Uber Pricing Strategies and Marketing Communications

8/18/2019 Uber Pricing Strategies and Marketing Communications

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This case was prepared by Virginia Weiler, Marketing Instructor, University of Southern Indiana; Paul Farris,Landmark Communications Professor of Business Administration, Darden School of Business; Gerry Yemen,Senior Researcher, Darden School of Business; and Kusum Ailawadi, Professor of Marketing, Tuck School ofBusiness, Dartmouth College. It was written as a basis for class discussion rather than to illustrate effective or

ineffective handling of an administrative situation. Copyright 2014 by the University of Virginia Darden SchoolFoundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to

[email protected]. No part of this publication may be reproduced, stored in a retrieval system,

used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,

recording, or otherwise—without the permission of the Darden School Foundation.

UBER PRICING STRATEGIES AND MARKETING COMMUNICATIONS

By late March 2014, Uber Technologies, Inc., was on a roll, rapidly expanding service tountapped markets and gaining new, enthusiastic customers, as well as a few vocal and visibledetractors. Some of its critics were focused on Uber’s practice of “surge pricing,” a tactic thatincreased rates sharply in times of higher demand for car service. Other groups that disliked thecompany included competing taxi and limo services, which argued that inadequate driverscreening and training endangered consumers and made for unfair competition in the highlyregulated industry. In addition, some city governments were debating regulation to limit thenumber of cars on the road that ride-sharing companies could offer—indeed, one of the first

markets Uber entered, Seattle, restricted that number to 150 cars per company. Given the pressure of impending legislation and increasing negative public attention, management wouldhave to respond. Was this the time to persevere or pivot? If persevere, how? If pivot, towardwhat?

Taxi and Limousine Industry

In 2012, the American taxicab and limousine market was enormous, employing close to240,000 drivers nationally who earned an average annual salary of $22,440. The Bureau ofLabor Statistics estimated that there would be a 20% increase in the number of drivers between

2012 and 2022.1

Major cities such as Chicago and New York City controlled the industrythrough the use of medallions. New York alone had 13,437 yellow cabs licensed through themedallion system, as well as 32,000 limousine and livery (call-ahead) vehicles. The number oftaxi medallions was fixed, and those sold on the open market could fetch close to $1 million.2

1 Statistics Brain, “Taxi Cab Statistics,” July 2, 2012, http://www.statisticbrain.com/taxi-cab-statistics (accessedMar. 17, 2014).

2 New York City Taxicab Fact Book, http://www.nyc.gov/html/tlc/downloads/pdf/2014_taxicab_fact_book.pdf (accessed Mar. 17, 2014).

For exclusive use INSEAD, 20

This document is authorized for use only in PSA-P2 MarApr 2015-7SM103T by M. Lee, INSEAD from February 2015 to February 2016.



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The New York City Taxi & Limousine Commission calculated a medallion’s annual return oninvestment as close to 20%. Many cities used the medallion system as a way to ensure incomefor the medallion owner.3

Taxis were either hailed on the street or sent out after a passenger called a centraldispatcher. Livery car service was prearranged; the cars generally could not be hailed on thestreet, protecting taxis from competition. There was usually a waiting period between the call fora car and passenger pickup, in some cases up to an hour.4

By and large, taxis were regulated at the municipal level and livery services wereregulated by state agencies. One method employed by regulatory agencies to ensure that vehicleshailed on the street were licensed was to standardize their appearance. Taxis had a distinctivelook (e.g., mustard yellow in New York City) and were required to indicate clearly whether ornot they were in service. Other taxi and livery regulations included a set number of vehicle

inspections per year, requirements for the location of a taxi service’s dispatch station/businessoperations, and whether or not customers could be solicited and cars assigned to customers for pickup.5

Taxicabs charged passengers based on time and distance, which were calculated by ataximeter prominently displayed inside the vehicle. Taximeters calculated fares based on ahighly regulated and standardized fare schedule (e.g., $3.50 per mile for the first five miles and$5.00 per mile thereafter). Livery vehicles had no taximeters, and fares were usually based ontime, or rough distance with a predetermined minimum price that was agreed on in advance. Ingeneral, livery vehicles were not allowed to charge based on time plus distance.6

When an alternative “ride share” option started to develop in the mid-2000s, theInternational Association of Transportation Regulators, a trade group representing taxicab andlivery drivers, took notice. In July 2013, they called for the prohibition of what it called “bogus”and “rogue” ride-sharing services in the name of public safety. In a press release, the associationclaimed it was protecting the public from unlicensed drivers who could be drug users orcriminals.7 In effect, the trade group called for a ban on mobile applications (apps) that wouldallow people to make ride arrangements via smartphone.

