Table of Contents
The emergence of Uber in the taxi industry was the beginning of the exceptional growth of a start-up that has managed to gain global popularity. The success of Uber has been mainly attributed to its use of technology to satisfy a highly demanding consumer market. In essence, Uber made it convenient to aces taxi services in cities. This is achieved by the use of App from which the consumers can select taxi of their choice based on rating and other preferences. This modernized the taxi business which has been described as a traditional occupation.
Regardless of the success of the company, Uber has faced huge challenges in the global which mainly emanate from the challenges of a shared economy. Countries that have banned Uber operation have cited unfair practices such as offering very low prices rates that affect other taxi drivers. However, considering the nature of the largest consumer population, the ease Uber offers in the taxi industry has made possible for it to overcome its challenges which have further increased the popularity of the company. The main threat the company faces in the modern market is the fact that emerging competition have applied Uber’s business model which has increased competition in the industry.
This paper analyses the cost structure of Uber in regards to internal and external market variables that affects the business. Also, the paper analyses the competitive nature of the taxi industry, and how Uber could retain its huge competitive advantage.
Uber’s Cost Structure
Product Cost Structure
The main product offered by Uber in the form of services as the company is not directly involved in the acquisition or maintenance of vehicles used in the taxi business. Uber allows drivers to come into the company with their own cars from which its gets its commission. In an argument by Petropoulos Uber hugely benefits from the fact that it does not purchase cars for the taxi business which allows the company to minimize operational costs, and possible liabilities involved (1). The author further asserts that companies that have an indirect involvement in product purchase or maintenance have a reduced product cost (Petropoulos 1).
The only fixed product costs Uber has are the costs required to maintain its online platform and applications. The company has to occasionally improve its online resources to keep up with the consumer demands. The current Uber app is different from the first one in regards to features consumers can use. This has to be done occasionally based on trends and available technologies.
Service Cost Structure
Uber incurs the normal internal service costs which include staff wages, taxes and other staff financial demands. These costs are not fixed considering the number of staff may change or bonuses reduce or increase based on the performance on the company. The only fixed service cost the company has are the administrative costs.
Considering the fact that Uber drivers can be described as staff members, the service costs incurred to this respect is dependable on the income by the drivers. Drivers are only entitled to commissions for income raised. For this reason, this service costs is well managed by the company considering that the company may only pay out commissions paid to the drivers after they generate an income for the company. Hawlitschek points out that commission based employee pay structure ensure that a company may not incur service costs that are unwarranted (30).
Customer Cost Structure
Uber’s duty to its customers is the provision of a platform that is easy to use, reliable and dependable. The cost incurred in providing this is based on the costs required to maintain its online platform regardless of the number of users. This may be costly considering the traffic per day the app has. Uber has also a responsibility to its drivers as they require a functional online platform in order for them to develop income for the company.
In regards to services, also, the company has to ensure drivers maintain the best standards of operations, as they are the face of the company. To ensure that the drivers remain ethical and professional the company has to occasionally review commission rates which vary from time to time based on the nature of the market.
Product Line Cost
Uber incurs indirect labour costs considering its commission based payment system to its drivers. The only fixed product line cost may be the salary for internal employees for direct labour. On the other hand, Uber does not incur product line costs involving acquisition of products; vehicles used as taxis.
Uber’s Pestle Analysis
Across the globe Uber has faced numerous political setbacks that have limited its economic performance. The company was accused and even sued for not having clear and concise regulation in regards to insurance cover for the driver, and passengers. In addition, the company was forced to embrace the need to have taxi licences for all its drivers, and cars used in the business. This also increased the operational cost of the company, but directly impacted the drivers who have to adjust to these requirements.
The most significant political challenge faced by the company is the minimum wage debate. Uber has an internal responsibility of ensuring it generates enough income to sustain its long term profitability goal. On the other hand, Uber also strives to ensure drivers are paid commission that may minimize the possibility of a wage conflict. The challenge of attaining this is that the company main selling point is offering low taxi prices, which means that drivers will be required to get lower commissions or the company lowers its profitability level. In many countries, the minimum wage put in place have lowered the profitability level of the company which has been a huge challenge.
Main economic challenge faced by the company is that some nations have banned the service terming unfair competition practices. In essence, Uber offers very low prices as compared to regular taxi which had created major controversies for the company. For this reason, regular taxis have been required to lower its prices. If regular taxis lower prices too much, Uber would also be required to lower its prices which mean low profitability (Gaskel 1).
However, Uber has a huge economic power considering its significant growth since its inception. Regardless of the low prices offers, Uber drivers earn more than regular taxi drivers as the platform allow the drivers to manger their time and services. This shows the economic impact of the company (PESTLE Analysis).
