When ‘Uber for X’ companies fail

There are many discussions pertaining to “Uber on X” companies and they mainly fall under three categories: one, do they justify their ultra high valuations, compared to Uber and its clones in Asia? two, how does their asset light business model scale? and finally, what is their survival rate? In this article, I provide a comprehensive view on these kind of companies and offer a set of conditions on why they would fail using the example of a vertical in the area of logistics company.

How do you define a ‘Uber for X’ company?”

The best way to identify a ‘Uber for X’ startup is a two sided marketplace where it matches an on-demand service between the customer and the service provider. With the rise of mobile, such types of marketplaces are able to move the consumer from the online to the real world by providing the service. With that perspective, most people tend to think of ‘Uber for X’ startups just as a mobile or an online booking tool. It is a lazy way of thinking and if you dig deeper, you discover that there are other features which made them different.

Other than an online booking tool, it also solves three other problems which a lot of tech pundits and clueless investors are either totally unaware of: (a) discovery of the service provider: they are able to provide you a service provider within a certain period of time, geo-fenced within a specific location; (b) curating the service provider thru ratings: the best example is the driver rating in Uber, and if the driver’s score is less than 4, Uber will remove the driver from the platform; and (c) incentivising the service providers to stay on the network, i.e. provide additional perks for the service providers to stay on the platform instead of the service provider directly bypassing the platform to work with the client. For example, most on demand taxi or logistics apps provide additional perks to the cab drivers from petrol subsidies and discounts to ensure that they would not go direct to the customer. That locked-in network effect is why on-demand taxi mobile apps are working and not the rest. If they do not possess all three features, they cannot be classified as ‘Uber for X’ companies.

How does their business model work? It is predicated on two basic principles: one, the economics principle of supply and demand, and having an asset light infrastructure that keeps their costs extremely low, i.e. they do not own the service providers. If the ‘Uber for X’ company is not able to do surge pricing during times of high demand, they lose the capability to make money on arbitrage. If they start to own their own service providers, they run into the situation of creating more operating costs for themselves. Upon having these ideas in mind, we answer the question, “How do they make money?”. It’s simply by taking a fee from each transaction and of course, own some money on the side (such as helping drivers to get cheaper petrol costs where they locked in the drivers and at the same time, making money from the petrol companies) by providing perks to the service providers on the side, given that they own the network, but not the assets.

Until you see that all of the above conditions matched, you are not seeing a ‘Uber for X’ company.

When they fail

How do you know when the ‘Uber for X’ company can succeed in the marketplace? There are two ways of evaluating ‘Uber for X’ companies. The first criteria is to look at their capability to generate recurring transactions. Usually, this lies in whether the service is truly a need or a want. For example, you need to take a transport from point A to point B, and hence you need the capability to book and pay a taxi with the help of the button on your smartphone. There are other services such as dry cleaning of suits in laundry which is not really a high recurring need, and hence you can immediately make an educated guess whether something will work. Another example are food delivery companies. The need is that all of us need to eat, and hence at certain parts of the day, the on-demand food delivery service becomes essential.

The only metric you can judge these startups, is the volume of transactions based on the cost per transaction and whether you can artificially surge the cost per transaction based on high demand. Hence without high volume and high demand, such startups are doomed to fail. Some people claimed that a niche service with a high customer life time value might work but they are totally missing the point. Without the volume, the ability to scale becomes a problem for such companies.

The second way to know when they fail is to look at how they scale. Here lies a general misconception of ‘Uber for X’ companies which I have observed in many people. Most people conflate the consumer to consumer market with the business to business market and none of the Uber for X companies including Uber have provided the solution to scale to the enterprise market. The reason is that the business model for enterprise level required service levels that are close to these companies owning their own supply, which totally decimate their asset light advantage against the traditional X companies. The best to explain this is to use the logistics industry as an example.

A lot of people are beating the drumroll on how Uber for X companies can kill Fedex, UPS and DHL in logistics. First of all, the logistics companies have bundled their services in different segments: same day delivery, next day delivery and optimised delivery via cross border or within the city. All logistics startup companies (whether on demand or not) who are trying to unbundle the logistics industry tend to either go after same day or next day delivery but rarely both. The reason is operating costs. Uber and all its clones are essentially on demand logistics companies that are focused on same day deliveries. Even with their remarkable market efficiencies, a consumer to consumer market is nowhere of the size of what logistics companies are doing with deliveries from fulfilment centres to the consumers with an optimised fleet.

All logistics companies, big or small, have a business model that is asymmetrically and diametrically opposed to Uber. Uber and its clones are essentially asset light and relied on demand and supply matching. They are market efficient but not cost optimised. In traditional logistics companies, the main reason why they have optimised fleets is that they have accumulated data about demand and supply and leveraged on major contracts to keep their costs low. Ecommerce has driven this demand even higher and hence the advantage of having optimised fleets and not depending on supply and demand models makes sense.

For Uber to reach the scale of UPS or Fedex, they have to end up building up their own fleets. The only situation that I can ever see Uber doing this is to have a fleet of self-driving cars and that’s when they can compete in the space of traditional logistics companies. So, why are UPS, Fedex and DHL not investing in Uber clones?