Outline:

  • Uber began targeting an expensive service in black hire cars;
  • It discovered a cheaper way of executing it;
  • Then applied this model across an industry, fully disrupting it.

“Uber started out as everyone’s private driver. Today we aspire to make transportation as reliable as running water, everywhere and for everyone.” —
Travis Kalanick [source]

Everyone wants to be the next Uber. On-demand is the sector everyone wants to be — because of the success of Uber. Let’s stop and think about it for a second. Uber wasn’t trying to be the next Uber. Kalanick just wanted to get him and his friends black cars on demand. They didn’t want to make transportation as reliable as running water. Uber started at the high end and got cheaper.

When most people think about starting a business, they look at what was previously successful. How many times have you heard “we’re the Uber for X” in the last 5 years? When you look at how Uber was started, it seems bananas that people are trying to mimic Uber’s success.

“We just wanted to push a button and get a ride. And we wanted to get a classy ride. We wanted to be baller in San Francisco. That’s all it was about.” — Travis Kalanick,
[source]

It’d be impossible to be as cheap as Uber is now without being expensive at the start. They would have died long before their core technology was good enough to handle millions of rides. Some would argue Uber’s success is because Kalanick was scratching his own itch. That’s not the most important thing. The most important thing is Uber started off by targeting a inefficient niche market.

I don’t have data on the black car market but I’m sure the numbers look as bad (if not worse) than the taxi data below.

Let’s compare the efficiency of the taxi market vs. Uber, just to make it clear how inefficient the market was.

According to Deloitte Australia, the average wait time for an UberX is 4.46 minutes, compared to 7.79 minutes for taxis. That’s 3.33 minutes faster. Let’s assume that you earn the Australian average of $34.70 an hour. That 3.33 minutes is worth just under $2 of your time.

Pretty interesting, but the interesting data for me was the price difference between UberX and a Taxi in Australia’s major cities.

The average price of an UberX is $22.41 and the average price of a Taxi is $27.94. So, for every Taxi that isn’t taken the average person saves $5.53 and 3.33 minutes each trip.

Let’s compare 15 million trips on UberX vs. 15 million trips in a Taxi, both in terms of money and time saved.

From this data, taxis are the less efficient service with a higher price and longer waiting time. The value is created by offering a better product at a lower price.

The most important thing for Uber has always been the same thing. Be cheaper and faster than whatever they were competing against. In the beginning, that was black cars, now it’s taxis. Tomorrow, the goal is to be faster and cheaper than owning your own car.

This is exactly what Uber has done: the company spent its early years building its core technology and delivering a high-end experience with significantly higher prices than incumbent taxi companies. Eventually, though, the exact same technology was deployed to deliver an lower-priced experience to a significantly broader customer base; said customer base was brought on board at zero marginal cost. - Ben Thompson, Stratechery. [source]

Think about it, Uber wasn’t always cheaper than a taxi. It was a high-end experience. Now, it uses the same technology to deliver a cheaper experience. That’s what wonderful technology companies do.

Cheaper at the start doesn’t always mean cheaper at the end. The goal for any wonderful technology company is to bring the cost down over time as their core technology improves.