3

Steve Chapman, “Ride-Sharing vs. the Taxi Industry,” Chicago Tribune, February 20, 2014.4 David Hoyt and Steven Callander, “Uber: 21st Century Technology Confronts 20th Century Regulation,” casestudy (Stanford, CA: Stanford Graduate School of Business, 2012), 2.

5 Hoyt and Callander, 2–3, 5.6 Hoyt and Callander, 3.7 International Association of Transportation Regulators, “Regulators Join Rising National Trend Prohibiting

Bogus Ridesharing and Rogue Apps,” July 17, 2013, http://www.iatr.org/PresidentUpdate-July2013.html (accessedFeb. 15, 2014).





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Uber Background

Uber Technologies, Inc., originally called UberCabs, was founded in 2009 by tech start-

up veterans Garrett Camp and Travis Kalanick and headquartered in San Francisco. Uber beganas a private luxury car service catering to Silicon Valley’s top executives. In those days,someone in need of a ride had to e-mail Kalanick for a code that would give them access to theapp. Kalanick had recognized the potential profit in empty limousine seats and idling taxis. In2010, watching cars traverse San Francisco, Kalanick was convinced that the concept oftechnology bringing drivers and passengers together efficiently could scale globally.8 By 2010,Kalanick had executed an aggressive growth strategy.

The company expanded rapidly, and by March 2014, it was operating in 85 cities in33 countries and had more than 400 employees. Examples of cities served were Abu Dhabi,Amsterdam, Bangalore, Bogotá, Doha, London, Moscow, New York, Rome, Shanghai, Tokyo,

and Zürich. Kalanick was able to attract influential and high-profile investors whose fundinghelped fuel Uber’s rapid expansion. Among those financiers were Ashton Kutcher, Jeff Bezos,and Google’s investment division, which in August 2013 gave Uber $258 million in capital.9

Uber’s product was a smartphone app that allowed urban dwellers to hail vehiclesvirtually (see Figure 1). Fares fluctuated, and the company employed no drivers itself. Instead,Uber served as an electronic dispatcher as passengers and drivers connected digitally through its proprietary software. The app matched “willing” drivers and “needy” consumers thusly: a potential passenger, who had downloaded the Uber app onto his or her smartphone, put in arequest for a car to take him or her to a specified location. When the passenger requested a ride,he or she got access to a driver’s name, car model, and rating. Based on that information, the passenger could accept or decline the ride.

8 Marcus Wohlsen, “What Uber Will Do With All That Money From Google,” Wired, January 3, 2014.9 Wohlsen.





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Figure 1. Uber app showing Black Car option and UberX option.

Source: Case writer screenshot from Uber mobile app.

If accepted, the driver usually arrived within a few minutes. Uber’s short wait times,facilitated by proprietary algorithms that directed drivers to locations where customers were most

likely to call, were seen as one of its significant operational advantages. As one customer stated,“I found Uber remarkably convenient, considering chasing down a cab on a New York Cityweekend evening can be quite the task.”10

Uber’s fares were calculated according to its algorithms—developed by a data-scienceteam of nuclear physics, computational biology, and astrophysics PhDs—which helped matchsupply with demand. The price for a ride was higher during times of peak usage. Uber chargedthe customer’s credit card (which was kept in his or her Uber profile) after a trip was completedand e-mailed a receipt to the passenger (see Figure 2). Uber kept 20% of the fare and paid thedriver the remaining 80% via direct deposit; the passenger and driver never exchanged moneydirectly. In December 2013, Uber’s gross annual revenue was estimated to be $1 billion.11

10 Case writer interview with Uber user A, January 12, 2014.11 Brad Stone, “Invasion of the Taxi Snatchers: Uber Leads an Industry’s Disruption,” BusinessWeek , February

20, 2014.





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Uber’s share of that revenue would be approximately $213 million annually.12 Uber received onemillion ride requests weekly and fulfilled approximately 80% of those requests.13

Figure 2. Uber receipt.


