Why Uber And Lyft Are Losing Money

“Despite revolutionizing the transportation industry, these ride-sharing giants are facing hard times and low stock prices.”

It’s the Friday night before winter break starts. And while all of your friends are home from college, you are stuck in the snowy, bustling city of Middletown, Connecticut waiting for Uber to locate a ride to transport you to the New Haven train station. Even though there is little to no traffic in the area, you are left confused as to why there are no Uber rides are available. You think to yourself, “Wow, Uber is busy right now. They really must be ‘raking it in!” While it may seem as though Uber’s profit margins are high, this could not be further from the truth. Consistently trading below its IPO of $45, Uber has been labeled as one of the most unprofitable companies worth $50 billion. 

Founded in 2009, Uber sought to be the revolutionary transportation service of its generation gaining upwards of $13.6 billion in private investment. Yet since the ride sharing service went public, its stock price has dwindled well below its IPO reporting a $3 billion loss due to operating costs. In response to their rapid loss in earnings, the company has stated, “We have not yet achieved profitability, and even if our revenue exceeds our direct expenses over time, we may not be able to achieve or maintain profitability. The relationship of revenue to direct expenses is not necessarily indicative of future performance.” Given Uber’s catastrophe to cover their expenses resulting in unprofitable earnings, it is safe to say their business model is unsuccessful. Uber has struggled to earn positive profit margins due to six assumptions that have since been determined to be false. The assumptions lie at the forefront of how the ride sharing service sought to operate flawlessly with persistent high demand as well as low fixed and variable costs making their company undeniably efficient. Yet with Uber unable to cover their extremely high operating costs with a lack of revenue, the once “groundbreaking” transportation service has now come to pay the price!   

The first assumption is that Uber would yield an immense network effect, and attract economies of scale as it was deemed the revolutionary transportation service. However, this has not panned out the way the company thought it would as increased marketing and operating costs have left Uber desperate for profits. 

The second assumption is that Uber’s vast number of investors and fundraising would give it plenty of buffer room not only to be competitive within the markets, but also to create a global monopoly having complete price control. Yet competitors such as Lyft, and other public transportation services have made it very difficult for Uber to take control of the ride sharing service industry due to lower competitive prices. 

The third assumption lends itself to the idea that with efficient programing Uber would not only be able to improve productivity by creating low wait times for their passengers, but that the combination of low fares and improved efficiency would lead to profitability. However, the sheer number of operating costs that remain within Uber including the payment of drivers, as well as the marketing scheme to attract riders has skyrocketed leaving the vast amount of ride sales useless in regards to positive profit earnings. 

Additionally, the fourth assumption implies that the government would not be able to restrict the transportation service as a monopoly given its large scale of use by consumers, the sustainability impact it has on the environment, and the endless employment opportunities it offers. The government has not deemed it an effective monopoly, simply because there is no need to given its struggles to gain customer and driver loyalty. There are only so many drivers as well as roadspace available that the transportation service has failed to be efficient in operation. 

The fifth assumption implies that with the implementation of extensions such as “Uber Eats”, the company would be able to back its losses if push came to shove. However, Uber has struggled to remain profitable with its outstanding investors awaiting dividends, along with its extremely high marketing and operating costs. 

Finally, the last assumption states that through the capital raised by the company, Uber would facilitate a smooth transition into future ride sharing opportunities within the industry . This expectation relies on the fact that vehicle use will diminish as society becomes more environmentally conscious of fossil fuel production, further increasing the demand for ride sharing services to limit carbon dioxide emissions. 

While the first five assumptions have turned out to be flawed, the last speculation is still up in the air. Although it is unclear what will become of the once sought after start up, Uber’s immediate future does not look bright as they remain in the rat race among other transportation companies and services. 

One of the major issues, which undercuts Uber’s profits, is their conclusion that the automobile industry will be more sustainable in the future. While the ride sharing company boasts “lower fares”, it has had trouble consistently attaining riders with the introduction of surge pricing along with comparable prices that Lyft offers as well. Additionally, public transportation is often cheaper than both Lyft and Uber combined, causing Uber to post negative profit margins given their high cost of marketing and high fixed costs paid to riders. 

Furthermore, taxis in some cities such as New York now use the app “Waave,” which allows consumers to see how much a taxi fare would be before hailing a cab .  There are simply too many technological computing programs distributed among the transportation industry that limit the versatility of Uber’s short wait times. As a result, their net profit has continued to decline given its struggles to consistently retain customers further decreasing their revenue.

While the future of Uber is unclear at the moment, it does not look promising due to the strong competition it shares with Lyft and other modes of public transportation. Not only does Uber offer the same service as other related ride sharing companies, however similar competitive prices continue to sink their profit margins. Furthermore, Uber’s business model lies on the foundation that the use of cars from consumers will reduce to such an extreme extent that the demand for cheap fares will boom. Moreover, Uber will remain unprofitable until they can successfully limit the wide variety of options consumers have in terms of travel, or they can somehow severely differentiate their respective services in order to compensate for their high operating and marketing costs. 

Sources

Levy, Ari. “Uber Will Soon Join an Ugly but Exclusive Club: Unprofitable Companies Worth More than $50 Billion.” CNBC, CNBC, 27 Apr. 2019 

Conger, Kate. “Lyft's Losses Continue, but Company Says They Will Abate.” The New York Times, The New York Times, 7 Aug. 2019,

Sherman, Len. “Can Uber Ever Be Profitable?” Forbes, Forbes Magazine, 7 June 2019, https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-ever-be-profitable/#d20a7af57856.

Hiltzik, Michael. “Column: Lyft's IPO Disclosure Shows It's Not Close to Profitability and Has No Good Way to Get There.” Los Angeles Times, Los Angeles Times, 7 Mar. 2019