Uber, a cab company valued at $51 Billion without even owning a single cab has raised many eyebrows. The business model of Uber has created what is called the ripple effect in the on demand economy. The widespread term ‘Uber for X’ says it all. But, “What led to the massive success of Uber?” is a question that many of you would be interested to get an answer to. Some researchers in the USA, has dug deep into Uber’s Business Model and researched their strategies to answer this million dollar (or maybe a billion dollar) question for you.

The question: What led to Uber’s Success; was answered with the help of Alex Osterwalder’s Business Model Canvas. To be precise in the answer and for a better explanation, the Uber Business Model canvas has been divided into two parts.

The First part: Product, and the Second Part: Market

Let us start with the second part of the business model canvas (the market); this series on Uber Business Model and their success secrets, talks about the market side of Uber’s Lean Business Model.

While you may think that the product and the market for which it has been built both have an equal impact on the success of a startup, but I will assert that market is more important than the product. Any market that needs to be fulfilled will be fulfilled by the first viable product that comes along. The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.

When a great team meets a lousy market, market wins.

When a lousy team meets a great market, market wins.

When a great team meets a great market, something special happens.

By now, you’ll be able to make out that in the case of Uber, it was a great team that met a great market.

You can obviously mess up a great market (and that has been done, not infrequently), but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. so, the market matters the most. The cab industry chosen by Uber actually wanted something of this sort which can be termed as their first factor to success.

Let’s move beyond the first factor of Uber’s success and dig deeper into the Uber business model canvas to understand the other factors.

Customer segments – Who are we creating value for: for a startup to be as successful as Uber, the main question an entrepreneur should ask himself is “Who am I creating value for?” This would define your customer segments. Let’s turn this question towards Uber and understand if their initial product was a perfect fit for the market or not.

Who does Uber create value for? Let’s start answering this through Uber’s company vision which says:

‘Transportation to be as reliable as running water for everyone, in every city in the world.’

It becomes clear that Uber creates value for anyone who wants to go from Point A to Point B within a city. But the use cases have evolved over time. When Uber started, their initial target customer segment were wealthy young people being catered through what goes by the name of Uber Black today. At this point, Uber is becoming a verb in many cities, clearly signifying that it has slowly expanded its offering by providing value to a larger set of people.

Uber’s customer segments: I want a ride; I want a luxury ride – Choosing Uber Black, a high end luxury sedan or SUV comes to the curbside. I am willing to pay a lot more to get a ride now. The dynamic pricing concept is meant to cater this target audience. Balancing demand and supply ensures that there is always an option after that Friday night concert or a huge sports event to go back to your place.

I want a cost effective ride – Great thing with Uber’s network effects – more demand, more supply is the ability to reduce the time their driver partner’s spend on the road. Thus economics 101 tells us that Uber can offer some of this increased efficiency to the end customers in the form of reduced costs. In many cities, UberX (a lower price Uber variant with hybrid and mid-range cars) is available at rates 30% lower than the regular taxi rates.

I want to share the ride to reduce cost – UberPool allows you to share the ride. Again this value is enabled through network effects as more the probability of finding a match on your designated route with another customer, easier it becomes for the platform to offer the carpooling option.

I want to travel with a group – Uber offers a range of options like UberXL that helps you hail SUV’s and minivans to your place.

Over the last four years, in addition to expanding its value for different sets of customers it has also been expanding its coverage area to create a network that now spans over 311 countries across 63 countries.

It would perfectly fall in line if we say that creating value for a large audience with different services and different price range has been the second biggest success factor for Uber.

Uber Drivers/Uber Partners: Being a two sided marketplace, the value that Uber brings to its driver partners has been an equally important variable that has led to Uber creating a biggest taxi network without owning a single taxi. Here’s how the partner network evolved:

Jan 2013 – fewer than 1,000 partner drivers.

Jan 2014 – More than 6,000 partner drivers.

June 2014 – Over 19,000 partner drivers.

Nov 2014 – Near to 32,000 partner drivers.

December 2014 – Over 40,000 partner drivers.

The big question over here is, “How did Uber manage to get so many new drivers signed up on its platform?” For any marketplace model, the supply has to meet the demand and vice versa. Let’s put some light on Uber drivers/partners.

Broadly, these new driver partners joining Uber fall into two categories:

Existing drivers of other taxi companies and regular people with a car willing to drive for extra income.

Before we talk about specific value proposition for these two sets, the retention rates of 70% among the new drivers that join every month put a lot of things in context. Another aspect worth noting is that 50% of those surveyed as a part of the same survey were riding for less than 15 hours a week. These stats give us the third major factor for the success of Uber and define its business model as one of the best in the on demand economy.

What is the value Uber is creating that keeps bringing these two set of customers together one city after another?

For the customers, Uber provides an alternative to the dysfunctional transportation system in many cities.

A quick comparison of the earlier way of hailing taxis and ‘Ubering’ rides gives insights into the value proposition for the customers. Rather than attacking any specific step in the transaction flow, Uber attempted to take a more holistic view by providing an alternative transaction flow.

Search (exclusive ride at an affordable price)

Book (On Demand availability at the doorstep)

Pay (cashless drive)

Review (in-built feedback loops).

This article will continue next week as we discuss further the subject in question. Send me an SMS/WhatsApp message or Call for more details and training opportunities.

•Lawrence Nwaodu is a small business expert and enterprise consultant, trained in the United Kingdom and the Netherlands, with an MBA in Entrepreneurship from The Management School, University of Liverpool, United Kingdom, and MSc in Finance and Financial Management Services from Rotterdam School of Management, Erasmus University Netherlands. Mr. Nwaodu is the Lead Consultant at IDEAS Exchange Consulting, Lagos. He can be reached via nwaodu.lawrence@hotmail.co.uk (07066375847).

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