Uber’s cofounders had very different roles within the company. Camp, a serialentrepreneur who cofounded StumbleUpon in 2002, acted mostly as a silent partner. From Uber,he went on to another startup, Expa, which developed new consumer products, systems, andservices. The public face and voice of Uber clearly belonged to its other cofounder. Kalanickgrew up in Northridge, California. He attended UCLA, but dropped out to develop his first start-up, Scour, a file-sharing program.14 In 2000, Scour was sued for a quarter of a trillion dollars by

12 Kim-Mai Cutler, “Hey Uber, Lyft Is Growing Faster Than You,” December 18, 2013, http://techcrunch.com/2013/12/18/uber-lyft/ (accessed Jan. 13, 2014).

13 Jo Coscarelli, “The Uber Hangover: That Bar Tab Might Not Be the Only Thing You’ll Regret in theMorning,” New York Times, December 27, 2013, http://nymag.com/daily/intelligencer/2013/12/uber-surge-pricing-model.html (accessed Mar. 17, 2014).

14 Christine Lagorio-Chafkin, “Resistance Is Futile,” Inc., July/August 2013.





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the Motion Picture Association of America, for copyright infringement.15 Subsequently, Scourfiled for Chapter 11 bankruptcy protection. Kalanick’s next venture, Red Swoosh, a peer-to-peernetworking site, was bought by Akamai Technologies in 2007 for $15 million.16

Kalanick was personally involved in efforts to overcome regulatory agencies’ resistanceto Uber’s expansion in a number of cities. Indeed, he was described as a “brawler” who relisheda good fight, whether it be on Twitter with a competitor’s CEO or with the entrenched taxi andlimousine governmental bodies he viewed as a threat to Uber’s growth.17 Uber had encounteredsignificant political headwinds in a number of markets; the fiercest resistance came from Paris,Miami, Denver, and Washington, DC.

Uber Business Model

Uber did not directly employ drivers; rather, it claimed that it simply facilitated theconnection between passengers and drivers, similar to how a website such as Expedia connected passengers and airlines. Uber did not own a fleet of vehicles, although it had guidelines as towhat vehicle types its drivers could use.

In most of the markets Uber served, customers could select from one of four services:UberX, UberBlack, UberSUV, and UberTaxi. UberX was the least expensive option anddispatched drivers in smaller vehicles than those used for the other services. On its website, Uberclaimed that its UberX service was “10% lower than taxi prices.”18 And unlike the other services,UberX utilized both professional and nonprofessional drivers. UberBlack, the original Uberservice, used black town cars; fares for these vehicles were roughly 35% more than for UberX.19 Still, it was described as the “poor man’s town car”—it targeted those customers who could notafford a full-time driver but who wanted more luxurious transportation than a yellow cab or public transit. UberSUV worked well for large parties and was priced higher than the UberBlackservice (see Table 1). UberTaxi allowed passengers to use the Uber app to hail a regular taxi.Unlike users of the other Uber services, customers using UberTaxi paid the driver directly.

15

John Borland, “Movie Studios Target Scour with Copyright Lawsuit,” July 20, 2000,http://news.cnet.com/2100-1023-243432.html (accessed Mar. 17, 2014).16 “Akamai Acquires Red Swoosh,” Akamai Technologies, Inc., press release, April 12, 2007,

http://www.akamai.com/html/about/press/releases/2007/press_041207.html (accessed Mar. 17, 2014).17 Wohlsen. 18 Uber, “The New UberX: Better, Faster, and Cheaper Than a Taxi,” June 11, 2013, http://blog.uber.com/

2013/06/11/uberx-cheaper-than-a-taxi (accessed Mar. 6, 2014).19 Katherine Boehret, “Baby, You Can Drive (or Ride in) My Car,” Wall Street Journal, November 12, 2013.





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Table 1. Sample uber rates in Denver, Colorado, April 2014.

UberX Black Car SUV

Base Fare (start with this fare) $2.25 $ 7.00 $14.00

Per

mile

(under

11

miles) $2.00 $ 3.25 $ 4.00Per minutes (under 11 miles) $ .30 $ 0.75 $ 0.90

Minimum Fare $6.00 $15.00 $25.00

Data source: Uber.

