partner with other cab operators if they want to.”
Lean Staff Strength- While Uber has about 25 employees in 10 cities, Ola has 11,000 cabs and 550 employees, and TaxiForSure has about 550 employees that service 5,000 cabs. Uber’s general expansion strategy includes hiring a three-member team comprising of a general manager, a community marketing manager, and a head of operations in every new city.
That's because platforms don't try to own one side of the transaction, the way traditional taxi companies do by employing drivers, says Johnson. Instead, Uber simply connects both sides using technology.
Quick Scaling- Uber doesn't need to scale by adding resources such as physical infrastructure (stores, factories, etc.) or additional inventory, the way traditional businesses do. Instead, it grows through its highly scalable number of drivers which is driven by network effects between its users and drivers.
Logarithmic Growth - So while a traditional taxi company's costs continue to rise as it grows (because it needs to buy more vehicles and employ more drivers), Uber's costs start to level off logarithmically when it reaches scale in any city. This ability to grow through ecosystems rather than resources allows it to scale to an extent that traditional businesses can't.
Surge Pricing and Tax Laws
Not
all is rosy. The tech taxi provider is in the line of fire for many
other reasons. Industry watchers would recall Uber and Lyft really go to
war in the US over drivers. Whoever gets more drivers will be able to
meet more demand, and ultimately make more money, was the rule.[Also read: Are Uber's aggressive recruitment tactics legal?]
The need to balance supply and demand is also the main reason behind Uber’s controversial ‘surge pricing’. That’s how a platform like Uber easily controls its business. When Uber raises the price with surge pricing, it does so because there are more requests coming in than there are drivers to take them. “Uber is willing to raise the price to consumers and price some of them out of the market if it will get more drivers on the road,” says Johnson
[Read: Uber won't surge-price you too much in emergencies]
Of course, another challenge is regulation. This challenge isn’t unique to Uber or other ride-sharing platforms. This legal trouble happens because platforms are a new, disruptive way of doing business in today’s world, but the laws are still oriented around the old ways of doing business.
As a result, these platforms often operate in a legal grey area. The usual strategy to counter this challenge is to get big really fast and then to try to use its popularity to legitimize itself. This only underlines how important expansion is to Uber. It needs to continue to grow in order to be able to have the popular support to convince local or national politicians to work with Uber and not against it.
[Airbnb, Uber and problems with the digital-sharing economy]
“The option that Uber is most likely to choose in India is partnering with a company that provides payment gateways or digital wallets. This way, Uber will still be able to accept online payments, and users will be able to pay in rupees through their cell phones, using the cash they have stored on their digital wallets,” says Jordan Perch, transportation analyst at DMV.com “Uber will have to integrate a digital wallet into their application and the two-step authentication requirement can also be met, since Uber will no longer use an international payment gateway.”
In a world where technology has made swift market disruption a reality, companies like Uber are increasingly exposing the ‘dinosaurs’ around us. With Uber also opening up non-credit card payment models in India, the most heartening news that emerges in all the confusion is that the last one laughing is the Indian consumer.
Timeline:
2013
August – Uber launches India Operations
December – Uber launches in India’s capital, New Delhi
2014
July – Uber teams up with Windows Phone in India
September – Ola and Meru Cabs launch in-app wallet
14th Oct – RBI asks Uber for tax-clarification
21st Oct – Uber slashes fares by 45 percent with UberX
30th Oct – Uber gets more time from RBI to meet Indian payment norms
10th Nov – Uber launches vehicle financing programme with M&M, Maruti ,Tata Motors, and Toyota
Shweta Rao, Principal Correspondent at CIO India and Computerworld India, writes on technology trends spanning both consumer and enterprise markets. Send feedback to shweta_rao@idgindia.com. Follow her on twitter at @GeekSnuff
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