Uber was founded in 2009, and to take a term from boxing, you can argue that it is pound for pound, the most valuable company in the world based on the revenue it has generated in such a short timespan. Last year, it raised $12 billion, which placed a $66 billion valuation on the company. However, according to Aswath Damodaran, a professor who specializes in equity valuation at NYU’s Stern School of Business, their true value is closer to $30 billion. And that disparity—roughly the value of two Twitter’s—is where this gets complicated.
What someone is willing to pay for a product doesn’t necessarily mean that’s what it is worth. People are not defined by numbers, as Uber CEO Travis Kalanick demonstrated last week in a fight with an Uber driver which he later apologized for in a note to his employees: “My job as your leader is to lead…and that starts with behaving in a way that makes us all proud. That is not what I did, and it cannot be explained away. It’s clear this video is a reflection of me—and the criticism we’ve received is a stark reminder that I must fundamentally change as a leader and grow up.”
The dispute was about the price of Uber Black, and the driver asserts that he is losing money due to all the alterations the company is making to its pricing model. Given the drastic changes that have occurred just in the last couple years alone, the driver’s confusion has merit. Buzzfeed reported that based off of internal Uber documents they obtained, Uber “knows less than it publicly suggests about the relationship between price cuts and driver pay.”
Initially, Uber did not let their customers know what their ride would cost until they arrived at their destination. This uncertainty, combined with surge pricing, lead to wide-scale complaints by riders and drivers alike. If you were taking an Uber during a busy hour, you had to input the multiple that was the surge pricing at the time (ie: 1.5x), in order to confirm that you were willing to ride for that multiple of whatever base price they would charge you if the trip were taken during regular hours.
Uber saw the clear flaws in this, as they wrote on their blog last June:
Imagine buying an airline ticket without knowing the full fare until the end of your trip. Or booking a hotel room online and being told that the real price would be 1.3X. Yes, that sounds odd—but it’s what happens with many Uber trips today.
Now, the app forces you to input your destination prior to reserving a car, and it lets you know exactly how much you will pay up front. However, this change has made it easier for them to hide surge pricing. Instead of displaying a multiple front and center on the screen, it simply says “fares are higher due to increased demand,” so you cannot ascertain how much more than normal you are paying.
Surge pricing is an attractive business model largely because it has already been proven. If you stay in a hotel during the week of the Super Bowl, you will pay considerably more than if you were to spend a few weeknights during an off-peak month. That’s surge pricing. Once Uber was able to bring that model to the taxi industry, a wave of copycats soon followed. From similar business models like Airbnb, to models nothing like it like Disney theme parks, to tequila bars, the benefits of surge pricing became blatantly obvious, and many businesses tried to take advantage of this simplistic idea rooted in the laws of supply-and-demand.
However, many businesses are now finding that simply doing an “Uber for X” does not produce the results that many anticipated it would after the ride-sharing company burst through their specific market. As Farhad Manjoo wrote in the New York Times last year:
But Uber’s success was in many ways unique. For one thing, it was attacking a vulnerable market. In many cities, the taxi business was a customer-unfriendly protectionist racket that artificially inflated prices and cared little about customer service. The opportunity for Uber to become a regular part of people’s lives was huge. Many people take cars every day, so hook them once and you have repeat customers. Finally, cars are the second-most-expensive things people buy, and the most frequent thing we do with them is park. That monumental inefficiency left Uber ample room to extract a profit even after undercutting what we now pay for cars. But how many other markets are there like that? Not many. Some services were used frequently by consumers, but weren’t that valuable—things related to food, for instance, offered low margins.
This has given rise to the anti-Uber. It’s not that these anti-Uber’s are building a model that is the opposite of Uber’s, but simply improving on the inefficiencies that Uber has very publicly demonstrated. Uber has struggled with a litany of issues pertaining to its drivers, especially when it comes to assault. Last year, they settled with two women who claimed that they were sexually assaulted by a driver.
So, enter Juno, a ride-sharing company that has virtually the same business model, but charges a little bit more than Uber, and is hyper-focused on ensuring that its drivers offer their riders the utmost courtesy and respect. Uber drivers are exploited by the fact that they are not employees, but independent contractors, and are not offered benefits like health insurance. By contrast, Juno gives its drivers an opportunity to earn an ownership stake in the company.
YouOrder is another new company that attempts to piggyback off Uber’s theoretical model while also avoiding the missteps which have lead to issues around the treatment of employees and their customers. As Augustin Doumbe, one of its co-founders, told L’usine Digitale (note: the quotes from Doumbe below are translated from French to English using the Google translate feature built into Chrome):
“For us, it was inconceivable to build an entrepreneurial project by ‘using’ people. Young people who start out need a pay slip to talk to a lessor or a banker, which is the basis for progress and growth in life. Elsewhere, the turn-over is huge, there is a lot of volatility.”
By making employees, well, employees, instead of contractors, the business takes a larger responsibility for the actions of its workers, which then places a greater emphasis on providing the proper training, benefiting the company, employee, and customer in the process, as Doumbe continued:
“It is by proposing a delivery mode as personalized as possible, respecting the codes and processes of the brand, that we can convince the actors to subcontract the delivery, whereas before they preferred to keep it internally to maintain quality of service.”
