It is common for companies to give discounts to their most loyal and biggest-spending customers. A discount means the company enjoys a lower profit margin on each transaction, but a greater number of transactions is good for profits overall.
However, if you’re an executive at Uber, you should take note: This model is built on the assumption that you have a positive profit margin. If you lose money on each transaction, then your “best” customers are actually your worst customers. The more products or services they buy from you, the more money you lose. And if you insist on giving them discounts in exchange for their loyalty, you will lose even more money. The amount you lose per transaction will grow, and they’ll do more transactions because you gave them such a good deal.
In this vein, let’s talk about the discount deal Uber has been offering me lately. If I take at least five Uber rides in a week (which I almost invariably do) then I unlock a promotion of 50 percent off rides the next week, up to a maximum of $10 off each ride and up to 20 rides per week. This is a pretty sweet deal for me, but it almost surely means Uber is losing money on my business, while encouraging me to give them more money-losing business than I already do.
For example: I took a 2.17-mile, 25-minute Uber trip in Manhattan last Wednesday afternoon. After discounts, I was charged just $9.14 for this trip, before tipping. That left Uber with just $5.60 in available revenue from the ride, since it had to remit a $2.75 congestion surcharge and $0.79 in taxes and fees to the government.
Is it plausible Uber made a profit on this trip? Remember, regardless of what actual fare revenue they generate, Uber is subject to a government mandate to pay its drivers at least $17.22 per hour after expenses in New York City, which is equivalent to $27.86 before expenses. Uber has actually supported this regulation, believing it’s in a better position to comply than its competitors are; Lyft and Juno have sued to block the rule. At the time the rule went into effect, in a since-deleted blog post, Uber said the rule would lead to higher fares for customers in New York; indeed, I was being charged more for a time, but here I am, three months later, receiving repeated, deep discounts.
Obviously, there is no profitable way for Uber to pay drivers $27.86 per hour by generating fares like $5.60 for 25 minutes. Maybe the reason Uber felt it could work with this regulation is it doesn’t mind losing money.
This is a problem that Uber poses for policy-makers. Usually, you can incentivize behavior by imposing taxes and granting subsidies. The idea behind the congestion charge is it is supposed to get passed on to customers, who will choose to take fewer Uber rides, leading to less congestion. It also seemed plausible the driver pay floor would lead to higher fares and fewer cars on the road. But what happens if all these transactions are intermediated by a company with an abnormal relationship to profits? That is, what if Uber just eats the cost of higher driver pay and congestion charges instead of passing them on to customers? Certainly these regulations aren’t reducing my rideshare usage because I’m not bearing their costs.
As with so many things about Uber, my main question here is: Why? Does this company not like money? Even the theory that Uber is engaged in predatory pricing designed to drive its rideshare competitors out of business makes little sense, as the company admitted in its IPO filing it needs to price its services below cost to compete effectively against non-rideshare modes of transportation, such as driving your own car or walking.
This is something for lawmakers to keep in mind as they set congestion policies: If these policies depend on the imposed fees actually getting borne by the end consumer, they had better make sure they are actually getting passed through to the end consumer, since Uber seems bent on losing money in every creative way it can find.