After a ride was completed, the passenger and driver could rate each other on a scale ofone to five stars. Uber drivers had the right to refuse to pick up a passenger whose rating wasthree stars or lower. One Uber driver defended this practice by stating that low-rated passengerswere “not worth the headache and hassel [sic].”20 In some extreme cases, passengers whosedrivers reported them as particularly poorly behaved had their accounts suspended.21

There were other advantages for Uber drivers—for example, they did not have to providekickbacks to human dispatchers to increase the likelihood that the dispatcher would steer farestheir way. Drivers were guaranteed to be paid, because Uber had passengers’ credit cardinformation on file. One Uber driver in San Francisco noted that when he drove a taxi, he wouldmake about $300 for a 10-hour shift, whereas with Uber, on a good day, he could make $700. “Ihope the new idea will work,” Mohamed Mandour said. “Because then we will be taking overthe whole Bay Area.”22

Uber had market-specific criteria for its drivers. On its website, an individual interestedin driving for Uber would select the appropriate city, and the requirements for drivers in thatmarket would appear. For example, in March 2014, if someone interested in driving for Uber in

New York City went to the company’s website, he or she would be presented with two sets ofcriteria: one for UberBlack (town car) and one for UberTaxi (yellow cab). For UberBlack, the prospective driver had to be “a professional chauffeur with a commercial license and commercialauto insurance.” His or her vehicle had to be “a black sedan, town car, crossover SUV thatcomfortably seats 4 passengers, or a full-size SUV that comfortably seats at least 6 passengers.”Those interested in driving for UberTaxi had to be “a taxi driver certified and licensed by thecity” whose vehicle was “a commercial taxi vehicle.”23 If an individual was interested in becoming an UberX driver in San Francisco, he or she had to be “at least 23 years old, with a personal license and personal auto insurance” who drove “any mid-size or full-size 4-doorvehicle, in excellent condition.”24

20

“While You’re Rating Uber, Uber Is Rating You (and It Could Cost You a Ride),” June 10, 2013,http://sarahsfav.es/2013/06/10/while-youre-rating-uber-uber-is-rating-you-and-it-could-cost-you-a-ride (accessedMar. 18, 2014).

21 Hoyt and Callander, 4.22 Brian X. Chen, “Uber, an App That Summons a Car, Plans a Cheaper Service Using Hybrids,” New York

Times, July 1, 2012.23 Uber, “Uber Partners and Drivers,” https://partners.uber.com/signup/new-york (accessed Mar. 6, 2014).24 Uber, “Uber Partners and Drivers,” https://partners.uber.com/signup/san-francisco (accessed Mar. 7, 2014).





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Market Entry/Employee Recruitment

When it was time to launch service in a new city, Uber executed a consistent strategy. 25

Approximately six weeks before its targeted start date, Uber would send an advance team to thelocation to recruit already-licensed drivers. Another team was tasked with communitymanagement, which included creating a local social media groundswell about Uber’s impendingentrance into the market and hosting private parties for local influencers to help create buzz.Local managers oversaw, in effect, two very different businesses—drivers/logistics and socialmedia/public relations—and Kalanick hired people who could successfully handle both.26

In cities where it was well established, Uber would attempt to hire drivers away fromcompetitors to further increase its share of the market. In some instances, these recruitmentefforts were quite direct. A San Francisco Lyft driver recounted how, in November 2013, he picked up two attractive women. Something about them struck him as odd; they were evasive

about where they were headed. In short order, they dropped their ruse and tried to recruit him todrive for UberX. They offered him a $50 gas card for checking out Uber’s headquarters, a freelunch, and a $500 bonus for picking up 20 passengers and promised that, if he accepted, Uberwould waive its commission for the remainder of the year. As the driver saw it, “How smart isthat—recruiting drivers in their very own car?”27 Another driver-recruitment tool Uber utilized inSan Francisco in 2013 was a mobile billboard featuring a pink mustache (Lyft cars’ brandingfeature) and a razor, urging Lyft drivers to “Shave the stache.”28

Traditional Taxi/Livery Services Competition

The established taxi and livery services represented one cohort of Uber competitors. Thissegment had, in some instances, fiercely resisted Uber’s expansion into certain markets. Themost contentious fights occurred in Paris, Miami, Denver, and Washington, DC. Generally, theseconflicts centered on the municipal taxi and/or state limousine regulatory agency insisting thatUber was subject to agency authority since Uber was, in effect, operating as a transportationservice. These agencies had strict guidelines about how passengers should contact the service provider, the fare structure, and the labeling and appearance of vehicles.29

25 Lagorio-Chafkin.26

Hoyt and Callander, 2.27 Ellen Huet, “Uber, Lyft, Sidecar Put Driver Recruiting in High Gear,” SFGate, January 31, 2014,http://www.sfgate.com/bayarea/article/Uber-Lyft-Sidecar-put-driver-recruiting-in-high-5190676.php (accessed Mar.17, 2014).

