Written by: Morgan Brown
Uber — What’s Fueling Uber’s Growth Engine?
Uber Co-Founder and CEO Travis Kalanick explains, “In the beginning, it was a lifestyle company. You push a button and a black car comes up. Who’s the baller? It was a baller move to get a black car to arrive in 8 minutes.” (Source)
But what began in 2009 as a luxury car service in San Francisco is now valued at $3.76 billion and operates in more than 35 cities worldwide. As of August of this year, Google Ventures has officially cast their vote of confidence in the startup with a $258 million investment—a full 86% of their $300 million annual budget—and for good reason. (Source) Uber’s revenue is up 18% month over month, and in the past year alone they’ve grown from just 75 employees to more than 300. (Source)
In fact, at Disrupt NY 2013, Bill Gurley of Benchmark—investor for both eBay and Uber—claimed, “Uber is growing faster than eBay did … [it] is probably the fastest growing company that we’ve ever had.” (Source)
How did Uber do it? As a multi-sided marketplace business model, how did they crack the chicken-and-egg problem that so many marketplace startups struggle with? Much like Belly, Uber used intense market focus to create local network effects in their launch city, San Francisco, while fueling word of mouth growth through targeting of the early adopting Bay Area techset.
The Need for Uber
If on the outside chance you’re not familiar with Uber, the basics are as follows:
In the past, when you needed to get somewhere, hailing a cab was a nightmare. You either stood outside—wind, rain, sleet, snow, or shine—waving your hand in the air until you could hail a cab, or you called a taxi dispatch (if you had their number) and had to wait 20 minutes until a car arrived.
Once you arrived at your destination, you fumbled to count out the right amount of cash plus a tip, negotiate with the driver who never had the right change, or who “forgot” to start their meter, or whose credit card machine was “broken”.
All told, very few people viewed finding and using taxi service as something enjoyable—it was simply something that they dealt with due to the lack of an alternative. Before Uber you were beholden to an entrenched, monopolistic entity, whose sloppy execution and lack of regard for the customer experience was evident at every touch point.
This poor experience and a perceived lack of ability to change anything about it created pent up frustration and demand from consumers who were eager to find anything better. Uber tapped into that frustration and demand exceptionally well.
Uber is completely changing the way getting private transportation is done in several key ways. First, their smartphone app is integrated with Google maps so that you can see how far away the nearest cars are, set a meeting point on the screen, and hail a car to meet you there. You can even see your driver’s information (including ratings) as you watch the car get closer to your location.
Uber drivers call or text to confirm that they’re on the way, giving you peace of mind that your order was received. Once your car arrives (usually within a few minutes), the driver greets you by name and you hop in. The cars are black cars and SUVs. Uber X, a lower cost version of the service, is made up of a fleet of well maintained sedans.
Once you arrive at your destination, the app charges your card, and you’re free to go on about your day. There’s no need to deal with cash, change, tips, or receipts. You just hop out. (Source) Uber has removed the friction from the typical taxi cab transaction, and made it highly enjoyable in the process.
Bill Gurley sees Uber’s key to growth as a simple one: Uber offers a great product. He explains, “The product is so good, there is no one spending hundreds of thousands of dollars on marketing.” (Source) While this is certainly the case, it isn’t the only factor driving growth at Uber. First, let’s go back to the beginning and look at some of Uber’s early tipping points.
Though the company was founded in 2009, Uber didn’t officially launch until June 2010. In January 2011, just six months later, they had had between 3,000 and 6,000 users and had already done between 10,000 and 20,000 rides. (Source) So what got them there?
Completely Solves Problems for Riders
First and foremost (as Gurley points out, and as with Square), Uber provides a solution to a real problem that impacts millions of people. In all sense of the word they have disrupted the monopoly of taxi cab transportation that exists in many cities and reinvented the experience from top to bottom.
Among the many problems Uber is tackling are: poor cab infrastructure in some cities, poor service and fulfillment–including dirty cabs, poor customer experience, late cars, drivers unwilling to accept credit cards, and more.
Uber set out to reimagine the entire experience to make it seamless and enjoyable across the board. They didn’t fix one aspect of the system (e.g. mobile payments for the existing taxi infrastructure), they tackled the whole experience from mobile hailing, seamless payments, better cars, to no tips and driver ratings.
By avoiding the trap of smaller thinking, and iterating on one element of the taxi experience (say, by making credit card payments more accessible in the car) they were able to create a wow experience that has totally redefined what it means to use a car service, sparking an avalanche of word of mouth and press.
Early Adopter Advocacy
In many cases, the importance of the early adopter tech community can be overstated. In Uber’s case it cannot. Uber knew that launching in San Francisco meant that they would be interacting regularly with the tech community who are continually looking for new tools and services that improve their quality of life. Uber took aim at those people by sponsoring tech events, providing free rides, and in general driving awareness among this audience.
