The Business Of
Sharing | Uber | How Do They Make Money?
Morning All!
So yesterday, we started Part 2 of The Business Of Sharing. And our focus this week is on Uber. We saw that the company has 3 business segments – the famous ridesharing business. The food delivery business – Uber Eats. And a logistics business – Uber Freight.
The chart below shows us how Uber’s $32bn revenue is split between the 3 segments. And I was pretty amazed to find that Freight makes up 22% of revenues – much larger than I would’ve guessed!
But as I mentioned yesterday, this week we’re going to focus pretty much solely on the Mobility business, for two reasons. One, because it makes up the largest proportion of Uber’s revenues. But two, because it makes up pretty much all of Uber’s profits… which we’ll talk more about tomorrow!
So, the format today is going to be very similar to Airbnb’s – How Do They Make Money newsletter. Because the drivers (no pun intended) for Uber’s revenue are pretty much the same as Airbnb’s. Just replace ‘nights’ with ‘rides’! And the table below illustrates that for us…
Alrighty, without further ado, let’s dive in!
Driver #1 - Rides Booked
Okay, so let’s look at the number of rides booked on Uber. In 2022, there were 4.7 billion rides made on the app. A huge number. But to be honest, that doesn’t really tell us that much. So, let’s split that number into 2 mini-drivers - (i) the number of users on the Uber app, and (ii) the average number of rides per user.
Now, let’s look at active users on the app. As we said yesterday, Uber started ridesharing in 2011. And 7 years later in 2018, the app had 91 million users. Pretty incredible. After a drop in 2020 – due to lockdowns – the app bounced back post-pandemic. And as we can see from the chart below, Uber had 131 million active users in 2022.
Now, for the purposes of our discussion, we’ll assume that all of these users are Mobility users. Obviously, some users will just use Uber Eats. Some might just use Uber Freight. But those numbers aren’t public! So, let’s keep it simple and say there were 131 million people who ordered an Uber ‘cab’ in 2022.
Right, so there are 131 million active users. The second part of our mini-equation was average number of rides booked per active user. And using some simple division, we can work out that 4.7 billion rides divided by 131 million users gives us 36. This means that the average active user on Uber booked 36 rides in 2022. 36! I’m not sure about you but that seems so high to me!
And it’s even more incredible that for Uber’s standards, this 36 is actually quite a bit below what the number was pre-pandemic.
Now, as I said, we assumed that all 131 million active users were Mobility users. If we assumed there are less Mobility users, that 36 number would be even higher! But 36 rides per user seems incredibly high to me. I mean I book an Uber maybe once a month.
But whilst it seems super high to me – for someone who has a car and is close to a tube station - there are plenty of people who use Uber daily. I tried to find stats on the % of people in New York/London who daily commute using Uber… but I couldn’t find any! Sorry!
Anyway, back to the mini equation. We have 131 million users who each book 36 times per year, on average. And that means Uber had 4.7 billion (131m x 36) rides booked on their app in 2022.
And whilst 4.7 billion is a mammoth number, would you believe it, it’s still 18% lower than the trips booked on Uber in 2019 - before the pandemic!
What I find absolutely astonishing about that chart, however, is that whilst Uber’s rides in 2020 fell due to social distancing - they did still see 3.1 billion rides booked. In a pandemic. When people were afraid to get into cabs and be around strangers. I think it’s a huge testament to the strength of the business that it can record such strong numbers even is a worst case scenario.
A couple of other interesting facts about Uber’s trips… 22% of Uber’s rides came from just 5 areas – Chicago, Los Angeles, New York, Sao Paulo and London. And 15% of their trips were either to or from the airport. Alright, let’s move onto driver #2!
Driver #2 - Booking Value/Ride
Okay, so we’ve seen the super high number of rides that are booked on Uber. The second thing to think about is - how much does the average ride cost?
Now, the numbers below aren’t exact. Because Uber doesn’t publish this info publicly. But I think they’re pretty decent estimates from looking at the info Uber does provide. As we can see, the average booking value/ride has increased ~29% since pre pandemic (2019) levels.
Now, a key question we need to ask is - how much control do Uber have over the cost of a ride? Remember we saw 2 weeks ago that Airbnb had limited control of the average nightly rate on their platform because it was up to guests how much they charged. Well, it’s completely different here. Uber has all the control! Because the driver doesn’t set the price of the ride. Uber does! More specifically, it’s Uber’s dynamic pricing algorithm.
