Uber’s Business Model: A Look At A Successful On-demand Taxi App
The rise of the on-demand business model has served as a catalyst for entrepreneurs and investors to study the inner-workings of successful companies – the Uber business model is considered to be one of the most intriguing because of the successes the company has enjoyed over the last 10-plus years. From a high-level perspective, it seems like the perfect idea to borrow from or emulate for your own business.
Like everything else in life, a bird’s eye view is a lot different from an up-close perspective – Uber might seem like a relatively simple idea but the reality is that it’s quite complex under the hood. Let’s take a look at the Uber business model from what it took to get Uber off the ground to how the company remains competitive in the rideshare industry.
The early days of Uber
If you want to read up on the milestones that allowed Uber to evolve into what they are today, you can visit the Uber site for a brief digital storybook on their history. To summarize how the Uber business model came to be, co-founders Travis Kalanick and Garrett Camp came up with the idea in 2008 while waiting for a ride in Paris – the app was built over the next few years until the first official ride was taken in San Francisco in 2010 while the company was still known as UberCab.
The founders were in a unique but not uncommon position as both had previously founded successful companies which they would sell and acquire seed money to start what would become Uber. In 2007 Kalanick sold his company, Red Swoosh, for $19 million to Akamai Technologies, and Camp sold StumbleUpon for $75 million to eBay. This gave the co-founders a starting point to begin developing the product as well as established a financial record to attract potential investors.
With some money in the bank, they were able to move forward and raise additional money by running several rounds of funding. This funding enabled Uber to market to its early target areas, meaning major metropolitan locations in the US.
Attracting users meant gaining the attention of both potential riders and drivers – in this sense, it’s a lot like Airbnb. Without drivers to deliver the service, Uber wouldn’t be very useful!
The company’s initial directives involved first establishing themselves into the most population-dense areas in the US, later launching their service in Chicago then New York in 2011 before going international in 2012 by spanning into Toronto then London. During this time and into the future, the company would continue to raise capital through rounds of funding which was used to develop the app as well as attract users for both sides of the marketplace.
Geographically focusing these initiatives were a huge contributor to the initial success of the company as focusing too much on national growth would have detracted from the ability to build a well-balanced, two-sided marketplace. This in and of itself could be discussed at great length but to summarize, it’s like dousing a giant pancake with syrup: the first bites are always great but the portions you eat toward the end are often soggy and tepid. The saturated parts that sit unattended until you get to them are arguably not as good as the first few bites – similarly, the same thing happens to many (namely, smaller) locales if you try to market to too large an area.
Eat your breakfast as you please but if you’re building an app, it’s crucial that each bite is perfectly balanced, meaning you need to be more deliberate with how much, where, and when you garnish.
Gaining momentum as the first digital on-demand taxi service
You know you’re doing something right when you begin to see imitations surface – the first major competitor, Lyft, would launch their service in San Francisco in 2012. Uber would slowly grow due to organic growth and funding until late in 2013 when funding from sources like Google Ventures (GV) helped push the company into the billion-dollar mesosphere.
Though having substantial funding, it wasn’t until late 2016 when the company would truly begin to see a major upswing in business. In Q4 of 2016, Uber reported bookings were up over 28%, allowing the yearly revenue to exceed $2.9 billion.
By then, Uber had exited China where they were losing money. It was around this time the general public had accepted Uber as a viable alternative to traditional taxi services and Uber became a household name. In 2017, Uber released its earnings to Bloomberg which leveraged the company’s financial powers to investors, resulting in a much-watched IPO when the company went public that year.
Uber would stagger a bit in 2017 but would eventually find its ground as a publicly-traded entity. Today, the company is estimated to be worth around $120 billion.
Building Uber: the frontend
The Uber app is a true example of an on-demand two-sided marketplace. The customer side of the app allows users to hail a ride from almost anywhere in the world that Uber is active – rides are fielded on the driver side using geolocation that allows the driver to find the rider then deliver them to a requested location.