28 Henry Grabar, “Taxi Battle of the Day: Uber vs. Lyft,” Atlantic Cities, May 7, 2013,http://www.theatlanticcities.com/jobs-and-economy/2013/05/taxi-ad-battle-day-uber-vs-lyft/5519 (accessed Mar. 17,2014).

29 Hoyt and Callander, 2.





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Uber countered these regulatory efforts, insisting it was merely a service that connecteddrivers and passengers and was not operating as a transportation company. Therefore, it shouldnot be subject to the rules and regulations governing taxis and livery cars. Uber’s entry into the

San Francisco market represented one of its earliest victories against regulatory agencies.30

Meanwhile, in late 2011, it was well known that taxi service in the nation’s capital wasreplete with problems, including not enough cabs in circulation, unreliable call-ahead service,and a reputation for taking advantage of passengers unfamiliar with the city.31 Passengers alsocomplained that taxis would refuse to take them to certain parts of the city.32 DC taxicabs, unlikethose in New York, did not accept credit cards. “This is my biggest qualm with them,” one passenger said. “It is 2014. I do not have cash.”33 Another practice passengers disliked was whendispatchers managing the taxi line at major destinations (e.g., Union Station) forced them toshare cabs with other passengers they did not know. In this instance, both riders paid the fullfare, despite the forced sharing arrangement.34 As one disgruntled passenger said, “In New York

City, you would never be forced to share a cab but still pay the full fare.”

35

These shortcomings made Washington, DC, an attractive location to Uber, and itattempted to enter the market during the summer of 2012. Uber’s relationship with DC regulatorswas immediately contentious and resulted in Uber drivers being targeted for stings by cityofficials and having their cars impounded.36 Uber reached out to its users on Twitter, Facebook,YouTube, and its website and asked for support. The result was 50,000 personal e-mails and37,000 tweets with the hashtag #UberDCLove being sent to City Council member Mary Cheh,who had initially opposed Uber’s entry into the DC market.37 Cheh subsequently dropped heropposition.

Miami proved to be another market where Uber encountered strong political headwinds.In mid-2013, Uber ran afoul of Miami-Dade County commissioners, who refused to approvelegislation that would allow Uber to operate in their jurisdiction. As of January 2014, Uber wasnot operational in Miami-Dade.38

30 Hoyt and Callander, 5.31 Case writer interview with Uber user B, February 3, 2014.32

Jackie Bensen, “DC Taxicab Passenger Complaints,” August 28, 2013, http://www.nbcwashington.com/news/local/DC-Taxicab-Passenger-Complaints_Washington-DC-221583171.html (accessed Mar. 18, 2014).33 Case writer interview with Uber user C, February 4, 2014.34 Uber user C.35 Uber user B.36 Hoyt and Callander, 7.37 Lagorio-Chafkin.38 Uber, “Cities,” https://www.uber.com/cities (accessed Jan. 23, 2014).





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Las Vegas was another example of market-entry failure for Uber. In March 2012, Uberattempted to start operations in the city, but it ran afoul of a state regulation requiring a $40minimum charge for limousines, regardless of the length of the trip. Uber’s leadership realized it

would be virtually impossible to compete in Las Vegas, since even the shortest trip would cost$40.39 As of February 2014, Uber was not operating in the Las Vegas market.

Even after it entered and established itself in a market, Uber was vulnerable to cityregulation and pressure from the traditional taxi and livery competitors. For example, in early2014, the Seattle City Council penned a bill that would restrict UberX to running 150 cars at onetime.40 Uber sent out Twitter and Facebook notices asking supporters to contact council membersto encourage nonpassage of the legislation. Uber had used a similar campaign in 2013 when itfaced regulatory challenges in Dallas. On its blog, Uber had asked its Dallas users to sign a petition supporting Uber and to take to their Twitter accounts using the hashtag#DallasNeedsUber, and it had worked. But on March 17, 2014, the Seattle City Council passed

the 150-car-restriction law.

Ride-Sharing Competition

In addition to traditional competitors, another set of Uber challengers was entering therapidly developing technology-based personal urban transportation arena. This group—whichincluded the companies Lyft, Hailo, and Sidecar—employed a business model that closelyresembled Uber’s, with passengers and drivers connecting via technology rather than a humandispatcher.

