Sunday, July 26, 2015

Uber Drivers – A Search for Fools Gold?

There is a lot of continuing controversy over Uber, the worldwide phenomenon that is sending taxi drivers to the brink. The founders have come up with an amazing business model. It's a $50-billion company which generates huge profits by providing generally excellent service at a very low price.
Most of the controversy centers over the tensions between Uber, traditional cab companies and government regulators.
But long term, the Uber story may come down to a fundamental of the business model: Uber works only by creating the chimera of profitability for its "independent contractor" drivers. And drivers appear to be realizing that they are working for little or nothing while the fatcats at Uber get really wealthy.
After driving under the Uber banner for nearly a year, my statistics show me something undeniable: while I have generated thousands in revenue for Uber (and provided safe, low-cost transportation for thousands of riders) I've made virtually no money.
So I'm done.
Yes, I have had some pretty sizeable deposits into my bank account, as much as $1,000 in a week. Most drivers see those big deposits and compare them with the relatively small amount they spend on fuel for their vehicle, and conclude it is a winning proposition.
But the reality is those nice deposits are merely down payments on expenses they will feel down the road.
According to Kelly Blue Book, my car depreciates at a rate of about 6.7¢/mile. So when I go to sell it, the price I get will be depressed because of all of those Uber miles.
Then there's the maintenance which, thanks to Michigan's crappy roads, can be hundreds of dollars at a time (I just put a second new set of tires on the car at a cost of $600, and had a $800 front-end job not long ago).
The IRS, never known for generosity, calculates the total average cost of operating a car for business at 57.5¢/mile. To satisfy the IRS, I keep careful records of how much money I am paid by Uber and how many miles I drive.
The numbers are clear: I was paid a lot of money, but virtually none of it was profit.
In the first seven months of 2015, I put more than 14,600 Uber-related miles on my car. That includes time spent driving to pick up passengers, actually taking them to their destinations, and then returning to a parking location to await my next summons on the Uber app.
My 14,600 miles on my car earned Uber about $3,500 (or about 24¢/mile). My payments from Uber amounted to 64¢/mile. But since a car costs 57.5¢/mile to operate, my net was just 6.5¢/mile. A typical 3-mile, $7 fare is generated a 20¢ profit.
(If you think the IRS allowance is too high because I drive a fuel-efficient car, you can cut it in half and I'm still only making about 35¢/mile, or about $1-to-$2 actual profit per hour.)
Uber doesn't pay you unless there's a customer in the car . So if you are driving to pick someone up, or sitting in the driveway waiting for a rider to show up, you aren't getting paid. Start-to-finish that 3-mile trip actually takes 10-20 minutes. So if I was really busy and jammed three of those trips into every hour, I was taking home a princely 60¢/hour after expenses. That's 60 CENTS, not DOLLARS.
To top it off, while Uber claims drivers are independent contractors (a status being challenged in a California courtroom right now), the company decides how much those "independents" can charge for their services. Uber's pattern is to enter a market by charging relatively high rates. At this level, the driver can make a decent net income.
But once they have built a driver base, they cut prices to maximize system utilization. In my market, the charges were reduced 10% after around 4 months, and another 20% last week (a total reduction of 28%). My operating expenses, of course, did not go down at all.
Uber has a massive database, and knows exactly how to maximize the revenue coming into Uber from each market it inhabits.
Uber recently reported that in Grand Rapids (which had already absorbed a rate decrease) volume and gross fares increased thanks to lower fares. Even so, using Uber's own numbers, the average driver in that market is paid (after Uber commissions) $10.26/hour from which the driver has to pay overhead. To earn at that level would require a minimum of driving 10 miles ($5.75 expense), so the actual profit to the driver amounts to less than $5/hour (well under the minimum wage).
The reason Uber wants more rides (even with lower mileage fees) is because it collects much of its revenue from a $1 fee added onto every ride. (That "safe driver" fee, of course, is never reduced.) And those "dead-head" miles required to pick up customers costs Uber nothing.
Uber has another potential gut-punch awaiting the driver. If he or she is unfortunate enough to have an accident while operating through the company app, it is going to hurt financially. Your regular private auto policy has an exclusion when you are driving for hire. Although Uber carries collision coverage for its "independent contractors" when they are on the clock, there's a $1,000 deductible and a $25,000 cap. So a small collision has little or no coverage, and totalling a newer model car could go well beyond the cap.

* Here's the breakdown for a typical Uber fare in the East Lansing market (the busiest part of the mid-Michigan Uber market):
Drive to pick up rider: 1-2 miles (5-10 minutes)
Waiting time for rider to get into the car: 1-10 minutes (I have waited as much as 20 minutes)
Client trip: 2 miles (5-10 minutes)
Fare charged to the client: $5
Uber fees: $1.80
Paid to driver: $3.20
Car expense (3 miles): $1.75
Net to driver: $1.45 for around 20-30 minutes of their time
Often there is a drive back to downtown from one of the outlying apartment complexes such as Chandler Crossing - another 2 miles of non-revenue driving - which takes the "net" down to around 30¢.

Here's a second example from the other end of the spectrum: the occasional ride from East Lansing to Detroit Metro Airport (it happened for me about once a month):
Client's approximate fare (under current rates): $125
Uber's cut: $26, leaving a net fare of $99
Mileage (round trip, with an empty car back to East Lansing): 180 miles ($103.50)
Net: A LOSS of $2.20 for the three-hour round trip
Before the 28% in fare reductions, the Metro Airport trips were marginally profitable (gross fare around $160, net to driver about $25 after expenses for the three-hour round trip. The fare cuts eliminated all the profit for the driver.

Uber appears to already be feeling the heat, at least in the Lansing market. While the numbers may work for drivers in high density markets like New York, Washington DC or San Francisco, it's a different story in smaller markets and drivers apparently are catching on.
Locally Uber has been offering $250 bonuses to drivers who recruit other drivers (a.k.a. competitors), and recently doubled that bounty to $500. It is encouraging drivers to recruit their spouses as drivers. And it has reinstituted deceptive "guaranteed" fares for drivers during peak demand hours, but structures the "guarantee" so a driver doesn't qualify for it unless they actually snag customers. (Sitting around, waiting for the Uber app to ping a driver into action, still pays nothing.)

So let the controversy over regulation and competition with regular cab companies continue. For the long term, the viability of the Uber model will hinge on continuing to make drivers believe that working for peanuts (while the company makes millions) is "freedom."

More on Uber fool's gold

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