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

Click here to read Part 1, “The Inconvenient Truth Uber CEO doesn’t want you to know”

By Len Sherman

–Reprinted with Permission–

Part 2

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

To quantify just how potent Uber’s AI-driven algorithmic pricing and pay policies have been to the company’s bottom line, I estimated that Uber’s take rate –a term widely understood in the rideshare community to be the percent difference between rider price and driver pay — spiked to 40% by Q3 2023, an increase of over 4 percentage points year-on-year, boosting the company’s annual operating cash flow by billions of dollars at drivers’ expense.

Uber’s Response
My forbes.com article detailed my sources and methods, and invited Uber to correct any disputed facts. Uber responded by strenuously disputing my findings. In emails and phone calls, company spokespersons called my article “irresponsibly wrong,” adding that “Uber’s take rate is nowhere near 40%” and that “the fundamental premise of the piece, that Uber has achieved profitability by increasing the percentage of the total rider fare that it gets from drivers, is fundamentally false.”

Soon afterward, Uber’s Senior Vice President of Mobility and Business Operations, Andrew MacDonald weighed in, posting the following tweet.

MacDonald’s tweet linked to an Uber blog post, contesting my findings (without providing specific counterfactual data), and sidestepping my key finding on take rates by rejecting my definition of the term, as summarized below.

1. Uber’s Price Increases

Uber’s blog stated: “Yes, prices have gone up significantly over the last few years. Uber is an open marketplace, which means that prices tend to reflect broader economic conditions as well as the balance of supply and demand for rides.” However the company did not provide any data on its US rideshare pricing trends or comment on my finding that Uber’s price hikes significantly outpaced CPI growth during the first four years of Khosrowshahi’s leadership, and have remained relatively high since.

2. Uber’s Driver Pay Cuts

In my article, I specifically focused on Uber’s driver pay cuts following the company’s launch of new driver pay policies, i.e., the period from Q1 2022 through Q3 2023. Yet Uber’s rebuttal only asked and answered a contextually irrelevant question:

“But didn’t Uber cut driver pay? No. In the US, median driver earnings per utilized hour, including tips and incentives, have grown nearly 30% over the last six years, faster than inflation.”

Uber’s commentary ignored the figure it included in its blog post confirming my finding that US driver pay declined significantly between 2022 and 2023 (my emphasis added below).

3. Uber’s Take Rates
Uber’s blog presented an accounting explanation of why the widely understood and used meaning of take rate ­– the percent difference between rider price and driver pay– is inappropriate. To the confusion of many readers (including myself), Uber argued that “if you were to subtract out all of [our] insurance costs from Uber’s US Mobility Revenue, you would be left with well under 20% of the total fare.

In essence, Uber was saying, the company is only willing to talk about “take rates” after deducting its insurance costs and other pass-throught and booking fees. But the inconvenient truth is, drivers too are experiencing sharply rising insurance and maintenance costs, but are being left with a smaller slice of the pie to deal with them.

Here’s how one of Uber’s best-earning drivers in Massachusetts responded to Andrew MacDonald’s redefinition of take rates.

Another response came from Harry Campbell, owner and founder of The Rideshare Guy, a media company followed by hundreds of thousands of gig work drivers.

Will Coleman, a former McKinsey transportation industry partner and current CEO of a competing ridehail company echoed drivers’ sentiments.

When asked for additional comments and data to strengthen their prior response to my research findings, an Uber spokesperson said, “We’ve said again and again, that local governments have increasingly taxed rideshare trips and the cost of auto insurance has risen dramatically in recent years. Uber’s global Mobility take rate remains flat — and as included in our earnings report on Tuesday, is 23.4%, down from 23.7% in Q1. I recognize you’d like us to break out that number just for the US, but that’s not how we report our financials.”

For the record, Uber no longer refers to “Take Rates” in its earnings reports, having changed the term previously used to “Revenue Margin” starting in Q3 2023. Uber’s reported global mobility revenue margin of 23.4% for Q2 2024 (adjusted for accounting changes across in several countries outside the US), was more than 2 percentage points higher than the prior year. Uber has also previously acknowledged that its US take rate is higher US than its global average.

Protecting Uber’s Source of Newfound Profitability
It’s not a coincidence that Uber’s cash flow jumped in 2023 (and again in the first two quarters of 2024), after Uber had fully implemented recent pricing and driver pay policies. Uber’s success is critically dependent on exploiting its asymmetric information advantage over riders and drivers, as Mr. Khosrowshahi explained in an interview with Kara Swisher in October 2023, “We use AI when you get quoted a price for an Uber, when a driver gets an offer for a particular ride, when we route you, when you open up Uber Eats. All of it is powered by AI. So AI is intermingled and every single part of our service at this point and these algorithms are superior to the technology that we had 5 to 10 years ago because they learn a skill in a personalized way. It’s pretty powerful tech out there.”

And during Uber’s Q4 2023 earnings call, in February 2024, when asked specifically about Uber’s “upfront fares,” Mr Khosrowshahi again said the quiet part out loud about the company’s ability to maximize its take rate on every trip: “I think what we can do better is targeting different trips to different drivers based on their preferences, or based on behavioral patterns that they are showing us. That is really the focus going forward: Offering the right trip, at the right price to the right driver.”

Uber’s financially savvy, ex-investment banker CEO is undoubtedly aware of the company’s profit drivers, but is understandably reluctant to openly discuss the strategic leverage his company wields, namely the extent to which high sustained rider prices and substantial driver pay cuts have generated billions of dollars of additional operating cash flow.

Next: Why Uber pushed back so hard on the findings 

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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.