Chapter Review

Strategic Case 3Uber Attempts to Make a Right Turn

Uber Technologies Inc. is a tech startup that provides ride sharing services by connecting independent contractors (drivers) and riders with the use of an app. Uber has expanded its operations to 674 cities in 83 countries around the world. It has become a key player in the sharing economy, a new economic model in which independent contractors rent out their underutilized resources such as vehicles or lodging to other consumers. The company has experienced resounding success and is looking toward expansion both internationally and within the United States.

Understanding Its Target Market

Like all companies, Uber must understand its target market and maintain a strong marketing mix to be successful. Due to its technology, Uber does not have as many constraints as taxi cabs, although it has encountered regulatory obstacles and some public resistance. A major reason Uber is so popular is because its app allows users to contact any drivers in the near vicinity. The Uber business model takes advantage of the smartphone technology of consumers and links them with independent drivers as their cabs. These drivers act as their own entrepreneurs. They pay Uber a commission but are free to run their businesses as they see fit. This provides a potentially more efficient and less expensive way for consumers to purchase transportation.

Uber's target market is focused on Generation Z and Millennials because of their lifestyle, interests, and low interest in auto ownership. While the market is similar to the taxi cab market, anyone who does not have a car or does not want to engage in driving is in the market. Research indicates the core U.S. market is 65 percent age 16-34, 17 percent age 35-44, and only 18 percent over 45. The market is split evenly between males and females with 48 percent suburban and 46 percent urban and only 6 percent rural. Because all are using the Uber app there is big data available for analytics.

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Available Locally, Expanding Globally

Uber has adopted the motto "Available locally, expanding globally" to describe the opportunities it sees in global expansion. As it expands into different countries, Uber is engaging in strategic partnerships with local companies. These alliances with local firms are especially important as Uber expands internationally because it allows the company to utilize the resources and knowledge of domestic firms familiar with the country's culture. Uber has partnered with Times Internet in India, Baidu in China, and America Movil in Latin America. International expansion is a major part of Uber's marketing strategy, and it believes that consumers from other countries will appreciate its low cost, convenience, and freedom.

Despite its international success, many countries have regulatory hurdles that have caused trouble for Uber. Perhaps the biggest is the failure to obtain licenses even though Uber drivers offer many of the same services as a taxi. Governments have responded by banning Uber or Uber services due to the lack of professional licenses for drivers. For instance, in Spain, Uber shut down its ride-sharing service after a judge ruled that Uber drivers are not legally authorized to transport passengers and that it unfairly competes against licensed taxi drivers. Because the taxi industry is an important industry in many cities, governments like France, Spain, and Germany are not looking favorably at what they view as an unfair competitive advantage that could potentially bankrupt the industry. Uber has since returned to some countries with UberX, which uses licensed drivers and places it more on par with licensed taxi drivers.

Driving Trust and Safety

Uber operates in an industry where trust between strangers is vital. This trust ensures a safe and comfortable ride for both passenger and driver. Uber has developed a rating system to help assure this trust and reliability between passengers and drivers, called a rideshare ratings system. Rideshare ratings systems pose a unique challenge for Uber because of the way they are set up and the level ofrider objectivity. Uber's insistent policy of maintaining a five-star fleet can put drivers at a disadvantage. Uber rivals have similar policies; for instance, Lyft tells customers that anything less than 5 stars indicates unhappiness with the ride.

Low driver scores can mean drivers are forced to take remedial classes where they learn about safe driving techniques and driver etiquette. Those who fail to increase their scores risk suspension or permanent deactivation. Because consumers have different views of what constitutes quality, it can be argued that Uber drivers are placed at the mercy of the consumer's mood.

Operating on Cost Leadership

Uber uses its app to determine pricing. Once the passenger completes his or her ride with an Uber partner-driver, the person's credit card is charged automatically. Fees charged for speeds more than 11 miles per hour are charged by the distance traveled. Uber operates on a cost leadership basis, claiming that it offers lower rates than taxis. However, the app OpenStreetCab suggests that Uber might be more cost-efficient only when the fare is more than $35.

Uber uses an algorithm to estimate fees charged when demand is high. Called surge pricing, Uber has even applied for a patent for this type of system. This "peak pricing" strategy is not too different than when utilities or flights charge higher prices when demand is high. Passengers are alerted during times when the price is higher. However, the extent of the pricing increase has been questioned as some consumers believe Uber uses this high demand to "price gouge" passengers.

Spreading Awareness and Creating Buzz

Uber has engaged in a number of promotional activities to make its brand known. Often it adopts buzz marketing strategies to draw attention to its services. For instance, to celebrate National Ice Cream Month one year, Uber launched on-demand ice cream trucks in seven major cities. In one promotion Uber partnered with General Electric to offer free DeLorean rides to San Francisco users reminiscent of the movieBack to the Future. Uber also uses promotion to portray its benefits compared to its rivals. For instance, Uber assumed a combative advertising approach to its major rival Lyft through a Facebook ad campaign. Uber advertising often stresses the convenience and low cost of its ridesharing services.

More recently, Uber has come under criticism for an aggressiveand some say toxiccorporate culture. Some prominent executives at Uber have left the firm, claiming that the corporate culture conflicted with their values. Former CEO Travis Kalanick was well-known for his aggressive strategies, and according to critics, this behavior trickled down to employees. Uber is now trying to build a new culture with its CEO Dara Khosrowshahi while attempting to clean up its public image.

What's Around the Next Turn

Uber's business model can be found in similar rides-for-hire services, such as Lyft and the Indian ride-sharing service Ola. More rides-for-hires could emerge, in addition to the everyday competition from taxi cabs, limos, rental car businesses, air travel, trains, and city and chartered buses. Switching costs for customers are low, and because ride-sharing companies do not own their own fleets, costs of operating are much less than in other industries. This means that Uber must remain competitive if it wants to keep its customers loyal. Lyft is probably Uber's biggest competitor in the United States with 20 percent market share. Its smaller size makes it easier for Lyft to subsidize drivers and to lower fares. Expanding into the autonomous car industry has also placed Uber in competition with Google, Tesla, and major automobile manufacturers that are also trying to enter the industry. The company temporarily halted road-testing of its autonomous vehicles in Phoenix, Pittsburgh, San Francisco, and Toronto after a pedestrian was struck and killed in Tempe.

Despite Uber's challenges, the company has become widely popular among consumers and independent contractors. Supporters claim that Uber is revolutionizing the transportation service industry. Investors clearly believe Uber is going to be strong in the market in the long run. One lesson that Uber will hopefully take to heart is the need to ensure that independent contractors using its app obey relevant country laws. Uber has to address these issues to uphold the trust of its customers and achieve long-term market success in different countries.

Questions for Discussion

1. What are the ethical challenges that Uber faces in using app-based peer-to-peer sharing technology?
2. Describe Uber's core market. Why is Uber targeting these groups in particular?
3. Why would consumers question Uber's pricing strategy?