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June 13, 2016updated 21 Sep 2016 12:29pm

The dangers and pitfalls of the Uber business model

Analysis: Uber has given rise to uberisation, with companies rushing to digitally disrupt and transform. However, very real dangers exist in the race to get 'uberised'.

By Ellie Burns

No-one can deny that Uber is the archetype of digital disruption. It has completely changed the face of the transportation industry, specifically the taxi hire business.

Ensuring a high-level of service at low cost, Uber uses a smartphone app to provide on-demand services to users, connecting passengers to taxi drivers. The taxi driver uses their own car to provide the service and Uber gets a 20% cut of the fare. Uber doesn’t employ any of the taxi drivers, nor owns any taxi vehicle.

Although this business model has expanded to include other services, the simple business model still remains. Not just remains, has flourished – kick-starting a rise of imitators and spawning ‘uberisation’ as a term synonymous with digital disruption.

There is no denying that the simple business model has worked for others – you only need look at how AirBnB has disrupted the hotel industry – and many businesses have seized upon the idea of uberisation and digital transformation, as Justin Anderson, Acting GM, Appirio, told CBR:

“In the last few years, all we seem to have heard is that organisations should follow in Uber’s footsteps. ‘Uberisation’ has become a verb in its own right to describe a disruptive business or a disruptive business process, specifically by thinking of any business as a tech business.

“The Uber example is certainly a good one in terms of showing how a disruptive strategy can reinvent a traditional market by putting technology at the heart of what it does. Many businesses should – quite rightly – look at aspects of its success and at ways they can in turn ‘digitally transform’.

However, switching over to an Uber business model is not straightforward or simple by any means – one of the first pitfalls a large established company may fall into. Uber did not have to digitally transform or change processes to get where they are today, nor struggle with legacy systems as Justin Anderson further explained:

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“You can’t change a business model overnight. Uber had the advantage of being new to the market so didn’t have any legacy to overcome – it could start with a blank sheet of paper – or sheet of code, as it were. Many businesses don’t have that luxury, and are instead bogged down with outdated legacy systems and processes.

“To actualise digital disruption, businesses need to find the right partner to lead the planning, strategy, and execution of the transformation – and do this in days and weeks, not months and years.”

Then there is the question of whether the Uber business model is actually a fit for the company in question. Uber didn’t succeed because it offered low priced taxis; it succeeded because it made the process of booking better and simpler, alongside specific market factors, as Colin Tyler, Partner at OC&C Strategy Consultants, explained to CBR:

“An Uber-style business model can only thrive if the following three elements are in place. Firstly, the sector in question needs to have an existing fragmented customer base and a large number of small providers. If the industry is dominated by only a few providers or customers it won’t work.

“Secondly, for Uber-style technology to have its greatest impact there must be significant inefficiencies and complex processes which are currently costly and painful.

“And finally, in order for such a solution to be adopted and persist in the long run, rather than emphasising lower costs alone, the value that an improved Uber-style solution brings needs to benefit both the providers and the customers”.

Dangers of the Uber business model

There is also a sustainability question which must be addressed when looking at the Uber business model. It is by no means a simple business to run – regulatory battles and losses are seemingly hidden from view behind the mammoth billion-dollar valuation of the taxi app business. Tej Kohli, founder and chairman of venture capital firm Kohli Ventures, told CBR:

“Uber is a valued at around $62.5bn, and recently received a $3.5bn investment from the Saudi Arabian Sovereign Wealth fund. It’s no wonder that there are hundreds of businesses rushing to become the next ‘Uber of x’, but businesses should beware the pitfalls of Uberisation. Uber is actually a loss making company, embroiled in a constant price war in every geography.

“The latest $3.5bn will be used to undercut its competitors in every market, while the revenues from rides will struggle to cover the legal fees in its various regulatory battles. Uber’s impressive success stems from its ability to spend huge amounts of money on advertising and undercutting its competitors. This might be sustainable for a Silicon Valley giant, but for the vast majority of start-ups it certainly isn’t.”

Kohli alludes to another danger of the Uber business model while pointing to the losses and marketing strategy of the company – regulation. Being a new company there is little regulation governing the operation of Uber, a fact which means there is no accountability. This Kohli, argues, is bad for both employees and customers. It can also be argued that Uber has navigated around workplace and employee regulation by using drivers as ‘partners’ or ‘customers’, without directly employing them. This has led to an ethics row centred on workplace benefits and workers rights. An important topic for Kohli, the venture capitalist told CBR:

“Until recently it referred to its drivers as ‘partners’ but recently changed to refer to drivers as ‘customers’ which feels like a better description but still not entirely accurate. Uber treats drivers like employees but denies them the benefits that employees of other business would expect. Despite its refusal to provide these benefits, it applies similar penalties that an employee could expect for breaking workplace rules; driver’s routes are dictated by the Uber app and a driver who turns down too many rides could have their Uber account deactivated.

“Uber is currently embroiled in a legal battle with British drivers over benefits such as holiday pay, sick leave and minimum wage guarantee – none of which Uber is willing to provide. Personally I believe in respecting your employees, and treating them fairly. In doing so you guarantee loyalty and a better work ethic, which in turn leads to a more successful business. Uber has a huge churn rate, meaning that there is a shortage of drivers and many those that do still drive are overworked and under paid or even suing Uber.”
First and foremost, a business must decide if an Uber business model is right for them. It is not for everyone, with the business model hard to adapt for established companies with legacy systems. The numbers show that Uber is a loss making company, fuelling questions around the sustainability of such a business model. These issues exist alongside regulation issues and ethical questions surrounding the Uber-driver, employer-employee dynamic. However, these dangers and pitfalls highlighted above are sometimes little more than an afterthought as the rush to digitise, no matter what, is seized upon my companies.

Large, established companies fear any Uber-like competitor threatening to disrupt a whole industry and rake in billions. This fear is driving transformation and shifts in strategy by many companies who do not even fit the Uber business model.

Instead, companies should look at how Uber has created a revolution in consumer user experience, completely transforming expectations of services. The end-user must be the priority, as Stephen Morgan, Co-Founder at digital transformation business Squiz, told CBR:

“Developing and sticking to a business strategy that is centred around the end user is essential to identify problems with an existing model. Established tech companies can then continuously excite customers with new experiences and features, whilst constantly identifying the opportunity for improvement.

“In this sense, innovation must be thought of within the process, not just as an end goal. When businesses value this they can undertake longer transformation projects that will enable them to reengineer their model and enable them to succeed in this digital world for the long term.”

Companies should be inspired by how Uber catered for the end-user, not embark on a radical shift and transformation based on the fear of ‘uberisation’. The Uber business model has disrupted and succeeded – but success may not come to every company which follows such a model.

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