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Business Model of Uber | How Uber earns Money? | Dhruv Rathee - YouTube
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Hello, friends!
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Today, getting taxis from Uber or Ola has become very common for us.
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Come, let's understand this in today's video.
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"The story of Uber is littered with scandals and controversy,
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at every single turn."
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"This is more global,
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It's diversified.
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By sharing scooters, Uber Green, air taxis,
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And even its own autonomous driving technology.
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I mean, look at Uber, you're really betting on the future of transportation."
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For those who don't know much about Uber,
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they think that
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you call a taxi on the Uber app on your smartphone,
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and the taxi just comes to pick you up.
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They think that the company Uber must have sent the taxi.
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But it isn't so.
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Uber doesn't own taxis.
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Uber is merely a technology company,
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and a smartphone app,
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and it works by matching drivers and riders.
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The people who are willing to use their cars as taxis,
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and the people who wish to use taxis, riders.
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This app works by getting them together.
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Using normal taxis is much easier than this.
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You go out, hail a cab,
without needing any apps for that.
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Uber's role is prominent where taxis aren't easily available.
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If you don't have taxis around you,
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then you can call the taxi to your home through the smartphone.
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With one app.
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Before this, you had to call people.
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The phone number of the taxis varied among different cities and countries.
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This one app simplified these.
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Additionally, it even gave some new people the opportunity to become taxi drivers.
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If someone wanted to earn more money by working part-time,
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they can use their personal car as a taxi.
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This opportunity wasn't available before Uber.
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Normally, to become a taxi driver,
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one had to get many licences and permissions,
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depending upon the city and country you were in.
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Often, the car had to be registered in the commercial register.
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And one had to get a commercial license plate too.
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All the hassles related to it have now ended.
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And the extra costs involved in these formalities,
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have now been reduced.
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And because of this reduced cost,
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Uber could offer their taxi service at a lower price.
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Generally, in normal taxis, the fare is calculated by checking the meter,
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but Uber has its algorithm to tell us
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what would be the cost of the taxi ride.
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And this is was quite innovative at its time.
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Their calculations are somewhat like this.
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First is their base fare,
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depending upon the car you're choosing in Uber,
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there's Uber X, Uber XL, Uber Black,
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add to that, cost per minute multiplied by time,
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and cost per kilometre multiplied by time,
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the cost per minute and the cost per kilometre,
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is different for each location, as decided by Uber,
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because the cost of things differ from one country to another and one city to another,
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and then the sum of the three is multiplied by the Surge Multiplier.
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The cost that you arrive at by adding the three parts,
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will be multiplied by the Surge Multiplier.
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After that comes the booking fees and administration fees.
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This is charged by Uber for itself.
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to pass on the cost to Uber to the end-user.
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The concept of the surge multiplier and surge pricing is truly groundbreaking.
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The thing is,
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when Uber started out,
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they saw that there are some places that have many available drivers,
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but at some places,
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there are many riders, but there's a lack of drivers.
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They wanted a solution to balance this.
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If there are more drivers at one location
and more riders at another,
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the riders wouldn't get a driver,
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and the drivers wouldn't get riders.
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They wanted to match the too.
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They decided to do this with surge pricing.
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They divided the map into hexagons.
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and in each hexagon, they would check
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for areas that have more riders
and the area with more drivers.
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In the hexagon where there are more riders than drivers,
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they would apply the surge multiplier in the price.
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Suppose this multiplier is 3x,
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then the price of the taxi ride would increase to three times.
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Thrice the price is quite high for the rider,
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but it is a motivation for the driver
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because they see the demand in the area,
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and think that giving a ride there would earn them thrice the price.
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That's why the drivers would go to that area,
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that has more riders.
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So that the demand could be met.
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And the riders have the option too.
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If the riders want, they can pay a higher price and get Uber instantly.
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Or they can wait 10 minutes to half an hour,
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till the time more drivers reach the area,
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and the surge multiplier is reduced automatically,
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when the numbers of riders and drivers are balanced out.
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How does this thing look realistically?
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The hexagon shapes I told you about,
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for the drivers, they appear in shades of yellow, orange, and red.
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The areas that are bright red,
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have a higher surge,
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and a higher surge multiplier,
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so the drivers would get more money.
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Overall, this is the way the cost of an Uber ride is calculated.
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Of the final cost,
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20%-25% of it is taken by Uber
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and the rest is paid to the driver.
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Recently, there have been controversies about this basic calculation.
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It was been said that
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Uber has come up with their own route-based pricing.
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That the roads and routes people travel by frequently,
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Uber increases the cost there
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so that the company can earn more.
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While ignoring this basic calculation.
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Some people had even accused them
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that Uber checks the phone's battery of the users.
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That it checks the battery level.
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If the user's phone has a low battery,
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they increase the price for the user.
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Because people are more desperate when their phones are running on low battery,
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to get a taxi as soon as possible.
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So they are willing to pay more.
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"It claims that rideshare services like Uber,
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raise their prices,
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relative to your battery level.
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Well, since this tweet,
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a few articles have popped up.
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They reinforce the idea that Uber actually changes the cost of the trip
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based on your phone's battery."
