Uber has well and truly entered the market in Australia, but how have they grown so quickly?
First, we need to understand how they operate…
Taxi Drivers are self-employed people where they lease the car and drive for a taxi company (operator). The drivers pay the taxi company a set amount so they can lease the car or an agreed percentage of the takings.
Uber Drivers operate via the Uber App, where users have to have a verified account and have a credit card linked to their account on sign-up. Uber takes 20% of the driver’s fare.
How does Uber Price Effectively?
Deloitte performed market research in August 2015 and one of their findings was that Uber on average is 20% cheaper than a Taxi. Deloitte report.
As you would expect, confidential data on cost information is difficult to come by. However, back in 2012, the Victorian State Government conducted an extensive investigation into taxi pricing and one of their recommendations was that the operator and taxi driver split should be 45/55% respectively. Victoria Govt Report
So based on the evidence from both Deloitte and the Victoria Government (albeit different timeframes) this supports the argument that Uber can afford to undercut the competition as their fixed costs appear to be lower, or maybe they are being less greedy on the profit front. Further, Uber have less Overhead costs as they not required to operate a training course for drivers, provide a security camera ($3000) and commercially priced 3rd Party Insurance ($9,500).
Uber also uses price discounts and offers to attract new customers. The use of referral credits for existing customers, credit of $20 for new joiners and promo codes, all encourage new riders to try an Uber. See Travel Mentor
Pricing strategy & elasticity
Uber have price variations that are in place during the peak hours and off-peak hours on the weekdays or during holidays or festive periods where the demands for rides are higher and thus exceed supply. During busy periods Uber drivers are limited and cannot cater for an increase in demand from riders so this becomes a price elasticity and sensitivity in pricing for riders. (Kosoff 2015). Uber calls this ‘price surging’ and offers their riders with the surge factor.
When demand exceeds supply Uber are still able to remain price competitive compared to taxis. Deloitte report
Uber can get away with higher price with minimum impact on demand, i.e. % change in charging a higher price results in smaller % change in reduced customer demand. Uber can do this as their demand is not affected due to; few good substitutes to absorb the increase in demand and the competition (i.e. taxis) are priced higher, even with surge pricing. (Iacobucci 2014).
Uber has recently tapped into consumer pricing psychology – pricing set to match the perceived value of the product or service (Macdivitt & Wilkinson 2012). When requesting a ride, customers can choose from standard UberX, or Uber black (luxury Cars; Mercedes, Audi, BMW…), where minimum fares are $8 and $25 respectively, and the price per minute and per KM are higher.
Customers will pay a higher price for the right image (social status) and the customer won’t investigate if the price accurately reflects the value (Dawson 2013). Another example would be watches, people pay $5000+ for a Rolex but a Casio watch for $20 does the same thing.
Uber has utilized many different pricing strategies. Their strongest strategy is a low cost penetration pricing strategy, undercutting the competition but still seemingly able to make a profit. Can anyone go lower?
Blogged by Thu Tran (TrThu) 214050144
Macdivitt, H & Wilkinson M (2012) Value Based Pricing. The McGraw Hill Companies.
Iacobucci, D 2014, Marketing Management (MM4), South-Western, Cengage Learning, Mason.
Dawson T 2013, Price Intelligently – How to optimise your pricing with Prestige Pricing. Available at: http://www.priceintelligently.com/blog/bid/182414/How-to-Optimize-Your-Pricing-Strategy-with-Prestige-Pricing Accessed on 27 April 2016
Deloitte Website – Economic effects of Ride Sharing in Australia. Available at: http://www2.deloitte.com/au/en/pages/economics/articles/economic-effects-ridesharing-australia-uber.html Accessed on 26 April 2016.
Kosoff M 2015. http://www.Business Insider.co.id – Stop Complaining About Uber’s Price SurgingAvailable at: http://www.businessinsider.co.id/uber-surge-pricing-on-new-years-eve-2015-10/#.VyWpk4-cHDd . Accessed on 25 April 2016.
Uber Estimate – Uber Surge Pricing. Available at: http://uberestimator.com/uber-surge-pricing Accessed on 24 April 2016
Uber – Sydney Pricing Available at: https://www.uber.com/cities/sydney/ Accessed on 24 April 2016.
Victoria Government Tax Services Commission – Taxi and Car Hire Reform. Available at: http://taxi.vic.gov.au/taxi-reform/about-taxi-and-hire-car-reforms/driver-agreement Accessed on 24 April 2016