Tip Talk

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Article from Issue 199/2017
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The New York City Taxi and Limousine commission announced a proposal that would require ride-hailing services such as Uber to include a space in the app for riders to leave a tip for the driver. The proposal was the work of the Independent Drivers Guild, an organization representing drivers from Uber and other ride-hailing vendors. The drivers want what coffee shop baristas and drivers for other services such as Lyft already have: an easy way for credit card customers to leave a tip.

Dear Reader,

The New York City Taxi and Limousine commission announced a proposal that would require ride-hailing services such as Uber to include a space in the app for riders to leave a tip for the driver. The proposal was the work of the Independent Drivers Guild, an organization representing drivers from Uber and other ride-hailing vendors. The drivers want what coffee shop baristas and drivers for other services such as Lyft already have: an easy way for credit card customers to leave a tip.

Uber drivers haven't been faring so well recently. The Uber website says as a driver you can "earn as much as you want," but that's not what the drivers say. Some recent studies show the net income for an Uber driver at around US $11 per hour – not even a living wage in many cities. Like Walmart, McDonald's, and other infamous big corporations with low wages, Uber is quite content to accept the labor of full-time employees without giving them enough back to buy food and pay their bills. The New York City Uber drivers make a little more (more like $20 per hour), but then, they have to pay for New York housing, which is around the most expensive in the US.

The absence of a tipping feature in the Uber app is quite curious. The company's website puts it this way:

"The Uber app does not include a tip when billing you for a trip fare. In most cities, Uber is a cashless experience. Tipping is voluntary. As a rider, you are not obligated to offer your driver a gratuity in cash. If you decide you would like to tip, your driver is welcome to accept."

If you wanted Uber to be a cashless experience, it seems like you would want to include a tipping feature in the cashless mobile phone app. Otherwise, you force users who want to tip to bring cash. And why go to the trouble of intentionally telling people they are "not obligated" to tip? If Uber drivers are so underpaid, why wouldn't Uber love an opportunity for their drivers to get more money without requiring additional direct compensation?

That questions gets down deep into Uber's business plan. According to Uber CEO Travis Kalanick, "Uber doesn't grow if car ownership is cheaper than taking Uber." In other words, although it looks like a high-tech taxi service, Uber is not really even trying to compete with the cost of a cab but is actually competing with the cost of car ownership. Their goal is to cost less than the cost of owning a car, which forces Uber to keep its cost down to way, way less than the price of riding around all year in taxis.

Encouraging tips adds to the total cost of using Uber, which, ultimately makes Uber less competitive with car ownership, even though they might still be well under the cost of a taxi.

How are they doing with that strategy? Not well, at least by old-fashioned standards of profitability. According to Wired, Uber lost a total of around US $3 billion in 2016. Uber fares reportedly cover only 41 percent of the total cost of the ride, with the rest of the cost subsidized directly by the company.

How long can they continue to lose money at this rate? Uber has been raising a lot of cash recently, and they reportedly had around $15 billion on hand last year, so they could keep losing $3 billion a year for another 4 to 5 years in order to wait for something to happen that hasn't happened yet. For instance, they could perfect their effort to employ self-driving cars, so they don't have to pay their drivers (although they would have the overhead of maintaining and insuring the cars). Or, they could out-last the competition and raise their prices, although higher prices would take them farther from their stated goal of competing with the cost of car ownership.

If Uber really could replace the role of car ownership in the lives of people around the world, as Kalanick suggested, maybe they wouldn't need to raise their prices. A huge increase in market share, such as a mass exodus of millions of people abandoning car ownership and depending on Uber, would spread the overhead around through more rides, thus potentially putting the company in the black.

Uber is thus a gigantic bet on the transformative power of new technology. Its success depends on the world changing in either (or both) of the following ways:

  • cars without drivers
  • people giving up their cars and living by ride sharing

Note that people giving up their cars and living by mass transit won't do the trick. Uber needs you, and millions like you, to continue to ride in cars – just Uber's cars, not your cars.

Will this work for them? It sure seems like a lot of moving parts will have to line up for Uber to break even. Some high-tech companies have succeeded with this sort of bold strategy in the past, but for now, just tip the driver if you can.

Joe Casad, Editor in Chief

Infos

  1. Uber Tipping: First NYC, then the Country? https://www.usatoday.com/story/tech/news/2017/04/17/new-york-city-uber-tipping-in-app-tip-ride-hailing/100564850/
  2. Uber's 2016 Losses to top $3Billion According to Leaked Financials": http://www.wired.co.uk/article/uber-finances-losses-driverless-cars

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