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Although Uber has denied this.
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They have said that they don't do this.
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But if we return to our overall model,
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this model proved very successful for Uber.
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Uber expanded their model in many countries.
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But what about the countries where most people don't own their own cars?
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People can't afford to drive cars.
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There would be a scarcity of drivers in those countries.
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What could be done in such countries?
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For such countries, Uber decided that
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they have to give cars to people someway or the other.
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They can either give loans to people
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with which they'll buy cars themselves.
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Or, they could give them cars on a lease.
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They could rent them.
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With this, Uber started their program Uber Xchange.
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Under the Uber Xchange program, if you don't own a car,
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and you want to become a driver for Uber,
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then you can lease a car from Uber.
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And you'd have to pay a weekly rent to Uber.
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You can use their cars to earn,
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And hopefully, you'll earn so much,
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that you can pay off the rent
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and you have some profits left with you.
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Unfortunately for Uber, this program wasn't very successful.
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They stopped this program in 2018.
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Because it was getting troublesome for Uber to manage so many resources.
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Uber was simply a technology company,
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just an app.
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Uber didn't own their cars.
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But for the Uber Xchange program,
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they had to own the cars.
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They had to buy the cars and keep them,
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so that they could be leased.
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This was troublesome for them.
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And it cost a lot too.
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They weren't able to manage it properly.
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That's why they decided to stop it,
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and, being a technology company, to focus solely on the app.
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To grow their business model through it.
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But the problem didn't end.
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So for the new solution, Uber adopted a new program.
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The Fleet Model.
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Uber thought that many people have multiple cars.
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There are companies that own several cars.
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Especially car rental companies.
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In such cases, their cars aren't in use at all times.
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Just imagine if a person has 3 or 4 cars,
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most of the time the cars are parked without being used.
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These people and companies that own multiple idle cars,
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are called Fleet Owners by Uber.
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Because they have a fleet of cars.
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They decided to connect the fleet owners with the drivers.
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So that the drivers can use their idle cars,
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to earn for themselves.
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The fleet owners would basically rent out their cars to the drivers.
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So that, once again, Uber could become the platform
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through which the drivers and fleet owners could connect with each other.
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This is how the Uber Marketplace began.
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The fleet owners,
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could rent their cars to the drivers.
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To the drivers who don't have their own cars.
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The fleet model could work in two ways.
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First is where the fleet owners rent out their cars to the drivers.
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And each week the driver has to pay rent to the fleet owners.
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And the Uber earnings goes to the driver.
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The second model is when
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the fleet owners hire their own drivers.
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The fleet owners could hire some drivers on a monthly salary,
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and the earnings from Uber,
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is kept by the fleet owners for themselves.
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Both these models are very common in India.
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For Uber India, the largest fleet owner in India is a company called Everest Fleet.
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They have thousands of cars
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that they lease out to the Uber drivers.
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Do you know what the most interesting thing is?
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I hope you've understood what I have explained till now,
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and let's think a step further now.
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What would happen when these fleet owners,
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don't buy their own cars,
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instead, they ask the common people to invest in them for buying cars
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or the fleet owners get the fleet on lease,
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and give them to the drivers on a sub-lease?
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Do you get what I'm trying to say?
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Suppose you need to buy a car,
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and it costs ₹600,000.
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But you don't have ₹600k to buy the car,
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so you get your 9 friends together,
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you and each of your friends invest ₹60k to buy this ₹600k car together.
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And then you use the car to become an Uber driver and to earn through Uber.
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And because 9 of your friends helped you to buy the car,
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you pay them the rent for each week.
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The pre-defined rent.
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You say that you will pay this rent weekly for 3 years.
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This is known as Fractional Investing.
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Normally, when you invest in a large asset,
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suppose you buy a home,
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you buy that home on your own.
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But if 10 friends come together to invest in a property,
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in the same property, the same house,
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it is known as Factional Investing.
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Once can get fractional investment in properties as well as in assets.
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Like the example of the cars.
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Imagine this on a large scale.
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Grip Invest is the largest alternative investment platform in India.
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Through Grip Invest, you can invest money in these physical assets as well.
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Such as cars and furniture.
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These cars and furniture are then leased out
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to these large companies.
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Grip Invest has partnered with Everest Fleet as well.
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It is an interesting concept.
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The benefit of this type of investment is that you don't need a lot of money.
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You can start investing with an amount as low as ₹10,000.
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And you can get a return of up to 2.5 times that of Fixed Deposits.
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By now, Grip Invest has raised more than ₹2 billion,
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and have more than 75 leasing partners.
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And they have returned more than ₹400 million to their investors.
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And they have made zero defaults in their payments.
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If you think this is an interesting idea,
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go and read up on fractional investing.
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Do your own research,
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and when you've understood this better and the risks associated with it,
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you can go ahead and click on the link given in the description.
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You will get a cashback of ₹2,000 on your first investment through Grip Invest.
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Here, I'd like to thank Grip Invest for sponsoring this video.
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Now, let's get back to the topic.
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To summarise this,
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Uber's Business Model is something like this.
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Where people own their own cars,
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there, Uber is a platform or an app that connects drivers with riders.
