Before joining the trend, here’s a quick overview of the ridesharing industry.
The ridesharing industry saw modest growth within a decade of operation. The transport model is often described as “disruptive” technology. It has significantly increased access to affordable and reliable transportation. Especially in major cities that are underserved by public transits.
Uber and Lyft, the leading ridesharing companies, have continued to increase in popularity. This is because more people see this transport model as a better alternative to traditional transportation.
Uber, for example, operates in more than 65 countries and in over 600 cities worldwide. In the third quarter of 2019, its ridership reached over 1.7 billion trips globally. In less than a decade of operation, Uber and Lyft have provided more than 11 billion rides worldwide. Their combined market worth is more than $80 billion.
But behind these overwhelming statistics lies the industry’s key players’ great anxiety. While investments continue to grow, profits are not forthcoming. To close the gap, the ridesharing companies have launched a system to generate profits. This is done by increasing rideshare costs.
Raising Rideshare Costs
Uber and Lyft appear to be wooing more investors by raising rideshare costs. This is apart from seeking to maintain dominant positions in major cities.
The need to generate profits becomes more necessary now that Uber and Lyft have gone public. There’s pressure on these rideshare companies to convince potential investors that the transport model can be a profitable business. Luckily, many investors appear bullish about the possibility of high returns soon. The ridesharing companies have hatched a major plan to achieve profitability. It is to increase revenue and lower costs.
With the companies’ growing efforts to make profits, it becomes pertinent to investigate who bears the burden. Passengers or drivers? In this particular situation, passengers become the primary source of financial improvement. This understanding is anchored in the perception that passengers have a low sensitivity to price changes. But, drivers are very sensitive to changes in their wage.
Uber, the latest Silicon Valley “unicorn” might be over promising to investors. Time will tell. The company is reportedly targeting a market valuation of close to $100 billion. Achieving this will mean that the company has to increase resources to scale revenue and distribution lines.
One major way Uber is generating more revenue is through its surge pricing. Surge pricing is the practice of increasing prices when fewer cars are available and demand is high. A comprehensive study of rider behavior in the marketplace revealed little or no change in passengers’ behavior to change in price. This study drew facts from the company’s data.
From an economist’s point of view, one can describe passengers as “inelastic.” This is because demand for rides fell less than price increased. For every 15% increase in price, the demand only drops by 6-7%.
Drivers are not making more profits despite the increase in what passengers pay.
Despite the consistent rise in passenger’s rideshare fares, one thing has stayed constant. There’s no corresponding increase in what drivers earn. This observation has caused concern among drivers. They feel the change in price doesn’t reflect in their earnings.
There’s a disproportionate relationship between passengers’ fares and drivers’ earnings. Passengers report changes in pricing models. They increase fares for passengers while leaving drivers earnings constant. A 2018 online economy report published by JP Morgan showed that rideshare drivers made 53% less in 2017 compared to 2013. Uber was quick to dismiss the claim citing a rise in the number of part-time drivers as an excuse. Even so, the truth remains that drivers are noticing recent wage cuts.
The Market Implication Of Drivers’ Sensitivity To Wage Change
While passengers are less sensitive to price changes, drivers are quite sensitive. They notice how much they would possibly earn at a particular time. This sensitivity is partly due to the fact that there are several drivers that are ready to work at any given time. People enter or exit the market depending on change in prices. So, the elasticity in supply pushes the average wage to what economists refer to as “market rate.” This is also known as the going rate.
An increase in wages will still not make much difference in what an average driver earns at the end of the day. For example, imagine there’s a 10% increase in earnings. The average driver will increase their working hours by 20% in response to the change in wages. This is far greater than riders’ sensitivity to increases in fare. Here’s a report on drivers behavior. It confirms the sensitivity of Uber’s drivers to change in earnings.
What’s the implication of wage cut on drivers?
The occasion of wage cuts is having serious impacts on rideshare drivers. For some drivers, wages have gone down by half. For such individuals, it means they have to double the number of hours they work to keep up with their previous earnings. Some disgruntled drivers that find the situation too appalling are quitting their jobs.
The Guardian quoted Uber on admitting to a significant attrition. It is due to “challenges related to our culture and workplace practices.”
What’s the ridesharing companies’ response to the public outcry?
The ridesharing companies are not oblivious to the complaints coming from drivers. In fact, Uber agreed that it has continued to experience dissatisfaction from a significant number of their drivers. But despite calling bluff and boom, the hope of a possible “more favorable” pricing model looks dim.
Uber has always classified its drivers as independent contractors. This perception isn’t changing any time soon. It may not even change as the tech giant hopes to use autonomous vehicles to reduce the number of drivers it needs. Meanwhile, the company has pledged to “provide earnings opportunities comparable to that available in retail, wholesale, or restaurant services or other similar work.”
Tying It Up
The average pay for drivers will remain low as long as Uber and Lyft maintain their business models. They allow for free exit and entry into the market. Any slight increase in drivers’ earnings will always attract more drivers. This will thereby force wages to market rates.
On the brighter side, it won’t be easy for rideshare companies to cut wages much lower. Doing so will force more drivers to stop working. The companies won’t be able to bear continued attrition. This is because they haven’t started their plan for autonomous vehicles.
Rideshare Advertising: An Alternative For Drivers To Earn Passive Income
There is an emerging niche within the rideshare industry, rideshare advertising. Rideshare advertising helps brands and business owners connect with their target audience. This is done through rideshare vehicles. It can be in-car or on-car. Drivers can now earn passive income without doing any extra work. They simply display ads with their vehicles to riders and passers-by. They can sign up with any of the credible rideshare advertising companies. Tappin X, Play Octopus, Vugo and Wrapify are some of the top players. Rideshare advertising is a good way for drivers to make extra cash to supplement their rideshare earnings.
Drivers who are looking to start earning passive income can join Tappin X today. They can start displaying ads in the backseat of their cars to their riders. They earn more as passengers view and engage with the ads. Click here to sign up on Tappin X.
Table Of Contents
Chapter 1 – Rising Rideshare Costs
Chapter 2 – Raising Rideshare Costs
Chapter 4 – Tying It Up