Uber is the leading online transportation network that has its headquarters in San Francisco. The car hailing company was reported to have at least $1.27 billion loss in the first quarter of 2016; however, the company makes more capital despite its losses.
The ride sharing giant raised $3.5 billion from the Public Investment Fund of Saudi Arabia, and within a few weeks the company received $2 billion, thus making the overall funding to $15 billion. This unexpected funding was received from the leveraged loan market which has made the tech company as the most valuable ventured company in the private sector.
Utilization of the funding capital
Everyone in the industry wonders what the transportation network does with the overflowing capital and the answer is that the company is able to outstand all the challenges and still lead the market.
International expansion
To attract more riders and make the service universal, the company is spending some billions on rider’s subsidies, marketing, driver payouts and other things, while it focuses on building its global extension by competing with other competitors in the industry. Apart from the local rival, Lyft that has $5.5 valuation, the car hailing company has many other rivals in many countries like Ola in India, Didi Chuxing in China, which has raised $7 billion that includes the $1 billion investment from Apple and is valued at $25 billion. There are even other rivals in other countries like Careem, the North Africa and Middle East based car hailing service and Singapore based ridesharing service called Grab. The company has to spend a fair amount in the market to succeed these rivals and lead the transportation network.
Covering Asian market
India and China has world’s largest population, and these are the two countries that have the largest user base which attracts many companies to operate their business in these countries. Uber focuses on the Chinese market to increase its rider base, but faces competition issues with the local rival, Didi Chuxing. Both the car hailing companies are racing up in the country with more revenue, but the American ridesharing company has lost a lot of capital to obtain less market share. The Chinese ridesharing company has also faced economic loss in the first quarter – last year. The company has two individual entities in the country, Kuaidi Dache and Didi Dache that reportedly had operating losses of $266 million and $305 million respectively. In the People’s Republic the car hailing company losses $1 billion in a year.
The CEO of Uber, Travis Kalanick touts that the company was able to accumulate four hundred and seventy nine times in the number of trips in Chengdu within nine months of its service and is similar to that of the service in New York and said that the company accounts within 30% to 35% in the Chinese market. In the private car sharing market in China, Uber claims to have 16% of the market, while Didi claims to hold 83% of the market.
To please the riders and drivers
The car hailing company has to spend more money to attract more drivers as well as riders in the market to make use of the service and they have to subsidize the rides and charge services at lower cost, so that they can expand their service internationally. This has attracted many drivers to be a part of the service and thereby earn more money by taking trips, but in reality gets only minimum wages. The company tries to follow new rules that will please the drivers and make them stay in the company, one such rule is that, the ride that makes the driver wait for a long time will be charged. However, the drivers will still remain as independent contractors and cannot enjoy the benefits of the employees like the retirement plan or medicare insurance.
The online transportation network spent a $100 million on the settlement action that misclassifies them as independent contractors, but the fragility that lies in the economy was highlighted.
Uber’s Business model
The commission percentage taken by the car hailing company is a secret and it varies depending on the competitive pressure, city and other factors. For example, if the customer pays twenty dollars for the Uber ride, the ridesharing company collects 20% to 30% of the price or sometimes it collects four to six dollars and the rest is given to the drivers. While other on demand companies collect a different percentage of price depending on the market value.
But Uber is the only company in the market that collects the highest percentage of money from its drivers in this sharing economy. But those companies collect money from the transaction process, while Uber provides credit card payment process, mapping software, takes insurance and helps with other problems.
Unlike Amazon and Airbnb, Uber is the only company that collects double the percentage of commission. On an average, the private rental company collects nine percent to fifteen percent for a reservation, Grubhub – the dining marketplace collects three to twenty dollars for a takeout, eBay collects eight percent for twenty dollars worth product and the hotel booking platform, Priceline’s Booking.com collects eleven cents for each dollar from the booking platform.
Along with the increase in the losses faced by the company, its revenue and valuation had a steady increase in the market. Sometimes the drivers sue or complain about the company, but these issues disappear within a few days and there is always a tension between the merchants and the marketplace that depend on them. Even smaller competitors like the Fasten in Boston and Juno in New York are exploiting the drivers by the commission percentage collected by the company. Unlike the merchants in the eBay marketplace, the drivers cannot pressurize the ridesharing company to reduce its commission rate.
Car hailing giant makes more capital
The online transportation company is the leading market giant and was founded in 2009 by Garrett Camp and Travis Kalanick. It has its service in 507 cities in 66 countries around the world with 6700 employees across the world. Despite its loss in the first quarter of the year, the company was able to raise an overall fund of $15 billion by including the 2 billion fund received from the leverage loan market. According to the July reports, the online ride sharing company values $69 billion and according to the current market status, the company need not worry about commission rates and other losses. There are many investors in the market who are ready to invest in the company because of its popularity and large driver and rider base in many countries.
But the company must be aware of the fact that anything can happen in the tech industry, so they have to be prepared for any challenges in the industry regarding the subsidies, driver payments and commission rates. Because the higher rack will lead to increase in the flow of revenue in the company, but eventually red flags the strategic situation. The others in the market might exploit the pricing fashion in the ecosystem, like the other market giants who follow a disruptive business model.
This is a guest post by Anand Rajendran who is the co-founder and CEO of Zoplay, a Software Development company which has launched Cabily Script which is a Uber Clone with Android and iOS apps. He is also a passionate blogger and an SEO Specialist.
——————————————————————————————————————————————Disclaimer: The views, opinions and positions expressed within this guest post are those of the author alone and do not represent those of Third Party Formations Limited T/A The Hacker Street Media. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.——————————————————————————————————————————————
Anand Rajendran
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