Lyft represented the largest of these competitors. It pursued a differential positioningstrategy as the “anti-Uber”41 and offered a peer-to-peer ride-share service. Lyft did not provide a black car service, and as of December 2013, it was estimated to be doing one-third of Uber’sweekly ride load, although Lyft’s growth rate was more than double Uber’s at that same time.42 Lyft passengers and drivers connected through a downloaded smartphone app. Passengers wereallowed to ride in the front seat of private vehicles when there were too many passengers for the backseat, and drivers (who did not hold livery or taxi licenses) greeted passengers with a fist bump.43 A distinctive mustache on the front of a vehicle identified it as part of the Lyft fleet (seeFigure 3).

39 Hoyt and Callander, 6.40

Blair Hanley Frank, “Uber CEO: Seattle Regulations Would Make Our Service ‘Unusable,’” GeekWire,March 14, 2014, http://www.geekwire.com/2014/uber-ceo-proposed-regulations-make-ridesharing-service-unusable (accessed Mar. 17, 2014).

41 Carmel Deamicis, “Lyft Introduces Uber-Style Surge Pricing, Urges Us Not to Call It That,” PandoDaily, November 22, 2013, http://pando.com/2013/11/22/lyft-introduces-uber-style-surge-pricing-urges-us-not-to-call-it-that (accessed Mar. 18, 2014).

42 http://techcrunch.com/2013/12/18/uber-lyft.43 Lyft, “How It Works,” https://www.lyft.com/how (accessed Feb. 10, 2014).





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Figure 3. Lyft vehicle.

Source: “Lyft’s Pink Car Mustache,” posted to public domain underCreative Commons (CC BY-SA 3.0) by “Pkg203,” July 26, 2013,http://commons.wikimedia.org/wiki/File:Lyft_Pink_Mustache.jpg.

In some markets, Lyft published a structured fare schedule. In others, it asked passengersto give drivers a donation.44 By November 2013, Lyft was experimenting with variable pricingduring high-demand periods in the Los Angeles market with what its president, John Zimmer,called “prime-time tips.”45 One former Washington, DC, Lyft driver, James Montana, describedhis experience:46

From my point of view, here’s how it went. A Lyft startup team parachuted intoDC with orders to get Lyft up and running in the city, and build market share asquickly as possible. To accomplish that, the startup team (1) hired lots of drivers,like me, (2) paid an hourly floor to drivers, either at $15/hr or $25/hr dependingon day and time, and (3) kept the price of fares very low.

This price and wage regime lasted for about six months. It was clear even to themost distant and careless observer (e.g., me) that this regime was a major moneyloser for Lyft. Lyft sent me weekly pay statements which listed the amount ofmoney that Lyft took in fees from passengers, and the amount of money that Lyftwas paying me in hourly. Lyft never made money on me, because [it] always paidout more in hourly than it earned in rider fees. I drove until midnight on NewYear’s Eve, and Lyft lost money on me on that night, too.

44 Lyft, “Donations vs. Charges,” https://www.lyft.me/help?article=1415358 (accessed Feb. 15, 2014).45 http://pando.com/2013/11/22/lyft-introduces-uber-style-surge-pricing-urges-us-not-to-call-it-that.46 E-mail correspdonence with James Montana, April 9, 2014.





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From that, I inferred that Lyft was burning lots of venture capital in order to getestablished in DC. It couldn’t go on forever, though, so, after six months, Lyfteliminated both elements of the old regime: Lyft dropped the hourly pay for

drivers and, a few months later, Lyft raised prices for riders. By that time, I had become a Lyft “mentor,” which is Lyft’s way of outsourcing hiring to its owndrivers. I noticed that Lyft was hiring lots of new drivers, presumably to replacethose who had dropped out due to decreases in pay.

I don’t know how this has changed the experience for riders. Anecdotally, I thinkthere are fewer drivers out there because the passengers report longer wait times. Idrive rarely now, because the leisure is worth more to me than the money.

In January 2014, Uber responded to its Lyft competition by placing social mediaadvertisements depicting a man and a woman fist-bumping with the headline “Don’t Pay a

Premium to Fist Bump.”

47

The caption read, “Uber costs less than Lyft, guaranteed.”