The most noticeable feature on either side of the app is the map (and geolocation functions) which serve as the backbone for the marketplace. To build the app, developers had to build a two-sided marketplace revolving around the map feature which got its start by piggybacking off Google Maps until eventually switching to MapBox. The rider location is processed by the app which allows drivers in the area to locate and “pick up” the ride request by “activating” the ride – at this point, the service commences, the rider is picked up, then delivered to a location the rider requested in the app.
The other main function of Uber is the actual marketplace on the backend that links drivers and riders as well as handles payment processing. Drivers function as independent contractors (which has led to some issues over the years) so they’re not on a standard payroll. Too, this segues into another interesting challenge which is the background checking of drivers. Thankfully, services like Checkr and their incredible API automate this process which is what we used when building the Hyer app.
Ride costs are calculated as an estimate before the ride begins which is based on distance and the type of vehicle selected by the rider. The larger (or more luxurious) the vehicle, the higher the fare premium. This transparent pricing model lets both the driver and the rider know what to expect before the ride is initiated, unlike a traditional cab. Too, pricing can be affected by “surge pricing” when the demand for drivers skyrockets, usually because of large events, but it’s always conveyed to the rider before the ride is initiated. In the end, drivers collect 75% of the fare (meaning Uber keeps 25% of every ride) as well as any tip offered by the rider.
Riders simply need to select the “type” of vehicle they require, input the drop off location, and select a stored payment method. Payment is handled by Braintree for regular credit and debit processing or PayPal can be used as well so there’s virtually no chance a driver could ever see a rider’s payment information.
Uber business model: the backend
All payment processing is hidden by the frontend of the platform so drivers can’t interact, manipulate, or even see any details of the payment aside from the fare they collect. All financials are securely stored and masked by the payment processing platform. We always suggest using a similar model, but we favor Stipe Connect for new on-demand marketplaces as it makes the type of “service-fee middle-man business model” super simple to set up.
With any app, there is the occasional hiccup that can stem from a myriad of different places such as operational error from the rider or driver, device hiccups, problems with the map service, among others. Because the app relies on data transfer real-time for the service to function, representatives and developers are available 24/7 to handle respective customer service and technical issues.
Uber doesn’t require major channels for communication so they’re able to operate by relying on the app as the main tool to directly interact with the company (if needed.) The idea is that people simply need to make sure their device is properly configured (i.e. location sharing is active while the app is open) and a form of payment is included. When everything is in place, the service is far more automatic, reducing the number of times calls (or messaging) needs to occur between drivers and riders. In the event a driver does need to call a rider, their number is masked (well, altered) to keep the driver’s personal device which is done through services such as Twilio via their Programmable Messaging feature.
Of course, there are times a ride is canceled on either end and a refund is due. By design, the Uber business model allows these disputes from within the app which saves on labor costs.
When everything is functioning properly, the app runs itself with minimal human intervention. The most a registered driver needs to do is confirm a ride from their end of the app while a user simply needs to confirm pickup location (in the event the GPS isn’t 100% accurate) and the drop off location.
When building an app like Uber, all of these technologies need to come together harmoniously – the convenience of Uber is what has allowed it to essentially kill off antiquated cab companies in many areas where you can’t simply flag down a cab already on the road. Being able to summon an inexpensive ride or earn money as a driver with a few taps is the selling point of these apps. It’s what users have come to expect from this on-demand two-sided marketplace – anything less simply won’t work.
Blue Label Labs builds sophisticated on-demand two-sided marketplaces
The Uber business model and ultimately, the design of the app, is what led this company into the billion-dollar realm. The idea seems simple on paper but the reality is that it relies on many moving parts to function properly in real-time. While building a billion dollar business is an exercise that goes way beyond the quality of an app and that technicals that underpin, much of the functionality that Uber uses: such as background checking and seamless marketplace payments are easy to integrate and do not require huge investments in proprietary technology. At Blue Label Labs, we’ve built numerous on-demand marketplaces, from HelloSitter to Hyer, and we understand much of what needs to go into a successful on-demand product, from the technical, product and business side. Get in touch with Blue Label Labs to learn more about our process of building on-demand two-sided marketplaces.