CityMunch is a London startup that is effectively based on the opposite of surge pricing. Aimed to bring in customers during non-traditional hours to eat, a restaurant can upload a discounted offer on to the app, and anyone using it can take advantage of a cheaper meal—with the restaurant’s hope being that this will create repeat customers who return at peak hours for a normal priced meal. This idea was borne out of a conversation that CityMunch’s founder, Robert Lynch, had with a friend who owns a burger chain. Per this article in The Telegraph:
The restaurateur complained that some peak periods during the week, such as Friday nights and weekends, paid for all the time that his shop sat empty, and he bemoaned the wasted overheads.
Paste interviewed another company looking to exploit Uber’s proven on-demand model while improving upon its inefficiencies, MyClean, who turned a $20,000 website into a business generating $9 million per year by matching cleaners with those who need their homes tided up. MyClean launched an “anti-Uber” dynamic pricing engine this week, and their CEO, Michael Scharf, answered a couple questions about how their model works and what they have learned from Uber.
This interview has been edited for clarity and length
What lessons can be learned from Uber’s mistakes?
Michael Scharf: I think “mistakes” is a strong word. Uber’s model is based upon the theory that car services are largely a commodity that can be provided and purchased by anyone; much of Uber’s value, then, comes from creating and supporting a technology that gives that commodity an accessible and user-friendly marketplace. Said differently, most people just want a car that takes them from Point A to Point B in a way that’s as simple and convenient as possible. While some things can and do go wrong (lost driver, messy cars, etc.), Uber is a logistics business in which the personal aspect is less important. That’s why the cash-free/invisible transaction/no-tipping aspect of the service is so attractive. And to further underscore that point, Uber’s publicized investments in self-driving technology show that Uber may even take drivers out of the equation completely one day.
By contrast, cleaning is incredibly personal. People don’t just want “anybody” that knows how to clean, to clean. Often, they want the same person each week, someone who is trustworthy and makes them feel comfortable, is familiar with their personal preferences, and knows the quirks of their homes. Inviting someone into your home every week is so much more intimate than a ride to the airport.
That means a couple things:
A. Because it’s such a personal experience, the caliber of our cleaners has to be very high. So, unlike Uber—whose drivers are independent contractors—MyClean cleaners are W-2 employees. This practice was a deliberate choice because we wanted the ability to provide deeper oversight and training. We also do other things that are typical with employees—all of our employees are interviewed in-person, reference-checked, trained and ultimately hired into a permanent workforce. This deliberate choice has gotten us real results—we have an incredibly loyal workforce, especially given industry standards (half our staff has been with us for two years or more) and we also have very loyal customers who request and receive the same cleaner on a recurring basis.
B. One additional benefit to hiring our staff as employees is that we are able to give protections to our staff. We offer health insurance, 401(k), disability insurance, workers compensation insurance, and pay FICA, among other things. We are lucky enough to be in an industry where doing the best thing for the customer (taking the time to develop and retain our cleaners) also means being held accountable to our staff as well.
So ultimately, not trying to sidestep the question, but I don’t think I know enough about the car service industry to pinpoint Uber’s mistakes. Instead, I can compare the ways our industries look different to me, and explain how we’ve built MyClean differently from Uber because of that. Specifically, because cleaning is so much more personal and intimate than a car service, it’s important to provide deep training and support for our staff in order to ensure that they can do their job well.
How is MyClean incorporating the lessons learned from Uber’s inefficiencies into your business model?
Scharf: First, per my first response, we’re using an employee model, as opposed to a 1099 independent contractor model.
A second difference, however, is pricing. One of Uber’s most notorious practices is their use of surge pricing. During peak times, when demand for a ride is high, they raise prices. If you’ve ever tried to get an Uber on New Year’s Eve or in the rain, then you know that can be a pain. The principle behind that is basic supply-and-demand. When demand is higher, pricing is higher.
We also believe in that principle, but we’ve flipped it. Unlike with a ride, where you often need to leave right when you hail a car, many cleaning appointment times have some flexibility. We realized that and thus are the first (and currently only) cleaning company that uses dynamic pricing—during off-peak times, we offer discounts so that customers can choose the appointment time that best fits their schedule and pricing needs. If you really need that Friday 10AM clean, it’s available for you. However, if you can have the clean Wednesday afternoon, you can save some money (for the life of your recurring appointment!).
This is great for a few reasons. First, it gives us an opportunity to pass savings on to our customers. Second, it creates more predictable and evenly-paced schedules for our cleaners. MyClean’s dynamic pricing rewards our staff by guiding customers to schedule when our cleaners are most available instead of leaving willing cleaners without work during off-peak times.
Uber no doubt will be keeping an eye on companies like MyClean, Juno, YouOrder, and CityMunch, as the recent changes to their business model suggest that they are still not fully convinced of their long-term plan. Kalanick’s ugly fight with one of his drivers highlights the lengths the company still must travel in order for its reputation to match its valuation, as the #deleteUber backlash threatens its promise as one of the central businesses leading us into a better future. The rise of anti-Uber doesn’t mean that Uber’s model is disproved, but it is a natural exercise in capitalism—where the market takes the lessons learned from established players, both good and bad, and applies them in a way that will benefit their specific vertical. Uber is here to stay, but so is anti-Uber.
Jacob Weindling is Paste’s business and media editor, as well as a staff writer for politics. Follow him on Twitter at @Jakeweindling.