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But in countries where most people don't own cars,
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there, Uber is a platform
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that connects fleet owners with drivers.
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These fleet owners could be individuals
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As I told you in the beginning, there used to be taxis then.
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If someone wanted to become a taxi driver,
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they had to undergo many commercial registrations
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get commercial licence plates,
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a special driving licence was needed,
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the taxi drivers had to get regular checks too,
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there was a lot of bureaucracy,
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and it used to cost a lot.
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The biggest advantage that Uber had was that
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when people started using their own cars as taxis,
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they didn't need to go through all this bureaucracy.
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They didn't need to get commercial registrations,
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they didn't need a special driving licence,
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so all the expenses towards it disappeared.
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Because of this, Uber could keep its prices low.
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The cost of a taxi ride was reduced by Uber
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compared to that of a normal taxi.
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And the Uber driver could earn more money,
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that compared to a normal taxi driver.
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Initially, that is.
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But just think about it.
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If normal people could use their personal cars as a taxi,
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through Uber,
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and they don't need any commercial registration,
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no need for a special driving licence,
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but the actual taxi drivers
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have to get these.
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They have to incur more expenses.
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So isn't this a loophole in the system?
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Due to this reason, people filed cases against Uber.
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was bypassing all these rules and laws.
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In some countries, obviously.
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Because the laws applicable differ from country to country.
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In many countries, there were court cases against Uber because of this.
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In 2010, when the San Francisco City Authority filed a case against Uber
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claiming that they are running their taxi services illegally.
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At the time, the name of the company was UberCabs.
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In response to the case, Uber said that
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they aren't operating taxi services.
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They decided to change the name of their company.
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They removed the 'Cabs' from UberCabs,
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and the name of the company became Uber.
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They claimed that they are simply a technology company.
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That they aren't a transport company and don't deal with taxis.
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They simply provide an online platform.
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This argument worked in many countries.
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Courts in several countries stated that their argument made sense.
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That Uber was right, and they should be allowed to function as they were.
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But in many countries
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this argument didn't sit well.
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The courts in several countries stated that
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Uber isn't a technology company,
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instead, Uber is a transport company.
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In 2017, the top court of the European Union passed the judgement that
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Uber is actually a transport company.
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They left it up to the individual countries how they decide to deal with it.
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Let's look at some examples.
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In Bulgaria,
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if someone wanted to drive a taxi,
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they needed a professional driver's licence,
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needed to undergo registration,
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and they needed an operating licence.
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When there were court cases against Uber,
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requesting that Uber be held to the same standards
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Uber saw that it would be too expensive,
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and the costs couldn't be kept low.
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Uber then exited Bulgaria.
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Uber said that they wouldn't provide their services in Bulgaria.
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In April 2017, in Denmark,
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the authorities said that the normal taxis have meters in them.
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And if Uber wanted to run their taxis too,
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they would have to work with the meter.
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And it is the government that decided the fare by the meter.
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Now, Uber couldn't determine the fare on their own.
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Uber couldn't work with these restrictions,
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so Uber exited Denmark.
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The same thing happened to Uber in Germany as well.
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Uber was asked that if a driver got into an accident while driving,
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who would bear the ensuing expenses?
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Normally, if an employee of the company gets into an accident,
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the company keeps its employees insured.
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But in this case, the workers were working as independent contractors.
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The poor drivers that were working to increase their earnings somewhat,
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would have to bear the expenses of any accident they get into.
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It's very unfair.
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In response to this, at some places, Uber has started to
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employ the drivers
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giving them insurance, a good salary,
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and are getting them the correct licence.
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As a taxi driver normally gets.
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And then they operate their services.
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Talking about India,
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Uber had to face a lot of legal challenges.
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After a 2014 rape case in a car operated by Uber,
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the government banned Uber.
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Saying that Uber can neither ensure the safety of the passengers
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nor can it protect the drivers properly.
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This ban was overturned in the High Court one year later.
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But the authorities remained wary of Uber.
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The Uber drivers work 12-13 hours a day often.
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They are overworked and aren't provided proper insurance,
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and they aren't even treated as proper employees.
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That's why the government has enforced new rules recently,
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for services like Uber and Ola.
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Uber is ordered to provide insurance cover for all their drivers.
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They can't increase their surge pricing by more than 1.5x.
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And the cut that they take, cannot be more than 20%.
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So that 80% of all earnings go to the driver.
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Additionally, no driver could be worked for more than 12 hours.
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Friends, this was the Business Model Uber employs worldwide.
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There can be 2 ways to see this.
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On one hand, people can say that,
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Uber is a company that brought major disruption to the technology
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and the existing system,
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making it more convenient and cheaper for people to get taxi rides,
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and the existing taxi system,
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Uber brought a much needed revolution to that.
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But on the other hand, it can also be seen as
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a company that
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used unfair business practices
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found loopholes in the existing system
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and by openly and illegally breaking the rules,
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this company grew.
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And it caused a major disruption.
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What do you think?
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Comment below to let me know.
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And if you liked this video,
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let me know the other business model breakdowns that you want to see next.
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Let's meet in the next video.
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Thank you very much!
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