Uber and Lyft have been in a vicious price war for the past year. On Thursday, Uber fired the latest salvo, announcing price cuts in 48 markets. Cities where customers will enjoy lower fares include Atlanta, Denver, Dallas, Miami, and Detroit:
The development will be cheered by passengers in these cities, but the announcement could cause consternation among drivers worried that their already modest incomes will take a hit. But Uber insists that lower fares are a win-win for everyone. The company says that cheaper fares will attract more customers, which will allow drivers to make more money per hour. In fact, Uber says it's so confident drivers will earn more that it's offering drivers a minimum-earnings guarantee.
Customers are "very sensitive to price," says Andrew Macdonald, Uber's regional manager for the central part of the United States. "The lower you bring the price, the better the economic case for riders to leave their car at home."
A guarantee to drivers
In Denver, for example, Uber is guaranteeing that drivers will make at least $18 per hour during periods of regular demand and $24 per hour on Friday and Saturday evenings. Here's the chart Uber has emailed to its Denver drivers:
These cuts in smaller markets follow aggressive price-cutting Uber did in its largest markets last year. In Chicago, for instance, Uber did two rounds of price cuts in 2014. Uber says its drivers actually made more as a result. Between December 2013 and December 2014 the average cost of an Uber trip fell from $14.25 to $11. Yet the number of trips per hour rose by 45 percent during that same period. As a result, the average hourly earnings of drivers rose from $19.10 to $21.10. Uber says that fare cuts in New York produced a similar result.
Uber wants to replicate that experience across the country.
The price cuts and guarantee amounts vary from city to city. In San Diego, Uber is cutting fares 20 percent and guaranteeing drivers they can make at least $20 per hour during regular hours and $26 per hour during peak periods. Kansas City customers will enjoy fare cuts of 30 percent, while drivers will make at least $10 per hour during regular hours and $20 per hour during peak periods.
Macdonald says Uber won't be guaranteeing driver earnings forever. "In some cities, you may see driver productivity jump so quickly that in four weeks they're already doing 30 percent more trips per hour." Macdonald says that at that point Uber would likely eliminate the guarantee because drivers were making plenty of money without it.
On the other hand, if demand doesn't increase enough to justify the cuts, Macdonald says Uber might reverse the price cuts. But he doesn't expect that to happen very often. "This is a formula that we know works," he says.
A tricky situation for Lyft
The economic theory behind Uber's move is simple: everyone wins when drivers spend more time driving and less time waiting around. Uber argues price cuts will help accomplish that by attracting more riders. My own experience driving for Lyft certainly confirmed that it's better for drivers when there are lots of passengers.
A larger company like Uber has an inherent advantage in this kind of market, because its deeper pool of customers allows it to offer drivers a more consistent flow of passengers. Also, a higher density of both passengers and drivers reduces average pickup times, simultaneously raising customer satisfaction and driver productivity.
All this means that guaranteeing drivers' incomes may cost Uber less, per driver, than it would for a smaller company like Lyft. When I drove for Lyft, I was guaranteed that I'd make at least $30 per hour, but I only earned about $12 per hour from passengers. Lyft wound up paying me the rest out of its own pocket. Uber isn't quite offering drivers $30 per hour, but it's offering more than I made as a Washington DC Lyft driver in cities (like Denver and San Diego) where the cost of living is lower.
Perhaps Uber's larger network means drivers will be able to earn more than the amounts Uber is promising them. If not, Uber can easily absorb the losses. Last year, the company raised a mind-boggling $2.4 billion from investors, nearly 10 times the $250 million Lyft raised in early 2014. With all that cash in the bank, Uber can afford to cut prices aggressively without worrying about short-term profitability.
Will Lyft respond with price cuts of its own? I've emailed Lyft for comment, and will update the story if they respond.