The “Inconvenient Truths” Uber’s CEO doesn’t want you to know

by Len Sherman

–Reprinted with permission–

Although Uber doesn’t like to talk about it, times have been tough on both sides of its marketplace.

Any long-time patron of Uber’s ridesharing service knows that prices have skyrocketed in recent years. And most Uber drivers have found that not only has their ridesharing pay not kept up with inflation, but it has declined substantially over the past two years, Nonetheless, Uber has gone to considerable lengths to obscure these inconvenient truths, while continuing to tout the company’s commitment to transparency.

Inconvenient Truths
Late last year, I wrote an article for forbes.com highlighting the disconnects between what Uber is willing to acknowledge about its business practices and the everyday experience of riders and drivers. Three key findings emerged, based on an analysis of two large-scale databases capturing prices and driver pay records on millions of Uber trips.

1. Under CEO Dara Khosrowshahi’s leadership, Uber has sharply raised US rideshare prices far faster than the rate of inflation

While Khosrowshahi acknowledges that Uber’s prices have increased, he has suggested that Uber is just following general inflation trends, telling Wired’s Steven Levy, “Everything is more expensive. Inflation has become a part of our everyday life.”

But what Khosrowshahi didn’t say is that Uber began sharply raising the company’s US rideshare prices shortly after he joined the company as CEO in late 2017 when inflation was relatively low, and outpaced the CPI over the next four years, during which annual inflation averaged below 2%.

2. Since launching new business policies in the US in 2022, Uber’s driver pay has sharply declined

For most of its history, Uber guaranteed drivers a minimum base fare, following the century-old taxi pricing practice of calculating base pay on established per-mile and per-minute rates. But two years ago, Uber switched to a new pay model — Upfront Fares + Destination (UFD), giving Uber complete discretionary control over how its opaque algorithms determine driver pay. At about the same time, Uber also introduced “Trip Radar,” an online auction scheme, in which multiple drivers vie in a race to the bottom to accept low pay offers. Uber’s former practice of guaranteeing minimum driver pay for every trip was thus replaced by a policy where Uber now only has to pay the minimum any driver will accept for each trip.

This policy shift has proven to be highly effective in reducing driver earnings — by far, Uber’s biggest factor cost — given two additional factors decidedly in Uber’s favor:

1. Artificial intelligence
Given its market dominance, Uber knows more about customer and driver behavior than any other company, and thus is in the best position to utilize sophisticated AI technology to exploit price discrimination on both sides of its marketplace. In essence, Uber’s asymmetric information advantage gives the company the flexibility and ability to maximize its profit margin ­– the difference between rider price and driver pay (commonly called take rate) on every trip.

2. Robust driver supply
The financial hardship of a growing precariat labor pool, boosted by elevated immigration, has fueled strong supply growth and downward pressure on driver pay. A growing number of drivers find themselves trapped in what venture capitalist Albert Wenger describes as a vicious job loop, working ever harder to overcome their precarious financial condition, leaving no time to build new skills or search for employment offering higher or more reliable pay.

Gridwise, a gig worker data services company that tracks customer price and driver pay records on millions of rideshare and delivery trips, reported that Uber’s average monthly driver earnings in 2023 declined by 15% — 17% year-on-year — a uniquely steep pay cut compared to its gig company competitors Lyft, DoorDash, Instacart, and Grubhub.

Tomorrow: The combination of elevated prices and driver pay cuts enabled Uber to achieve a take rate of 40% in Q3 2023

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Len Sherman is the Executive in Residence and Adjunct Professor at Columbia Business School. He previously served as, Senior Partner at Accenture’s products industries group and a General Partner in its corporate venture capital group. He has been a board member for five business startups.