The ride-hailing app Lyft is Uber’s largest competitor in the US. Uber and Lyft have been undercutting each other on price in the US for a long time, just as Uber and Ola do in India. This savage undercutting continues even as several other new start-ups in the ride-hailing business are attempting to gain traction in the market.
It appears to me that the businesses that “disrupted” the taxi and hire-a-car industries are now themselves in danger of being disrupted, simply by undercutting each other in a real-life enactment of a quote often attributed to Mahatma Gandhi—“an eye for an eye and the whole world goes blind”.
Speaking of eyes, all that any one of these providers really want to do is to catch yours. If you promote them to the first screen of your smartphone, rather than relegate them somewhere to the back of the many app screens that most phones have, they have a chance of being used more often. There is a direct correlation between the eyeballs they receive and the market share they enjoy.
Catching someone’s eye is one thing, stopping a roving eye is quite another. Customer loyalty is now a top priority for ride-hailing apps as they recognize that competing only on price is suicidal. So, in addition to their ongoing price wars, they have attempted to ramp up their technologies in many ways, as well as increase the quality of their service by providing instant feedback mechanisms such as the “rate your trip” screen that pops up on users’ screens as soon as the ride is complete.
However, technological bells and whistles and instant feedback are only two factors that ensure customer loyalty, and firms need to go back to other, traditional methods to ensure the “stickiness” of their customer base. One traditional business model that has been used for years to ensure loyalty is the subscription business model, largely because once a firm has a subscriber, it has captured a predictable revenue stream for a predefined period. This holds true for all industries. Countless firms have used this model to succeed, even in the old economy.
The old economy consulting and services companies I worked for have a “feast or famine” revenue model, where revenue is sporadic. They work hard to convert at least a portion of their revenue streams into subscription revenue streams by providing research reports or other such services where revenue is spread over long periods of time to get to an “annuity” revenue base. This means that their revenue swings from quarter to quarter are reduced. Information technology services and outsourcing firms have also attempted to build annuity revenues by securing long-term contracts for infrastructure management or application management, rather than only take on bespoke, short-term application development projects. Many do this even at the cost of sacrificing margin, since investors do not like the revenue surprises that come each quarter when a firm has sporadic project-based revenue.
The subscription model hasn’t been lost on the new economy either. Indeed, many start-ups began their businesses based solely on a subscription model—Spotify, the music streaming service, is one such, as is Netflix. Amazon is also seeking to build subscription services like Amazon Prime. Microsoft has its Office 365.
And now, as Lyft considers going public and facing unrelenting investor scrutiny, it is launching its own subscription model, which will allow subscribers to buy an “All-Access” plan each month. The plan is designed to give users a certain number of rides at a predetermined price and already has a wait list.
Uber and Lyft have been experimenting with the subscription idea for a while, but have found it difficult to implement. This is because each ride has a large additional variable cost in fuel and driver time, unlike other subscription models where the ongoing variable cost to service a subscription is negligible—for instance, you only develop and write a high fixed-cost research report or software version once; distributing it to several buyers comes at a lower variable cost. That said, expect Uber to follow Lyft.
Even disruptors eventually need to go back to traditional business strategies to be viable in the industries they disrupt.
Siddharth Pai is founder of Siana Capital, a venture fund management company focused on deep science and tech in India.