App-based taxi service providers like Ola & Uber have become quite the rage these days. And fairly justifiably too, in my opinion.
Of course, a significant proportion of their success can be attributed to technology.
At the same time, there is a powerful concoction of economic factors as well which are driving their rapid adoption. And both the companies have been quite smart, in my opinion, in aligning their business model with simple economic principles (though Uber is possibly the smarter of the two). They have got it right on practically every parameter that can be linked to transportational economic efficiency.
At their core, what these taxi providers are trying to achieve, quite simply, is better demand-supply matching, both temporally & spatially.
In a sense, they are doing to the taxi space what multiplexes and bookmyshow did to movie watching (differential pricing for different days & time slots etc)
The use of mapping technology through mobile phones allows them to significantly reduce/eliminate information asymmetries that are otherwise present for the ordinary cab driver & the ordinary passenger. Cabs can get directed quickly towards areas with higher passenger density.
Non-linear pricing (higher per unit fares for short distances & lower long distance fares) incentivize drivers to carry passengers for short distances as well.
By introducing the surge pricing multipliers for periods of higher demand (though frustrating for consumers like you and me), again they are following a simple economic principle - higher demand will usually lead to higher prices.
Conversely, one suggestion would be that periods of very low usage, they can even introduce a multiplier below 1 (as long as variable costs are getting covered).
Again the choices in terms of types of cabs helps them in catering to multiple customer segments.
Also, including a component for trip time charges again incentivizes economic efficiency. People will start modifying their travelling behavior so that they travel during periods of less traffic, thereby balancing traffic flows better (of course this is subject to constraints)
Of course, the phenomenal amount of data that these companies would end up collecting in terms of traffic patterns, customer preferences etc would help them in sharpening and improving their product offerings and marketing even more.
For instance, Uber allows drivers to be rated by customers and vice versa. Once they have a critical mass of ratings of drivers & the system becomes fairly robust, they could start adding a pricing differential depending on the driver's rating band (3 to 4, 4 to 5 etc).
They could also start a shared cab/cab pooling service wherein people using the app can let it be known that they are looking for people to share cabs on a particular route. Some standard multiple (say 1.5x) can be used and the fare can be split. Everyone benefits - Uber gets more, the driver gets more, and the passengers individually pay less than what they otherwise would.
Of course, like anything new, they have faced teething issues and opposition. However, the recent auto-taxi strike in Mumbai shows that the traditional establishment is feeling threatened, and they very well should. History shows that any new business/technology which is powerfully aligned with economic efficiency usually tends to win in the long run over older businesses/technologies no matter how many strikes happen and how many windows get broken.
In face, governments should take a cue from these companies and make pricing of traditional autos/taxis more flexible.
This is one area that should be keenly watched for more exciting developments in future.
Of course, a significant proportion of their success can be attributed to technology.
At the same time, there is a powerful concoction of economic factors as well which are driving their rapid adoption. And both the companies have been quite smart, in my opinion, in aligning their business model with simple economic principles (though Uber is possibly the smarter of the two). They have got it right on practically every parameter that can be linked to transportational economic efficiency.
At their core, what these taxi providers are trying to achieve, quite simply, is better demand-supply matching, both temporally & spatially.
In a sense, they are doing to the taxi space what multiplexes and bookmyshow did to movie watching (differential pricing for different days & time slots etc)
The use of mapping technology through mobile phones allows them to significantly reduce/eliminate information asymmetries that are otherwise present for the ordinary cab driver & the ordinary passenger. Cabs can get directed quickly towards areas with higher passenger density.
Non-linear pricing (higher per unit fares for short distances & lower long distance fares) incentivize drivers to carry passengers for short distances as well.
By introducing the surge pricing multipliers for periods of higher demand (though frustrating for consumers like you and me), again they are following a simple economic principle - higher demand will usually lead to higher prices.
Conversely, one suggestion would be that periods of very low usage, they can even introduce a multiplier below 1 (as long as variable costs are getting covered).
Again the choices in terms of types of cabs helps them in catering to multiple customer segments.
Also, including a component for trip time charges again incentivizes economic efficiency. People will start modifying their travelling behavior so that they travel during periods of less traffic, thereby balancing traffic flows better (of course this is subject to constraints)
Of course, the phenomenal amount of data that these companies would end up collecting in terms of traffic patterns, customer preferences etc would help them in sharpening and improving their product offerings and marketing even more.
For instance, Uber allows drivers to be rated by customers and vice versa. Once they have a critical mass of ratings of drivers & the system becomes fairly robust, they could start adding a pricing differential depending on the driver's rating band (3 to 4, 4 to 5 etc).
They could also start a shared cab/cab pooling service wherein people using the app can let it be known that they are looking for people to share cabs on a particular route. Some standard multiple (say 1.5x) can be used and the fare can be split. Everyone benefits - Uber gets more, the driver gets more, and the passengers individually pay less than what they otherwise would.
Of course, like anything new, they have faced teething issues and opposition. However, the recent auto-taxi strike in Mumbai shows that the traditional establishment is feeling threatened, and they very well should. History shows that any new business/technology which is powerfully aligned with economic efficiency usually tends to win in the long run over older businesses/technologies no matter how many strikes happen and how many windows get broken.
In face, governments should take a cue from these companies and make pricing of traditional autos/taxis more flexible.
This is one area that should be keenly watched for more exciting developments in future.
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