Promotion and Branding

Uber relied on social media for much of its promotional activity. Platforms includedTwitter, Facebook, YouTube, and its website. The company used campaigns to connect withcustomers and promote its brand. Uber’s motto, “Everyone’s Private Driver,” was displayed prominently on its Facebook page and incorporated into its YouTube promotional videos.48

In addition, Uber utilized creative one-day promotional events. On Valentine’s Day 2013,Uber launched its “Romance on Demand” service, whereby a customer could order flowersthrough the Uber app.49 Uber also held a one-day ice-cream delivery promotion in July 2013 in33 cities, including Boston, New York, and Munich,50 and a one-day Christmas-tree deliveryservice in December 2014.51

47 Cotton Delo, “In Quest for Ride-Sharing Supremacy, Uber Takes on Lyft with Facebook Ads,” January 17,2014, http://adage.com/article/digital/uber-takes-lyft-facebook-attack-ads/291158 (accessed Mar. 18, 2014).

48

“Uber: Everyone’s Private Driver,” YouTube video, posted by “Uber,” February 5, 2013,http://www.youtube.com/watch?v=P2M0RD7bhYY (accessed Mar. 18, 2014).49 Cary Smith, “Creative Valentine’s Day Campaigns,” Martin-Wilbourn Partners, February 13, 2014,

http://mwpartners.com/creative-valentines-day-campaigns (accessed Mar. 1, 2014).50 Alex Baldinger, “Uber Promises Ice Cream Delivery on Friday, but Will Cones Runneth Empty?”

Washington Post , July 18, 2013.51 Uber, “O #Ubertree, O #Ubertree,” December 4, 2013, http://blog.uber.com/UberTREE (accessed Mar. 1,

2014).





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Kalanick used his personal Facebook and Twitter accounts, which had more than 42,000and 34,000 followers, respectively, as of March 2014, to promote Uber. On Facebook, he had posted about Uber’s launches in the Middle East and Asia, as well as Uber’s Christmas-tree

delivery service.52

He used Twitter to publicize Uber’s regulatory difficulties in the Seattlemarket and an account of his stint as an UberX driver.

Uber’s promotional activities were not exclusively social-media based; it also used moreestablished methods to grow its business. For example, new customers could receive a certaindollar amount off their first Uber ride.53

Surge Pricing

Some customers were critical of Uber’s policy of dramatically increasing fares during

periods of peak demand (e.g., rush hour, New Year’s Eve, Halloween, and inclement weather), a practice Uber referred to as surge pricing (see Figure 4). Fares were continually adjustedaccording to a mathematical formula and could be as much as seven or eight times the normalUber rate.54 One San Francisco customer paid $30 for a ride of less than two miles on a busySaturday night in February 2014.55 Kalanick defended the surge pricing policy as one that benefited passengers, since it incentivized drivers to make more pickups. Indeed, scholars hadlooked at cabdriver behavior and found that many (particularly new drivers) did not finish theirentire 12-hour shift if they had hit their target income before the shift ended.56 Since this behavior was more likely to be exhibited on days with strong demand, it would theoreticallyhave facilitated the success of Uber’s surge pricing policy.

52 Travis Kalanick’s Facebook page, https://www.facebook.com/traviskal?fref=ts (accessed Mar. 18, 2014).53

Uber, “A New Excuse to Get Together,” https://www.uber.com/invite/uberMYMONEYBLOG (accessedMar. 18, 2014).54 David Goldstein, “Uber ‘Surge Pricing’ Controversy Is a Cautionary Tale Against Taxi Deregulation,”

Stranger , December 20, 2013, http://slog.thestranger.com/slog/archives/2013/12/20/uber-surge-pricing-controversy-is-a-cautionary-tale-against-taxi-deregulation?oid=18528505&show=comments&sort=desc&display= (accessedMar. 18, 2014).

55 Uber user C.56 Colin F. Camerer, “Taxi Drivers and Beauty Contests,” Engineering and Science no. 1 (1997): 11.





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Figure 4. Uber surge pricing notice.