San Francisco, with it’s notoriously spotty cab service served as the perfect foil for the launch. As early adopters, completely fed up with the taxi situation in the city, tried Uber, they took to blogs, social media and every other way possible to tell their friends about this new way to ride.
The Uber experience became a vector for growth as early adopters in the know impressed their friends with the ability to call a black car from their phone with a couple taps. These new riders were immediately wow’d by the experience and became new users and advocates within the span of a single car ride.
So how did Uber reach those early adopters? One distinct channel was event sponsorship. Uber was highly active at local-area tech and venture capital events and provided free rides to attendees. Uber knew that these attendees were well connected and highly likely to share their experiences with friends, tech press, and social media audiences after trying Uber.
By seeding this audience, they were able to create a growth engine that hinged on the fact that these adopters would show their friends, who would become new users after their first Uber experience. Leading to a growing network of passionate customers.
Word of Mouth from Satisfied Customers
Much of Uber’s success can be attributed, as mentioned above, to the fact that it is totally mind blowing compared to the frustrating and broken taxi experience. Max Crowley of Uber Chicago explains:
“We’ve found that our growth is driven substantially by word of mouth. When someone sees the ease of use, the fact that they press a button on their phone and in under 5 minutes a car appears, they inevitably become a brand advocate.” (Source)
According to Kalanick, Uber relies almost exclusively on word of mouth, spending virtually nothing on marketing. He explains, “I’m talking old school word of mouth, you know at the water cooler in the office, at a restaurant when you’re paying the bill, at a party with friends – ‘Who’s Ubering home?’ 95% of all our riders have heard about Uber from other Uber riders.” In fact, for every 7 Uber rides, word of mouth generates a new Uber user. (Source)
Uber has even gotten attention from the likes of comedian Dave Chappelle, actor Edward Norton, venture capitalist Marc Andreessen—who calls it a “killer experience,”—and AirBnB CEO Brian Chesky—who claims that “Uber makes it very easy to not own a car.” (Source)
This word of mouth is as much today’s growth engine as it was in early days. Uber doesn’t need to do traditional marketing to drive users, they simply find ways to fan the flame of that first trial to reach new people and grow their user base.
Leverage Distinct Growth Opportunities
In addition to providing an overwhelmingly superior solution, Uber has also leveraged some real life situations to spur growth, which Kalanick refers to as “accelerants.” These accelerants indicate a concentrated, temporary need for Uber’s services. These include:
Restaurants and Nightlife
Holidays and events
Each of these factors makes driving yourself problematic at best (and in some cases downright impossible), and cities in which they coexist are especially receptive to Uber’s services. Uber focused on executing in cities where those problems are near constants to drive accelerated adoption. For example, In Chicago—a city with great nightlife, intense weather, and tons of sporting events —Uber’s initial viral growth was double what’s typical for them (see viral growth numbers cited below).
Special events and holidays also provide an opportunity to showcase Uber’s model, and the company was able to deliver on key nights like New Year’s Eve in San Francisco—a city notorious for a lack of taxis—which drove buzz for the new service. These events created intense demand and pressure to get new users to take their first Uber ride, driving spikes in new riders and total rides.
Benefits for Uber Drivers
Not only does Uber transform the experience for riders, but it’s also good for drivers. Discussing Uber’s expansion to D.C., Kalanick explains,
“There are a lot of drivers in this city who are out of work. Because of that, there are a lot of drivers and limo companies that are coming to us to basically help their drivers make a living.” (Source)
Uber doesn’t employ drivers. Instead, the service acts as a liaison between people who need rides to drivers who are in the area. This arrangement can bring in more than $500 a day, which amounts to a week of work for some cab drivers. (Source) Like any good service, it’s a win-win for all parties involved, and this is certainly another factor contributing to Uber’s growth.
Today’s Growth Engine
Now, let’s examine today’s growth engine a bit more thoroughly. In addition to the points mentioned above—which are still very much driving forces—Uber’s growth engine is comprised of several related, moving parts, including:
Intensely Local, City-by-City Expansion
But perhaps the reason Uber has expanded so quickly is because they acknowledge that growth is not one-size-fits-all. What worked for San Francisco may not be what’s right for Chicago or New York, which is why they take it city by city, with local efforts tailored to each new location.
Because of the politics, regulations, and interests that make up each city, Uber needs to adapt their launch plans to suit the unique topology of each new market. It’s this ability to go into a market, understand who the suppliers are, who the special interests are, and account for those dynamics that makes Uber successful right from the start in new cities.
