Summary for Lyft CEO
Ride-hail is not going away, but it must to get profitable. You can try to “grow to profitability”, but as was have learned in the past, that is a risky proposition.
Uber is expanding, but it is already bigger than Lyft. Is that strategy profitable, and if it is, is there enough room for two players in it. Simultaneously, the path to profitability is getting harder with cities pushing back on Lyft and Uber, and as Lyft and Uber attract new customers, they may be less profitable riders. Consider another option: an alternative targeted and differentiated strategy:
- Lyft should double-down on a long-term strategy of letting Uber attempt to own the market… but in reality, building the interstate for Lyft to toll
- Continue to build cultural allegiance driver, rider, and city — which will differentiate and win in a commodity market in the longer-term, as Lyft captures share in an increasingly regulated environment
- Follow to profitable geographies
- Long term invest in autonomous public transport, leveraging massive experience with app / software and routing vehicles to individuals
Ride-hail – an establish Wall Street darling, dominated by two players
If you live in a city of any size over 50,000, it’s likely you have access to or ridden with a ride share / ride-hail firm — a firm that uses the vehicles of private people (being driven by those people) to synthesize a taxi-cab company. I certainly have used them extensively in business travel, and some for personal trips, too.
These services have changed the way that people experience big cities, and serve many important use cases, such as the following:
- Much less expensive alternative to a cab for those already using cabs, if you are concerned about money.
- Often a more pleasant experience than a taxi cab, even if someone else is paying for the ride (e.g. business travel)
- A not-that-much-more expensive option to public transportation (as public trans gets worse in many cities). This has been advance even further with the shared ride options on these apps
- A safe option for people (especially women) going home at night, in lieu of walking or public transportation
- Another excellent option to protect the public by giving another alternative to drunk driving
- A way of reducing parking fees, and sometimes even needing a car at all for consumers
- A method to take the load off of limited (and expensive) urban parking for municipalities
- In some cases, reduction in traffic
The 800 pound gorilla that rules the space is Uber, but there is a wiry and strong orangutan in the asphalt jungle as well: Lyft.
Today, we want to look at the Ride-hail market from both an industry perspective, but also from the standpoint of the Lyft CEO.
Ride-hail is a growing market, with broad customer appeal
As of July 2019, the ride-share market had grown to $184 billion (See Figure 1). This is predicted to grow, but with a diminishing year-over-year percentages of growth. The amazing thing is how much the US market is truly a duopoly, and it is getting even more so. In 2019, only 1% percent of revenue was from other companies, down from 4% just two years before.
Figure 1 – click to enlarge!
Figure 2 – click to enlarge!
Looking at Figure 3, we can better understand the customers of the Ride-hail revolution. Not surprisingly, the users are predicted to go up handsomely through through 2023, although revenue per user does not seem to go up by a lot. For example, from $184 in 2019 to $208 in 2023, that seems like it could only be 1-3 extra rides per user (and how much of that would be inflation)?
Figure 3 – click to enlarge!
Figure 3 also shows us WHO the users are. Not surprisingly, younger people are using Lyft and Uber more than older people. That is to be expected for a couple of reasons:
- Younger people tend to be more comfortable with technology and new ecosystems
- Younger people tend to live in urban areas, whereas there is a general trend when one gets older and is married (and especially with children) to move out to the ‘burbs or even more rural areas, where traffic is lighter and parking is plentiful, easy, and cheap.
However, the age demographic trend probably goes beyond this. The Wall Street Journal in 2019 noted a shocking fact that:
“about a quarter of 16-year-olds had a driver’s license in 2017, a sharp decline from nearly half in 1983”
Whoa… as someone who grew up in a rural area, this is shocking. Everyone I can remember in my high school viewed driving through the same lens: driving was cool; driving was a rite of passage to adulthood; driving was independence; driving was all American; driving was… personal freedom! However, the WSJ article does not shock me, because I have heard several people tell me about their kids or grandkids who have no interest in driving. If that is the case, then one would think that these as Zoomers become older, that average revenue per user would skyrocket (i.e. it’s pretty difficult to accomplish your transportation needs on $208, or even 2-3x that per year).
Interestingly, men use Ride-hail more than women. That was very counter-intuitive to me, but maybe that is because this is worldwide data, not only US. On average, the guys I observe in the US are cheaper than the girls (e.g. more likely to drive their own car and look for cheap parking rather than pay for a ride). And, one would think safety would be a greater concern for women in general (or they are more reasonably aware that it should be a concern than for some men). However, this probably means that there is good market growth potential as women’s share of usage increases, maybe past men’s.