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Different from regular taxis, Uber offers convenience for the consumer. The company has a positive social preference considering with the age of technology word of mouth spreads easily. Uber as an online platform which also makes it easier for its popularity to spread on social media platforms. As the number of users for the services increased the company also has increased online presence. This is a huge advantage when compared to the regular taxis which have to rely to the traditional forms of word of mouth without the help of the internet.
Technology has been the most significant asset Uber has. The company is built on the goal to use technology to ease life and increase profitability. The goal has been a huge success as the company has managed to use technology to improve the taxi experience, and still generate a huge income level. This has been the reason as to why the company has generated to much success.
Another technological factor that has led to the success of Uber is the online presence of the company, and using social media as a marketing platform. It is easy to sell a technological product on social media other than on any platform. Uber effectively used this opportunity to penetrate the market.
Regardless of these benefits, technology has also been the main threat the company faces. Emerging competitors have come up with better technologies that have challenged the dominance of Uber. Considering how fast technology changes, Uber has to occasionally update its online platform to keep up with the challenges. Main Uber competitors have developed online platforms with more features that ease consumer use. This is a huge problem for the company, unless it heavily invests in developing and applying trendier technologies (PESTLE Analysis).
Uber main legal challenges are based on the political restrictions placed on certain markets. For instance, the regulations on minimum wage and market restriction have limited the expansion of the company to various global markets.
From an environmental point of view, Uber has been cited as a positive change as it has minimized the usage of public modes on transport, which would in the long-term reduce traffic. Alternatively, Uber has also been accused on increasing traffic congestion considering the exceptional rise of the number of Uber drivers.
Overview of the Taxi Industry
Prior to the entry of Uber, the taxi industry was basically traditional which meant taxi could only be accessed physically, or through bookings. At this point, developing a differentiating factor was difficult as all market offered the same services. Also, the market was fair and pleasing to all involved players. However, the entry of Uber created a major differentiating factor which was heavily criticized by traditional competitors. Uber offered cheaper rates, and still provided an increased service level in regards to quality.
Consumers within the industry are mostly attracted with ease at which they could access taxi services. This is the reason taxi are found in cities driving around to capture the attention of the consumer. On the other hand, Uber developed a way in which this could be made easier through the use of a commonly used gadget, mobile phones. The application of this was significant as the popularity was positively embraced within the industry. For regular taxi drivers, migration of these online platforms was the only way to survive the industry. Currently, the industry is shared by the online taxi companies, and still by regular taxis. Regardless of being a shared economy, online taxi companies have the largest market share, and with massive popularity.
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Possible Economic Strategy by Uber
Firstly, Uber should consider further lowering price set for consumers. In this strategy, Uber would have to register the income level for each ride. However, a decrease in price would mean an increase the number of users which would still ensure the company generates a good profitable margin. In an argument by Ertz, Durif and Arcand lowering prices for the sake on increasing consumer use is a good strategy within a shared economy industry (6). This is based on that a shared economy means that there is still a huge market share that could be acquired. By lowering prices, a company has an increased opportunity to appeal to the market share.
From the evidence provided, Uber has a huge market share in the taxi industry. This could be attributed to the fact that the company introduced to the market a form of service that unique, and matched to the nature of the consumer market. Placing taxis on an online platform was a huge asset for Uber considering its popularity and economic success over the years.
Regardless of the success, Uber has been faced with many controversies after its market entry to the foreign market. The controversies have mainly revolved around providing drivers with better commissions. With Uber offering low prices, this has been a huge challenge considering it also has to create profitability. These challenges have not minimized the success of the company as Uber remains a huge company in the global platform.
- Ertz, Myriam., Durif, Fabien. & Arcand, Manon. “Collaborative consumption or the rise of the two-sided consumer”. International Journal of Business and Management, 2016, 6, (6).
- Gaskel, Adi. Study Explores The Impact Of Uber On The Taxi Industry. Web. Jan 26, 2017. https://www.forbes.com/sites/adigaskell/2017/01/26/study-explores-the-impact-of-uber-on-the-taxi-industry/#389a0f5016b0
- Hawlitschek, Florian., Teubner, Timm. & Weinhardt, Christof. “Trust in the Sharing Economy”. Swiss Journal of Business Research and Practice, 2016, 70 (1): 26–44.
- PESTLE Analysis for Uber. PESTLE Analysis. 2017. http://pestleanalysis.com/pestle-analysis-uber/
- Petropoulos, Georgios. Uber and the economic impact of sharing economy platforms. Web. Feb 22, 2016. http://bruegel.org/2016/02/uber-and-the-economic-impact-of-sharing-economy-platforms/