If you live in a major metropolitan area in the United States, you have likely heard of the Uber and Lyft car-sharing services. Basically they’re taxi services centered around a mobile app that connects drivers and passengers. You load up the app, input your debit card info and the system alerts a driver that is close by to come and pick you up. With Lyft, you get a time estimate of when the driver will arrive at your location, a picture and name of the driver, and even a picture of their car so you can recognize them when they roll up.
My wife and I recently used it to get rides to and from downtown Chicago where we were celebrating an event with family and friends. Although we could have simply called a cab, the cost would have been higher given our distance from the city center. Lyft eliminates a lot of the frictional costs associated with conventional cab-riding, so prices are kept low. There are no special cabs with Plexiglas or physical meters that need to be outfitted. There are no special licenses that drivers have to maintain and obtain other than their normal driver’s license.
The company gets around the legal requirements for running a cab service by insisting that their business is built on a “donation only” model, so it is technically a peer-to-peer ride sharing service and not a cab service. After your ride, you have the option to increase or decrease the amount of your fare via the app – pretty sweet, huh!
Naturally, the local taxis’ infrastructure currently in place in most cities are not taking kindly to Lyft and other similar services. For the traditional taxi driver, these businesses are cutting into their earnings. Although I feel for those in the taxi industry to a certain extent, as a consumer I’m incredibly happy the system is being brought into the 21st century. It is ultimately more convenient to the passenger to be able to flag down a ride with the press of a button rather than trying to wave a cab down on the street or looking up a phone number and calling.
I would also argue that these services help make the ride experience more personal. The fact that I know the driver’s name, face, and car before he/she evens pulls up is a positive psychological trigger that builds my trust in the service. The unique use of technology in order to connect people more efficiently and build trust is what is allowing Lyft, Uber, and others to take market share from the traditional cab companies.
Now, would I invest is Lyft or Uber were they to become publicly traded corporations? It’s unlikely. Part of the reason Lyft and Uber have even become worth talking about is because they are using technology to break barriers in a highly regulated industry. At the core though, driving passengers from point A to point B is a commodity-like business. There is little to no brand differentiation or competitive advantages in the long run. Think about airlines. Sure, Southwest, Delta, and United effectively rule the domestic industry in America as far as market share, but is there really that big of a difference between the service these companies provide? If Southwest is cheaper for my tickets at any given time, I’ll probably go for it. If Delta is cheaper, I’ll probably go for it.
The same logic applies to car-sharing services. Sure, customers will develop some brand loyalty, but we’re not talking Coke VS Pepsi here. My hunch is that business will naturally flow to the lowest cost providers, and right now for rides around the city, that’s Lyft and Uber.