However, the most encouraging demographic slice if you are the Lyft or Uber CEO is that the service seems to have broad appeal to all income levels. While it does skew to the high income earners, medium, and low income earners also have a substantial slice of the pie. Note though that it is probably not as “egalitarian” as it looks, depending on how these classes are defined. For example, if the high income group is 10% of the population then the revenue per user is much higher for people in the high income groups than that of the middle or low income groups.
But, Lyft and Uber’s thirst for growth makes it hard for investors to believe their claims of near-term profitability
Figure 4 – click to enlarge!
This all looks great, right? Well maybe, but this ride could also be more of a Delorean, taking us Back to the Future… back to about 2001. Remember, the “Internet Bubble” and its bursting? If we look at Figure 4, we see that while growth is very good on Figure 1 and 3, these are FAR from profitable companies, despite their IPO glamor.
While Uber seems to be doing better than Lyft on Operating margin, Operational Net Margin, and EBITDA Margin both are extremely negative. However, when Lyft calculates their version of adjusted EBITDA, they claim that it was only -45% in the 3 months ended September 2018 and now is a mere -13.4% for the 3 months ended September 2019. You can see how Lyft gets to its number on Figure 4, which shows it’s adjusted EBITDA calculation. Lyft claimed in October 2019 it would be adjusted EBITDA positive by end of Q4 2021. Uber is doing worse (-15% adjusted adjusted EBITDA margin) per their own EBITDA numbers for Q3 2019, although it is interesting to see how it breaks out by business line. The core business of rides does have positive EBITDA, but all the other business lines are in the red.
So, why doesn’t Uber just divest these unprofitable new ventures (or at least quit dumping so much fuel into their tanks). Some believe, it is the insatiable need for growth to stave off investor confidence loss and the bursting of the next potential bubble.
Figure 5 – click to enlarge!
Figure 6 – click to enlarge!
There is a concern that the most lucrative markets are becoming saturated and that municipalities are about to strike back
There is some potential worry over global revenue by country (Figure 7). It’s amazing that 91% of the ride-hail revenue is from only three countries and 97% from five. On one hand that seems like an opportunity for Lyft and Uber. I.E. can’t they reap massive growth by opening up LATAM and the EU? Maybe, but there are concerns:
- Opening up new countries requires expensive fixed cost investments to be made
- Just like secondary locations for a franchise, the “B and C” tend to be more expensive / less profitable than the A sites.
- Different geographies can bring different competitive threats. For example in the EU, competitors are focused on profit and efficiency more than the US Silicon Valley heavy-weights.
Figure 7 – click to enlarge!
In other markets, saturation could become a limiter. For example, in the Ride-hail markets biggest geography (China) the market is already 36% saturated. Granted, it is controlled 90% by Didi, which Uber partially owns. But, the question on my mind remains: is the other 64% of the market (a) real and (b) able to be served at reasonable profitability? Supply and demand tells us that profitability will suffer as ride-share penetration goes up.
In the US, it would appear that ride share penetration has a lot of room in the trunk still. It is only 22% penetrated on average, per Figure 7. And according to certify.com, many large cities have lots of share left to take. However, one wonders how long Uber and Lyft can go before suffering more profit and demand-damaging actions from cities. For example:
- California is trying to bend Lyft and Uber to their will by forcing drivers to be treated as employees, not independent contractors.
- Chicago’s mayor just tripled taxes on Lyft and Uber for downtown rides and raised them elsewhere.
- Many cities are upset, because they believe Lyft and Uber are causing more traffic and congestion, not relieving it. As rides get cheaper, more people, they believe, are being wooed away from public transport. And, as anyone who lives in a major US city knows, public transport is already rarely profitable, and often a quite unpleasant experience.
There are big differences in Uber and Lyft, not apparent to outsiders on first glance
Figure 8 – click to enlarge!
So, what do you do if you are Lyft’s CEO? To answer that question, we should go beyond the financial numbers only, to more fundamental differences. Figure 8 shows us some operational data. Uber has a much more massive international footprint and is expanding into lots of revenue streams. If Uber and Lyft are both about “get big fast,” Uber wants to be the BIGGEST and the fastest. That shows in its driving metric of number of users on its platform. On the other hand Lyft seems much more concerned about profitability (for themselves and their drivers). Although, from previous figures, we can see their own concepts of adjusted EBITDA do not really vary much in the end result. This should give us a clue to a hypothesis, i.e. maybe Lyft should focus on being efficiently fast drivers, not reckless speed demons, as Uber seems to like?