In December 2013, a social media firestorm erupted after Uber prices surged by a factor

of eight during a snowstorm in New York City. Customers sometimes found themselves with a bill for several hundred dollars for a trip of a few blocks.57 One customer’s fare was calculated atthe rate of $23.25 per mile.58 Uber customers took to their social media accounts to complain bitterly about the price surge. Those incensed included Salman Rushdie, Tim O’Reilly, andJessica Seinfeld, who shared with her Instagram followers a $415 Uber receipt followed by thehashtags #neveragain and #neverforget.59 O’Reilly said that surge pricing “Smacks of pricegouging to me.”60 Kalanick was unapologetic about the surge and once posted a detractor’s e-mail to his own Facebook page, along with his reply, suggesting to his followers that they “Getsome popcorn.” To the angry customer, he responded, “…without Surge Pricing, there would beno car available at all.” In addition, Kalanick argued that surge pricing meant shorter passenger

57

Lydia DePillis, “In New York, Uber’s Price Surge Isn’t a Problem. Other Cities Might Be Different,”Washington Post Wonkblog, December 18, 2013, http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/18/in-new-york-ubers-price-surge-isnt-a-problem-other-cities-might-be-different (accessed Jan. 13, 2014).

58 Bruce Golding, “Uber Under Fire for Storm Price ‘Surge,’” New York Post , December 16, 2013.59 Annie Lowrey, “Is Uber’s Surge-Pricing an Example of High-Tech Gouging?” New York Times Magazine,

January 10, 2014.60 Mark Bivens, “The Flaw in Uber’s Surge-Pricing Algorithm,” Satisfy My Soul (blog), January 21, 2014,

http://markbivens.com/m/archives/flaw-in-ubers-surge-pricing-algorithm (accessed Mar. 21, 2014).





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wait times—and more time spent in the comfort of the rider’s home as opposed to on a windy,rainy, or bitterly cold street. And he claimed that the surge pricing algorithm was designed tomaximize the number of rides, not revenue.61 Theoretically, then, the algorithm encouraged

drivers to be available, and with more drivers on the road, the fare multiple would drop.

Despite Kalanick’s aggressive defense of surge pricing, Uber lowered some of its rates inJanuary 2014, although no plans were made to eliminate surge pricing. Prices were cut forUberX (Uber’s least expensive service) in 16 markets, including Los Angeles, Chicago, SanFrancisco, and Seattle. Uber claimed that these cuts actually made the UberX service a moreaffordable option than traditional taxis.62

New York Fashion Week in February 2014 reinforced that Uber had no intention ofabandoning surge pricing when the market supported it. As fashion editors rushed from runwayto runway, Uber was in high demand. “Everyone is using Uber,” said Emily Holt, a fashion

editor at Vogue. Ms. Holt’s Uber driver took her and four other Vogue editors from one fashionshow to another and waited outside during the second show. “It drove us to Wang, sat and waitedfor us because we were concerned that if we let it go and tried to Uber another car, we wouldn’tknow where to find it,” Ms. Holt stated. Total bill (including an Uber fashion show discount promotion of $100): $272 for two hours and 26 minutes.63

Additional criticism was leveled at Uber for its service on Valentine’s Day 2014. On thatday in San Diego, Uber texted its drivers, “UberX is very close to SURGE. It’s Valentine’s Day!People will be out all night and we didn’t activate new drivers to make earnings even higher thisweekend.” Uber defended the text by stating that the company had recently activated asignificant number of new drivers in the San Diego market, and it wanted to reward them withstrong Valentine’s Day compensation.64

After the negative public reaction to Uber’s pricing strategy and the change in lawrestricting it to 150 cars in Seattle, and with a goal to continue growing, Uber’s managementneeded to move its narrative away from that of price gouging and toward one focused on itsservice. For example, one day after the Seattle City Council delivered its blow to Uber with thenew regulation, a USA Today headline read, “Comcast Seeks Uber-Like Customer Service.”65 Was it time to change models, or should Uber stay the course? And would the emergence ofmore competition affect Uber’s choice?

61 Lowrey.62

Victor Luckerson, “Following Surge Pricing Outcry, Uber Lower [sic] Its Rates,” Time.com, January 10,2014, http://business.time.com/2014/01/10/following-price-surge-outcry-uber-lower-its-rates (accessed Jan. 22,2014).

63 John Koblin, “Driving the Market for a Car Service,” New York Times, February 14, 2014.64 Sam Biddle, “Uber Forced Driver Shortage to Boost Surge Pricing,” Valleywag, February 26, 2014,

http://valleywag.gawker.com/uber-forced-driver-shortage-to-boost-surge-pricing-1531501176 (accessed Mar. 18,2014).

65 Roger Yu and Mike Snider, “Comcast Seeks Uber-Like Customer Service,” USA Today, March 19, 2014.


Documents

Uber Pricing Strategies and Marketing Communications