This algorithm adjusts trip rates based on several variables including (i) distance, (ii) time of day, (iii) traffic, and (iv) rider-to-driver demand. And it’s this fourth factor (rider-to-driver demand) that results in what Uber calls surge pricing. When demand for drivers outweighs the supply of drivers, Uber hikes up prices of rides to get more drivers on the road. And sometimes these hikes go to extremes as the screenshot below shows us…!
Now, whilst surge pricing is an obvious example of how Uber control ride rates. I think the less obvious examples are the ones that show real control. If I go on exactly the same trip today (same distance, same time of day, same traffic and same rider-to-driver demand) vs in 5 years time. I obviously can’t forecast the future, but I’m pretty certain the price of that ride will be higher in 5 years’ time.
Uber can tweak its algorithm to bring about pricing growth every year. And that is real power. When we looked at The Business Of LVMH, we saw how the luxury goods company increases the prices of their new products every year by ~5%. Apple have been able to increase the prices of their iPhones every new release. But Uber is different. They can increase the prices of exactly the same service (the same ride) every year with limited loss of customers. Will people stop using Uber if a ride that costs £10 today costs £10.50 (5% growth) next year? I doubt it!
Driver #3 - Take Rate
Okay, so final revenue driver. And here’s where we’re at. 131 million active users on the app. An active user books a ride 36 times a year on average. And they pay on average ~$11 per ride. Which means that the total amount paid for rides on the Uber app in 2022 was $52.7 billion (131m x 36 x $11). And the table below reiterates that.
But as we can see, there’s one final bit missing. And that’s Uber’s take rate! Because whilst there’s $52.7bn being paid by Uber users (gross booking value). Uber only take a percentage of that as its own revenue. Remember, Airbnb had $63bn as gross booking value. And they took 13.3% of that as their revenue ($8.4bn).
The slight difference with Airbnb here however, is that it’s a lot harder for us to see what Uber take for themselves! Below, on the left, we can see the screen when we book on Airbnb as a guest. We know how much Airbnb are taking from us because Airbnb split out their service fee. However, on the right, we can see what the screen looks like when we book a trip on Uber. There’s no clue as to what Uber take as revenue! It just tells us what the overall trip costs.
However, while it’s not obvious for us as consumers, it’s all there in Uber’s annual reports. And the chart below shows us that Uber’s average take rate for 2022 was 27% - more than double Airbnb’s 13.3%! On Friday, we’ll be doing an Uber vs Airbnb comparison so we’ll look at this take rate difference in much more detail then.
But I want to briefly touch on this 27% now, because Uber’s take rate has a couple of parts to it. In the majority of countries that they operate, Uber’s algorithm will show app users the overall trip price. Uber will then decide how much of that they want to keep for themselves (their take rate). And the remainder they’ll give to drivers. That’s all pretty simple.
However, in some countries, it gets more complicated. For example, in the UK, due to a lost legal battle - Uber HAVE to pay drivers at least a minimum amount (£8.72) per hour. What does this mean for Uber? Well it means that Uber has less control in these countries. They first have to give drivers a certain amount of the ride fare. And then they keep the remainder as revenue. On Friday, we’ll be looking a lot closer at regulation. Because as we’ll see - for Uber, and Airbnb - regulation plays a huge part in their business models!
Putting It All Together!
Okay, so let’s wrap up! The table below shows us how Uber’s Mobility revenue and their revenue drivers have changed since 2018. And this kind of table is super useful. Because we can see that whilst Mobility trips (driver #1) are down -18% vs 2019, revenue is actually up +31%! Why is that?
Well it’s because the average GBV/trip (driver #2) is up 29% (from $8.6 to $11.1) and the take rate (driver #3) is up 24% (from 22% to 27%).
Okay, so that’s Mobility. But what about Uber as a whole? How have Uber Eats and Uber Freight done? Well, it’s interesting to see below that whilst Mobility revenue has increased ~$5bn vs 2018, the majority of Uber’s revenue growth has come from their other 2 segments!
Uber Eats revenue has grown from $0.8bn in 2018 to a whopping $10.9bn in 2022. And Uber Freights revenue has grown from $0.4bn to $6.9bn over the same period!
Now, I should clarify - Uber Eats and Uber Freight are driving most of the REVENUE growth for Uber overall. And as we all know by now on TBO, this only tells half the story. Because as we’ll see tomorrow, when it comes to profitability, Uber’s cab business is still king.
10th Oct 2023
And that’s a wrap! Tomorrow, we’ll crack on with looking at Uber’s margins. To see whether the ridesharing giant has been able to convert their revenues into profits!
Have a fabulous day!
The Business Of Team