How big is Uber’s potential market? Grab an envelope; preferably a big one. An average Londoner or New Yorker spends $238 on taxis each year, data from the City of New York and London’s Licensed Taxi Drivers Association show. The potential customer base is – at the very least – everyone living in a big city, or 1.5bn people. That’s $357bn in revenue. Uber, a ridesharing app that allows customers to flag down drivers with the tap of a finger, takes 20 per cent of each ride. If profit margins settle at 10 per cent, the global profit pool is about $7bn. If Uber can capture just half this market, its $17bn valuation is five times earnings. Cheap!
Some investors are convinced. Uber’s latest funding round made it the highest valued US start-up. But there are question marks. Uber operates in 128 cities in 37 countries. Taking on regulators and the vested interests of taxi companies around the world will be expensive. In London, for example, taxi drivers are planning an anti-Uber protest on Wednesday. There is no telling how much it will cost for Uber to enter all the markets it wants.
Competition is a problem too. As Uber paves the way, others are crowding in. Lyft recently reduced its cut of the fare to zero in a bid to grab market share. As first mover, Uber will enjoy having the most drivers and most users, making its service superior. But margins are unlikely to be high and insurance costs could rise.