Figure 9 – click to enlarge!
To confirm investigate further, let us take a look at a cultural snapshot of these companies (Figure 9). I always like to say, “Everything has a genesis from people to software.” That genesis typically has long lasting and inherent influence on who we grow up to be and how we grow up to be. Uber spawned from the idea of improving black car service; Lyft was was more personal and folksy, about public transit and car-pooling. This helped forge each company’s values. Lyft is “your friend with a car,” where Uber is more the slick velvet rope service, without a VIP price.
SOURCES for Figures 8 & 9:
A common complaint in both companies cultures, but that seems worse in Uber’s, is the feeling that most drivers have that the compensation they make is very murky. It is not transparent to the driver and, especially on Uber, it seems to be constantly changing. This gives Ride-hail compensation the gestalt of a shell game or a pyramid scheme sales contest. In fact, many drivers are getting an MBA from the school of hard knocks in the difference between cash flow (which they see) and profit (which they are uncertain they are making).
To [over?]abstract and synthesize these two competitors (which can look identical to many users, investors, and casual observers), we could put Lyft and Uber on a a trusty 2×2 matrix (Figure 10). The axes would be the financial strategy to win vs. the cultural strategy to win. NOTE: on this 2×2 matrix which quadrant in which a competitor resides is only strategically positional. It does not imply better or worse (e.g. top-right quadrant is not necessarily better.).
Figure 10 – click to enlarge!
Uber started off at the top right, which is:
- Financial strategy: Get big, fast / 1st mover (geographic scale and platform breadth)
- Cultural strategy:
- For rider: reliability, formality, hospitality
- For driver: provide the volume of riders
On the other hand, Lyft is in the opposing corner:
- Financial strategy: More steady & safe risk valuation growth (higher rev. / rider, fast follower to Uber)
- Cultural strategy:
- For rider: authenticity, fun, ethics
- For driver: transparency, higher-profit rides
However, Uber struggled at the end of the founding CEO’s tenure with some alleged internal cultural challenges that eventually led to a CEO change. The new CEO seems to have nudged Uber’s cultural position in the direction of Lyft. However, how much of this was reactionary vs. strategic is unknown.
Looking at the service itself, Ride-hail is mostly a commodity at the end of the day. In a commodity, market, who ever has the lowest price, wins. Often, having a lower price is dependent on scale, because then overheads can be amortized more efficiently. Uber is ALREADY much bigger than Lyft, even in the US alone. Therefore, it is a risky / unlikely proposition that Lyft can overtake Uber to be the low-cost producer in a commoditized market.
Lyft needs to structure its go-to-market on it own terms as a differentiated and city/driver-friendly player, letting Uber be the commodity business and high-end player
Lyft needs to DE-COMMODITIZE the market by leveraging its natural cultural strengths and accumulated good will with drivers and riders. There are 3 stakeholders (outside of Wall Street) it needs to win:
Figure 11 has recommendations for each of those areas. Long term, it is likely there will be less need for drivers, if autonomous vehicles do finally become technologically and financially feasible. However, many think that is 10-20 years away, and until that happens, why not have drivers who want to take your rides first, before accepting Uber’s? Uber may still have the volume, but Lyft is continuing to grow that. Lyft needs to give drivers more and simpler choices. For example, they could offer drivers who prefer more steady income a more set salary, while allowing others to take more reward with risk. Either way, the driver needs to feel that he (/she) is in control and certain of how much he’s making on the fare. In fact, the Lyft’s driver app team needs to work very hard to offer the driver simple to use graphical tools on the driver app to intelligently make that decision.
Figure 11 – click to enlarge!
Happy and more loyal drivers can help with the other two constituencies, especially municipalities. Ride-hail drivers are not the wealthy. Lyft needs to educate municipalities that a good number of these drivers are lower income, and if not for Lyft, they could not afford their own vehicle and/or would be using more city resources for the poor. That would play especially well with more socialist regimes like California and Chicago, who are the vanguard that is harrying Lyft and Uber
Lyft should also should be partnering with cities where Lyft can do the city cannot. The big difference between Ride-hail and public trans, is that public trans has a set course, where ride-hail is on demand and creates custom routes. But, there are positions in between on this spectrum. For example, Lyft could allow enterprising drivers to buy or lease mini-buses, custom designed for rapid ingress / egress (e.g. every row has a door on each side and there are 3-5 rows with easy to maintain but study individual seats). These buses could be Geo-fenced to areas with high densities of riders. Think of the possible advantages for the stakeholders:
- Rider, gets to stay inside in the warmth (winter) or cool (summer) until the mini-bus arrives (same as ride-hail). Compare to the frigid experience at a Chicago El or bus stop!
