by Deepak Shenoy, Capital Mind
I’ve been taking a lot of Ubers and Olas to work. More Uber than Ola [1], and I get phenomenal conversations because I can speak in Kannada, which is apparently a rare thing in Bangalore, looking at the number of drivers who seem to be delighted.
The economics, from the driver’s angle, is fascinating. The first few things you realize is:
- The drivers are not “dumb”. Like I’ve found with auto drivers and politics (excellent awareness), the economics is plain obvious to the Uber drivers and they aren’t headless chickens.
- The vast majority of them are honest drivers who actually call each trip a “duty”. But each one is prone to a few points of “abusing the system”. We’ll get to that.
- There is complete acceptance that the current economic situation is extremely abnormal, and they are all scared of things changing .
- Most drivers are on multiple networks – Uber, Ola, TaxiForSure – and there is very little loyalty other than to the money.
- They don’t hesitate to tell you they’re being mercenary, and totally know that if I am paying X and they are getting 3X, Uber is paying the rest. But they won’t take any less.
Let’s take a deeper look into the economics of the business.
[1] I like Uber more because it’s cashless through PayTM or a Credit Card (launched recently). Ola’s cashless system of Ola Money is a waste of time because you can’t use it elsewhere. And drivers hate it to the point many will cancel your trip if you say you’re using it. Plus PayTM offers cash backs on purchases that you can use for Uber.
For the Passenger: The Rs. 7 Per Kilometer is actually Rs. 13.5 per Kilometer
Uber advertises its lowest fare in Bangalore at Rs. 7 per km charge but that is utter bull. For an average 10 km ride in the city, it costs much more:
- a Rs. 35 base charge that has no free usage, which would be Rs. 3.5 per km.
- Rs. 7 per kilometer run
- Rs. 1 per minute as a driver fee. For an average of 3 minutes per kilometer this comes to Rs. 3 per km.
These add up to Rs. 13.5 per kilometer. That’s how much you pay for an auto as well.
The economics: Should You Ditch Your Car?
At Rs. 13.5 per kilometer, your car would have to give you a fuel efficiency of 6 per liter for the economics to make any sense. I see comparisons of – oh you pay X for the fuel, Y for the driver cost, Z for the parking…this is utter bullshit. Owning a car means I will drive it; I don’t need a driver (if you do, your economics are different from mine, and I believe people like me are FAR more prevalent). Plus I’ve already paid for the parking – it comes with my house!
The annual costs of a car are tiny nowadays (Rs. 1 per kilometer, assuming Rs. 12,000 service costs for Rs. 12,000 driven). So if my car gives me 12 kms to a liter of petrol, i’m still paying just Rs. 5.5 per km for petrol and Rs. 1 for parking.
Add to this the convenience of owning a car, the ability to get groceries from hypermarkets that can’t or won’t deliver, the ability to drive your kids to a location just 2 minutes away because walking will kill you (welcome to Bangalore, just don’t walk anywhere). And the underappreciated advantage of being able to just up and leave at 6 am to smell the fresh air in the western ghats.
And then, Uber cars are not available when you want them – wait times are upwards of 10 minutes most of the time, unless you’re in a favoured location. Then, there are spikes – if it rains, Uber goes to 1.5x “surge” pricing. All this will not vanish because drivers too have their economics which ensures such practices (long wait times, surge pricing) will continue.
Oh, Uber and Ola will simply not replace cars, even at these “low” costs. I take a Uber even though I own a car only because the cost is low today – I get an airconditioned car for the price of an auto, and I don’t have to find parking if I leave later. (Every day that I leave home early, I take my own car)
For The Driver: You Pay Rs. 100, the Driver Makes Rs. 300: Uber Pays The Rest
I travel about 7 kilometers to office per day. My bill is between Rs. 100-120, given slightly longer than average time to destination. The driver, though, gets nearly Rs. 300 for my ride. How?
- The Rs. 100 I pay
- Uber pays Rs. 100 “incentive” per ride
- If he takes 12-13 rides per day, he gets another Rs. 1,200 which is Rs. 90 per ride
Out of the Rs. 300 he makes, he apparently “pays” Uber 25%. So he makes a net fee of Rs. 225.
This is awesome for him, because:
- For 12 rides a day, he gets Rs. 1200, plus Rs. 100 per ride incentive = Rs. 1200, plus Rs. 100-150 per ride as a fare = Rs. 1200-1800.
- That’s about Rs. 3600 – 4200 per day.
