I don’t quite understand, if even the contribution margin of an individual driver is negative (before fixed costs), then I don’t see how this model can become viable in the future.
My understanding is that contribution margins are obviously positive (Uber gets at least a half of the trip fare on average), but there is also a cost of investment in engineering and in low fares (which buy market share), that have not yet been covered.
The viability of the business model, thus, comes from the fact that future (quite positive) income from the provided services will continue to cover investments in non-monetary gains, such as brand, market share, assets and IP.
I don’t quite understand, if even the contribution margin of an individual driver is negative (before fixed costs), then I don’t see how this model can become viable in the future.
The hope is that they’ll hit on something big like self-driving car technology that fundamentally improves Uber’s marginal profit.
I run a service busines with a financial model kind of similar to Uber’s, and I can tell you there’s not much qualitative difference between reporting −20% vs +20% “contribution margin”, because it depends on how much you decide to amortize all kinds of gray-area costs like marketing, new-driver incentives, non-driver employees, etc, into the calculation of what goes into “one ride”.
I use the ambiguous term “marginal profit” to mean “contribution margin with more overhead amortized in”, and I’m pretty sure Uber’s is quite negative right now, maybe in the ballpark of −20%.
I don’t quite understand, if even the contribution margin of an individual driver is negative (before fixed costs), then I don’t see how this model can become viable in the future.
My understanding is that contribution margins are obviously positive (Uber gets at least a half of the trip fare on average), but there is also a cost of investment in engineering and in low fares (which buy market share), that have not yet been covered.
The viability of the business model, thus, comes from the fact that future (quite positive) income from the provided services will continue to cover investments in non-monetary gains, such as brand, market share, assets and IP.
The hope is that they’ll hit on something big like self-driving car technology that fundamentally improves Uber’s marginal profit.
I run a service busines with a financial model kind of similar to Uber’s, and I can tell you there’s not much qualitative difference between reporting −20% vs +20% “contribution margin”, because it depends on how much you decide to amortize all kinds of gray-area costs like marketing, new-driver incentives, non-driver employees, etc, into the calculation of what goes into “one ride”.
I use the ambiguous term “marginal profit” to mean “contribution margin with more overhead amortized in”, and I’m pretty sure Uber’s is quite negative right now, maybe in the ballpark of −20%.
Or the old fashioned thing where you kill off competition and then raise prices.