- Rider pays less, becuase the mini-bus or ride-hail van is a logical extension of the shared ride idea that Lyft Line uses already
- Cities like it, because every ride-hail van takes 3-4 individual cars off the road, reducing traffic and the need for parking
- Cities like it, because it helps the environment. These ride-hail vans could even be electric, charging in the bus lanes if there are already tram cables and / or with fast swap batteries that are replaced at a few swap stations around the Geo-fenced areas, while the driver takes a break, eats, etc.
- Cities can use it for multi-modal travel. At the end of the night, if someone lives outside the mini-bus radius, the bus can drop them of at a charging station with a warm and safe waiting room to be picked up by an individual Lyft to complete the trip home (coordinated to arrive, at the same time the mini-bus does). These charging / transfer stations could also be located close to subway or buss stops in various directions.
- Cities could be convinced by Lyft that this is “hybrid-public” transportation and tax it, but in return, all the ride-hail mini-buses get to use bus lanes and other priority traffic mechanisms
- Driver makes less per rider, but is getting many more riders per hour, because the pick-ups and drop-offs are very close to one another and fast, due to the design of the vehicle.
- Driver spends less time in traffic and waiting for the next ride and more time with paying passengers.
What is the barrier to entry? Only someone with the experience and technology of a Lyft and Uber has the tech ecosystem (app for drivers, servers to plot routes, past learning, network of drivers, etc.) to make this work. Individual cities can’t do this themselves, but they could using Lyft’s technology. Alternatively, they could pay a SAAS subscription or revenue royalty to use the Lyft tech platform and staff it with their own public trans employers and owned ride-hail vans. There are many options, but this would be a “sticky” partnership, i.e. once a city sets this up with Lyft, they would have a lot of natural disincentives to stop the relationship. For example, hundreds of their citizens would be employed in this Lyft/city ecosystem and tens of thousands would be happy users of the network. Is a mayor up for re-election going to mess with that? In fact, instead of cities fighting to keep Lyft out, or Lyft waiting for the 800 pound Uber to kick down the door into a new city, new cities may invite Lyft in to start such a partnership.
The last stakeholder is the rider. We have discussed some benefits to the rider already. Lyft may be ceding some of the high income / business class to Uber in this strategy, but maybe not. Given the younger demographics of ride-hail, Lyft can leverage its car-pool / environmental / fun image to younger riders. As they age and get promoted in their jobs, they likely will have loyalty to the Lyft brand, when they graduate to the more expensive and exclusive private ride-hail vehicles.
In traditional private car ride-hail, lyft should double-down on a long-term strategy of letting Uber attempt to kick down the doors first and then come into the market after it is proven possible and profitable.
Ride-hail is here to stay. Literally millions of riding customers would be angry, if it stopped. But, it has to get profitable. Uber is 150% wed to its get-big-fast and become a travel and freight conglomerate strategy. The questions are: is that strategy profitable, and if it is, is there enough room for two players in it. Both are murky questions, but there are other, less risky options for Lyft to pursue. Simultaneously, the path to profitability is getting harder with cities pushing back on the ride-hail players and the ride-hail players likely suffering less profitable riders as they penetrate the market and his supply / demand constraints. If Lyft pursues an alternative targeted and differentiated strategy, it can re-route around the jammed-up main traffic arteries on which Uber and it are currently driving together, and take a short cut to a profitable and sustainable destination.
Eric Arno Hiller is the managing partner of Hiller Associates, the leading consulting firm specializing in Product Cost Management (PCM), should-cost, design-to-value and software product management. He is a former McKinsey & Company engagement manager and operations expert. Before McKinsey, Mr. Hiller was the co-founder and founding CEO of two high technology start-ups: aPriori (a PCM software platform) and TADA.today. Before aPriori & TADA, he worked in product development and manufacturing at Ford Motor Co., John Deere, and Procter & Gamble. Mr. Hiller is the author of the PCM blog ProductProfitAndRisk.com. He holds an MBA from the Harvard Business School and a master’s and bachelor’s degree in mechanical engineering from the University of Illinois Urbana-Champaign.