- Of which he pays Rs. 1000 or so to Uber, and nets Rs. 2500 to 3000
- Most drivers I’ve met say that their target gross number is Rs. 2,000 per day – if they make it they consider it a good day, many just drop out after that. (There’s a lower Rs. 500 incentive for 8 rides, and many make their Rs. 2000 target at that point)
- That’s about Rs. 60,000 per month for a driver (gross) and net, around Rs. 45,000.
His costs are:
- Rs. 15,000 as EMI for the car
- Rs. 10,000 for fuel costs and service
- Net costs of Rs. 25,000 – they’ll take home Rs. 20,000 or so, which is sweet because it’s about 15% more than they can make as a standalone driver.
For Uber: This is a Lousy Deal, So Probably Called Marketing Expense
- Uber only gets what you and I pay. I pay Rs. 100 per ride. If you multiply that by 12 rides, that’s Rs. 1200 that they get, per day, per car. Let’s be nice and say they get Rs. 1,800 at the average of Rs. 150 per ride.
- The driver, as you can see, makes Rs. 3,000 per day, even after “paying” Uber their fees.
- So Uber’s paying the rest, at Rs. 1,200 per day of net losses.
- (Apart from this they pay 14% service tax, and apparently don’t charge the drivers yet, so that’s an extra loss)
- For 12,000 drivers (this is the average figure I hear in Bangalore from the drivers) that’s Rs. 1.5 crore, or Rs. 15 million per day.
- In Dollar terms, that’s $250,000 per day.
- For 30 days, that Rs. 45 crores, or $7.5 million – per month, of losses in Bangalore alone.
- The annual losses will be around Rs. 500 cr. or more, just short of $100 million. This is not considering any other expenses like marketing or salaries or support.
This is now, when incentives are low. They started with a Rs. 250 incentive per ride, and even higher number-of-rides incentives.
What can Uber do?
- Hope to reduce incentives. They’ve been trying, but the Rs. 100 is a huge roadblock. People defect to the other subsidized services (Ola, Taxiforsure etc) and even back to chauffered pickup cabs for companies, if they go below that.
- Hope to increase charges; they would have to up them by 2.5x just to break even (assuming no reduction in driver incomes). I don’t think the market will pay that much. (I wouldn’t)
- A bit of both? This is unlikely to work – people are very price sensitive and will use Uber only for certain times if prices are higher than an auto. And drivers don’t have that much room for comfort either.
In all the above, there is an unsaid problem, which currently is not a problem.
Make The Economics Work, And We’ll Have The Auto Problem
If drivers drive 1.5 km to connect with you today, it’s because they’re getting paid that Rs. 300 (okay, Rs. 225) per ride, no matter what.
They don’t crib about where they you want to go. They don’t mind going to a remote place. Uber’s incentives make them go for it. In fact, after 7 or 11 rides, just to make that last one count, they might ask a friend to book a small ride – of say Rs. 50 – so that they don’t lose the incentive. They even request customers – and in one case, when I had to drop a friend off in the middle, I even did it on my own (because Uber’s supposed to be point to point, so I told him I’ll rebook where my friend was dropped).
If you take away these incentives, it will go back to the Auto problem. Drivers will call and ask you where you want to go, and then refuse the ride. Uber might think that this will reduce driver rating which will kick them off the system. But if this is rampant, no “rating” system will help – and as we have seen in Autos, it *is* rampant, even though there are 2x more autos on the road than demand.
And if you increase fares, many drivers will not even use Uber – you will be able to pick them off the road which is how you pick up Autos. A simple app to measure distances is all you need – and there are tons today. That saves drivers and passengers the 25% that Uber would otherwise charge. And it saves the hassle of having to struggle with surge pricing and all that. A service to call taxis is not very difficult to build, and if Uber takes out incentives these kind of services will easily find their way into every city.
In effect Uber has to keep losing money, for a long time, to drive all competition into the ground. And then hope that as a monopoly it can raise prices and cut incentives. And regulators must not interfere. And public transport should not increase appropriately. And oil prices should be stable. And incomes should go up substantially. There is a non-zero probability of this happening. But even without the math, you get the feeling it’s a lot closer to zero than to one-zero-zero.
Currently, though, it’s a sweet deal for drivers and passengers. I know there will be die hard fans who think Uber is the best thing in the world (or Ola or whoever) but the economics of the business leave a lot to be desired. As a consumer, though, I’m taking all I can get before someone decides the red ink on the P&L has to go.
About Deepak Shenoy: Deepak Founded Capital Mind, which mines financial data and provides analytics. Deepak is part of the core team that helps build, grow and keep our data platform up to date. He lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.
Read the original article here.
