Problem
Let's watch the Uber case presentation video below. The Uber case is Case 5 in the 8th edition of the textbook and Case 17 in the 7th edition.
The case discussion assignment has two parts: (i) view the group's presentation video; (ii) post your thoughts on the discussion board question below to the discussion board. If you are the presentation group member, while you don't need to do Part (1), the discussion board question needs your participation.
One major challenge for Uber is that its operating costs are greater than its gross profit. In 2021, Uber Technologies reported its first profitable quarter since the company launched in San Francisco way back in 2009; Uber did not make a profit for 12 years. In the second quarter of 2022, Uber posted record revenue but loses nearly $2 billion on investments. Why is it difficult for Uber to turn a profit?
We know that the regulations and the competition with Lyft and some overseas ridesharing companies forced Uber to spend high marketing expenses (price war, sign-up, referral bonuses, buying political influences, etc.). More specifically, Uber's SEC report filed on April 2019 suggested the following cost breakdown:
• Cost of revenue: Uber's highest cost is the cost of revenue, a category that includes insurance costs related to ride-hailing, incentives paid to drivers, and costs incurred with carriers for the Uber Freight trucking platform. In 2018, Uber spent $5.6 billion, or 50% of its revenue, on this category. Cost of revenue increased by $1.5 billion, or 35%, from 2017 to 2018, in part due to an increase in "excess driver incentives." Uber describes these incentives as any amount paid to a driver that exceeds the revenue earned by that driver (for instance, if a driver's earnings from a trip exceed the fare for that trip). Excess driver incentives jumped by about $300 million in 2018 from the previous year, mainly due to Uber Eats.
• Sales and marketing: While most driver promotions go into the cost of revenue, rider discounts go into Uber's next biggest expense, sales and marketing. In 2018, Uber spent $3.2 billion, or 28% of revenue, on this category. The company attributed this increase to $1.4 billion in discounts, promotions, refunds, and credits for customers, up from $949 million in 2017. Uber also puts driver referral bonuses into sales and marketing, and reduced that expense to $136 million in 2018, from $199 million in 2017.
• Research and development: A lesser but still significant expense for Uber is research and development, which includes its efforts to develop self-driving cars through its Advanced Technologies Group. In 2018, Uber spent $1.5 billion on research and development, or 13% of revenue, up from $1.2 billion in 2017. Of that $1.5 billion, $457 million was spent on Uber's autonomous vehicle research, up from $384 million in 2017.
Share with us your thoughts on how Uber can increase revenue and decrease costs? You can use 4P as the framework to organize your analysis. The following are some supporting questions (you do not need to submit answers to the questions below; use them to help structure and sharpen the analysis that supports your recommendations).
1. (Product/service): Should it expand the offering and integrate more functions into the app? If so, what do you think should be the focus of its expansion? Some current lines and projects include ridesharing, food delivery, freight hauling businesses, bikes and scooters, self-driver cars, flying taxis.
2. (Pricing): Should it abandon dynamic pricing? Or any recommendation for improving its dynamic pricing?
3. (Place): Should Uber further expand into overseas markets? Additional channels for requesting rides?
4. (Promotion): Is it possible for Uber to cut marketing costs? Any recommendation for making promotion (referral, discounts, loyalty programs, culture) more cost-efficient and building brand loyalty that it needs?