Why are service apps like Uber and DoorDash losing so much money despite being so popular? What are they spending all that money on?
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Let’s say you take an Uber ride and pay $10.00. Most of the costs below grow in proportion to the ride costs – so double everything for a $20 rides. But for $10 rides:
* The driver gets $7.00
* Insurance costs are incredibly high, and unlike most costs, get higher on a per ride basis as Uber gets bigger (deeper pockets means more lawyers looking for huge settlements every time something bad happens.) Call this $0.75 for your ride.
* Credit card company gets 2.5%: $0.25
* IT costs: payments to google for google maps; to amazon for hosting, etc. $0.25
* State and municipal taxes: This is a big one. Hugely variable, and some states don’t let the companies charge through to riders, so it’s hidden. Call it $0.50.
* Driver acquisition: Huge costs. Marketing, signup bonuses, criminal background checks. And then most drivers leave every year and you have to get new ones all over again. This one’s big, call it $1.00/ride.
Ok, so on your $10.00 ride, they’ve spent $9.75. The remaining $0.25 isn’t nearly enough to cover rider marketing, engineering, customer service, executive pay, legal teams, etc. Say that all adds up to $1.00/ride. Now Uber’s in the hole $0.75 on your $10.00 ride.
So why don’t they just charge $1.00 more? They’re trying, but they’ve run thousands of experiments that show they’ll lose a lot of their business to Lyft, transit, personal cars etc if they do this. Investors wouldn’t like to see their demand crash.
Why not pay drivers $1.00 more to reduce the churn that increases driver acquisition? Where’s that money going to come from? Their unit economics don’t allow it.
Etc. There’s no easy solution.
(DoorDash is a bit more complicated since the restaurant gets paid too, but same general cost structure problems.)
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