Overview of Uber and Revenue Management
In core terms, Revenue management is a practice of changing the price up or down so that to maximise the revenue (Jerath, Netessine and Veeraraghavan, 2010). This practice was common in air travel and lodging industry but now it also starts expanding in other industries such as transportation and retail. On the other hand, yield management is also a variable pricing strategy based on anticipating and influencing consumer behaviour.
Uber is an App-Powered on-demand car service provider for smartphones. In 2009, Uber came into the market by introducing their applications both for android and Ios. The company is at different stages in their approach to revenue management.
More than 785 metropolitan areas were served by these taxi drivers of Uber (Brazil and Kirk, 2016). Some of the significant services and products deliver by company and taxi drivers are – Uber Moto, Pool, X, and Go. In Uber, there are 16000 plus employees working all over the globe. The company belongs to transportation and commerce (delivery) industry.
The company earn a revenue of US$ 6.5 billion in the year 2016 and their total assests are nearly approx. of US$ 15.3 billion.
Uber increases their rates for high-demand phases, stating on their site, “Our mission is to be as reliable as possible in linking customer with a driver whenever they need one” (Cramer and Krueger, 2016). When there is high demand, the numbers of drivers company connect become limited. This results in rise in prices so as to encourage more drivers to become available. This shows that Uber deals with highly variable demand and also have limited variable costs.
At the most basic level, the surge-pricing programme of Uber taxi driver is based on Economics 101. When demand is higher due to a holiday, severe weather, event, etc., then demand curve shifts to the right.
Source: (Woodford, 2010)
Whenever there is free market, supplier would raise their prices to imitate the rise in demand, resulting in a higher quantity and price at equilibrium (P1> P, Q1> Q). In the above graph, it is assumed that there is no change to supply, however, according to Uber, by increasing their rates during surges in demand; they can stimulate more number of drivers to hit the road. This shows and highlights a rise in supply shown in below graph,
Source: (Strbac, 2008)
So, when Uber quickly response to shifting in demand, they also provide riders with a better value. They also ensure that drivers have an acceptable number of fares to make it worth it to drive. One of the significant thing that Uber found that and that can be accepted by any organization or industry, increasing prices decreases the quantity demanded but the question is how much.
In terms of cost structure, this is one of the major concern areas for Uber. Much of the cost pressure comes from outside – drivers as partial employees (treating as semi-employees and also leads to higher costs and almost inevitable), insurance blind spot and fighting with the empire (amount spent on lobbying and legal fees will rise).
Revenue Management Business
Uber was a money loser last year and this year, the contribution margins (the profits after covering just variable costs) by city not only reveal big differences across cities but are uniformly low (King and Newcomer, 2018).
Uber emerges globally but there are several local competitors in every country managed to fend Uber (Ola in India, Didi in China and Lyft in US). Moreover, Ola has started their business in Australia also.
The relation between price and quantity demanded states Price elasticity. This means if the price is raised by $X, it can be expected that quantity demanded to reduce by Y units. If a product is price elastics such as Uber, it states that a small alteration in price has a dramatic effect on quantity demanded.
One of the major competitors of Uber i.e. Lyft is challenging the operating and revenue of Uber, although it does not has expanded globally until now (Cannon and Summers, 2014). For instance, Lyft is focusing on US for the majority of its resources and also planning to expand their business in Asian regions. Moreover in Australia, expansion of Ola affect revenue management strategies of Uber as they also increase the number of taxi drivers and vehicles so to control surge pricing.
As a multi-sided platform business, Uber will benefit from both sorts of segment i.e. customers (riders) and drivers. In customer segment, Uber revenue model and pricing strategy are divided in accordance with the various customer preference. For instance, if customer demands for an urgent ride, Uber use dynamic pricing to cater this type of targeted audience and if the customer wants to travel with a group, Uber taxi drivers offers wide range of options with differentiated pricing such as UberXL (SUV). In the same way if the customer need of cost effective ride, Uber use lower variant option with rates 30 % lower than regular taxi rates (Mahdawi, 2018).
Revenue management in hospitality had its origin with American Airlines following the Airline Deregulation Act of 1978 (Skodol, 2018). Revenue management over time became almost ubiquitous for hotels and the amount of information that they were gathering allowed them to improve their strategies and optimize their techniques. With the advancement in technology, hotels were able to forecast demand on the basis of previous year demand trends. These are same as the bigger ski portfolio organisations.
Hospitality industry must be willing to embrace revenue management to thrive because of the high infrastructure cost.
Conclusion
The role of internet and mobile application has a wide impact on traditional transportation services. In this competitive market, Uber focus on the basic needs of the targeted segment customers and give them superior services at reasonable prices. The company also know well that how to maintain their revenue management model effectively. This gives them a distinct image in the marketplace.
The company focuses on various aspects like surge pricing, trading hours, effective utilization of the capacity and the cost structure. This helps them in targeting the market effectively and earn maximum share against the competitors like Lyft, Didi and Ola
Uber is one of the most innovative companies of this generation. It can be said that it is the sharp end of the tectonic shift happening in this competitive environment. Uber can increase their revenue with their current offerings. The company and taxi drivers can use advertising tool while driving. They also need to keep track of each aspect related to costs such as financing, insurance, state fees, new brakes, tires, car washing, etc. Uber drivers can also offer snacks and beverages with in the car, as this will give them a competitive advantage over the rivals. Uber is doing well in many countries but it needs to adopt various different practices as per the different countries and markets to make a unique image in the world.
References
Brazil, N. and Kirk, D.S. (2016) Uber and metropolitan traffic fatalities in the United States. American journal of epidemiology, 184(3), pp.192-198.
Cannon, S. and Summers, L.H. (2014) How Uber and the sharing economy can win over regulators. Harvard business review, 13(10), pp.24-28.
Collins, M. (2018) Ekka fireworks are better than Riverfire [ONLINE] Available from: https://www.couriermail.com.au/news/queensland/ekka-fireworks-are-better-than-riverfire/news-story/b62881b50366c272d140eaa98ea8d022 [Accessed 18/12/2018].
Cramer, J. and Krueger, A.B. (2016) Disruptive change in the taxi business: The case of Uber. American Economic Review, 106(5), pp.177-82.
Jerath, K., Netessine, S. and Veeraraghavan, S.K. (2010) Revenue management with strategic customers: Last-minute selling and opaque selling. Management Science, 56(3), pp.430-448.
King, I. and Newcomer, E. (2018) Uber Spent $10.7 Billion in Nine Years. Does It Have Enough to Show for It? [ONLINE] Available from: https://www.bloomberg.com/news/articles/2018-03-06/uber-spent-10-7-billion-in-nine-years-does-it-have-enough-to-show-for-it [Accessed 18/12/2018].
Mahdawi, A. (2018) Is your friend getting a cheaper Uber fare than you are? [ONLINE] Available from: https://www.theguardian.com/commentisfree/2018/apr/13/uber-lyft-prices-personalized-data [Accessed 18/12/2018].
Skodol, D. (2018) The True Essence of Hotel Revenue Management [ONLINE] Available from: https://www.hotel-online.com/press_releases/release/the-true-essence-of-hotel-revenue-management [Accessed 18/12/2018].
Strbac, G. (2008) Demand side management: Benefits and challenges. Energy policy, 36(12), pp.4419-4426.
Woodford, M. (2010) Financial intermediation and macroeconomic analysis. Journal of Economic Perspectives, 24(4), pp.21-44.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
