The App Economy is Raising the Bar [and Prices]
Understand the price hike of hailing rides on Uber, Lyft etc.
Discover the shift in gig economy apps.
Make better pricing decisions.
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“There’s an app for that.”
Apple coined this phrase over a decade ago, foreshadowing of things to come – the gig economy run by smartphone apps. Convenience drove the demand for these apps. And the friction that the users used to feel while using conventional businesses started to sting a bit more. The early app-adopters of the gig economy cashed in by eliminating the middleman, the cost of running a physical store, and going directly to the customer. Several business models helped startups where they didn’t have to extract cash upfront from the user, there was no need for that anymore since running online ads and the data currency served as a great compensation.
Perhaps that’s why we have been conditioned to expect free or extremely low-cost stuff over the internet. Ordering from a smartphone? It’s gotta be cheap because otherwise, I can buy the pizza from the store. That is the case with almost the entire app economy, be it ride-hailing on Uber or renting space on AirBnB. But you can offer below-cost stuff only for a while. When people get accustomed to getting almost-free things and then later you charge them money, they find it intrusive – a disruption in the pattern. Heck, they might even feel cheated, ‘So you’re charging me money now for something I used to get free!’
The 21st-century businesses are in pursuit of making money by creating gig economy apps that offer solutions to everyday problems. Hailing a cab is inconvenient? Use a smartphone to call one to your doorstep. Your favorite restaurant doesn’t offer home delivery? Let’s create an app that delivers warm (or cold) food to your home or office. It might seem like a simple process of business growth, but this internet economy is more complicated (and ruthless) than you might think. Even if your app is a hit and makes you money, soon someone will copy your idea – maybe the entire business model – and then you will have to compete against a company that didn’t even exist when you started.
“How is Uber making money?”
My dad used to ask me that while glaring at the low fares showing up on the smartphone. This was back in 2017. Uber and Lyft started off their operations at incredibly cheap rates, literally unbelievable compared to the local cabs’. How were these companies able to sustain their operations? The Silicon Valley VC’s were shoveling in cash to promote the apps. Their idea was to gather mass following and the money would follow, but it never followed in the copious amounts that the investors had expected. This business model is not entirely useless, just that too many apps have failed to achieve that. You cannot keep spending money on advertising an app while the revenue doesn’t even cover the cost. At some point, you have to cut off the spending or increase the cost to the users.
Uber, Lyft, and the likes have built their business models around this gig economy. They have competed and beaten conventional businesses because they know how to utilize the gig economy to the max. But they need to protect the status quo of this economy. For example, Uber drivers are not employees of Uber and this makes a huge difference in saving cost since they don’t have to pay insurance or deal with the antics of the drivers’ unions. If Uber drivers become employees of the company, Uber will likely take a financial hit.
In 2019, when California passed a law which considered gig workers as employees, Uber and Lyft, among others, spent around $200 million on a ‘ballot initiative’ to legally NOT call their drivers ‘employees’, they lobbied for the term, ‘contractors’. The VC backed companies know how important it is for them to not have drivers on their payroll, so they won’t have to worry about minimum wage or unemployment benefits.
The surge in the ride fares on Uber and Lyft in the past year or so should not surprise you. Yes, COVID is to partly blame for that, but that’s only a part of the entire story. The guiding principle of making it big in the internet economy has been to scale up. And companies achieve that by offering cheap or free stuff, in the beginning, to gather audiences and then charge them later on. But the rapid adoption of technology had left little breathing space for the competing companies to sensibly follow this model.
It was not until companies like Uber had started reporting losses, year after year, that they realized that they needed to up their prices to stay in the game. In fact, they struck up a deal with Lyft to charge a certain price range from customers so that the drivers would remain happy and the commission would be just enough for the companies to fund marketing and research. Uber and Lyft rides cost 40% more now than they did a year ago. Similarly, the rate for AirBnB went up 35% in the first quarter of 2021. Bird is another example of how an internet business went from mass scale adoption to prioritizing its pricing strategy. They started out with $1 to start their scooter ride and then 15 cents a minute, which has gone up now to $1 plus 42 cents a minute. We can expect other companies to follow suit.
Once your app starts seeing success, no matter what your niche is or how innovative you are, others will copy your business model. They might even come up with a better product than your original idea. You can buy patents for your product, but that doesn’t guarantee hegemony. So how does a business protect its ideas and products? The short answer is, you don’t. You constantly need to evolve. Unless you can amass a cult following like Apple, which is not something every business can achieve. For that, you need a mad genius like Steve Jobs. Till then, your app needs to meet the bar first which has been set high enough already.