Kalanick explains: “We think that cities deserve to have another transportation alternative. It sounds crazy to have to say that but you have to do that because you have incumbent interests which are often trying to curtail innovation and curtail sort of transportation alternatives that might compete with their existing business. And, because of that, it requires us to take a very local approach to how we go after a city. We have launchers that go into [cities] … and turn nothing into something. I like to say they drop in with parachutes and machetes [and] get highly involved with the suppliers, people who own cars and run car services, and really just make sure that we can launch a service that is high quality from the start. Being local and speaking with local voice is important when you’re doing transportation and means you know what’s going on for the city.” (Source)
A city in which Uber has seen unprecedented growth is Washington D.C. Kalanick explains, “We’re not really sure exactly why, but D.C. really, really likes our product a lot. That is reflected in our growth, and the sort of overall demand we’ve seen has been unprecedented.” He claims that, month over month, growth is in the 30 to 40 percent range. When asked if this growth in D.C. reflects “that people are not happy with their alternatives,” Kalanick replies, “I think one can make that conclusion.” (Source)
Update: As reflected by Noah in the comments, the effort of Uber to support these city launches is massive and all encompassing, from local events, industry partnerships, business development and more. Uber makes sure that their marketing and business efforts are in full support of fueling that word of mouth engine, driving local growth.
Huge Potential to Disrupt Transportation
A major factor contributing to Uber’s growth is its potential. Not only is the company changing the way a lot of cities are hiring cars, but they’re doing so in a way that stands to transform car ownership and transportation in general—taking an established infrastructure and utilizing it in a totally new way.
Michael Wolfe, an entrepreneur and frequent technology commentator explains:
If you think of Uber as a town car company operating in a few cities, it is not big.
If you think of Uber as dominating and even growing the town car market in dozens of cities, it gets bigger. (Data point: there are now more Uber black cars in San Francisco than there were ALL black cars before Uber started).
If you think of Uber as absorbing the taxi markets, it gets pretty huge.
If you think of Uber bringing taxis to parts of the world that did not have them before because of insufficient density, it gets even larger.
If you think of Uber as a personal logistics service that can drive your kids to school and back, take you to work, pick up your parents at the airport, drive you to date night so you can get your drinks on, it gets very very large.
If you think of Uber as delivering both people as well as things (packages, dry cleaning, groceries) it gets even larger.
If you think of Uber as a replacement for your car, it gets even larger.
If you mix in a fleet of self-driving cars, orchestrated by Uber, it grows again.
If you think of Uber as a giant supercomputer orchestrating the delivery of millions of people and items all over the world (the Cisco of the physical world), you get what could be one of the largest companies in the world. (Source)
This potential is the primary reason that Uber has garnered so much attention from investors. The economic, environmental, and everyday implications are huge. They are changing the way that people think about transportation, making it less about everyone purchasing his or her own car and more about purchasing rides (like water or electricity) as we need them.
Understanding this potential, Kalanick envisions Uber as an “instant gratification” service—giving people “what they need, when they need it, whether that’s a ride or some other delivery.” As to what this other delivery might be, the possibilities are pretty limitless. (Source)
Kalanick explains, “What we’re doing right now is we’re in the experimentation phase where you sort of find some interesting ways to do promotions like Uber ice cream.” He continues, “It’s very straightforward for us to basically give [drivers] a phone with an app on it and say, ‘Look, when the thing is blinking, hit the screen and go to where the map tells you to go. And you don’t have to pick them up and take them anywhere, just give them ice cream.’” (Source)
In fact, so far the company has experimented with:
on-demand Uber Ice Cream
on-demand roses for Valentine’s day
on-demand barbecue in Texas
DeLorean rides in San Francisco
UberCHOPPER helicopter rides to the Hamptons
partnership with the NFL Players Association to promote safe rides for NFL players
as well as more standard promotional efforts, such as $10 off coupons and the like.
Though these are primarily marketing promotions, they are also ways to test the market for demand, and they hint at the company’s potential direction for growth. Though nothing is set in stone, many interpret Google Ventures’ whopping investment in Uber as an indication of what’s to come. Google is, after all, in the process of making the self-driving car a reality, which means the prospect of a fleet of driverless cars shuttling us to and from work, school, fun, errands, and home is no longer purely in the realm of science fiction.
Controversy and Press
Uber’s word of mouth engine is fueled not only through word of mouth; the company is fast becoming public relations experts. As Uber rolls out into new cities, they face myriad lawsuits from existing interests, challenges to their legality from state and local lawmakers, and varying degrees of support or resistance from drivers.
The company has done a masterful job of turning these dust ups into a platform to tell their pro-consumer story. Uber has taken what could be seen as a massive business hurdle—litigation—and turned it into an asset that drives growth.
As Uber launches into market after market, these controversies are played out in the court of public opinion, and the power of Uber advocates and the quality of the experience, create an outpouring of local public support for the company. This support changes laws, helps pave the way for Uber in new cities, and the local and national press coverage helps Uber reach more potential users who hear about an innovative new company recreating a transportation experience that is nearly universally disliked by people everywhere.
Low Risk Trials
Uber knows that once you ride Uber, it’ll be your preferred mode of getting around from that moment forward. That insight and confidence makes it easy to make the first ride a free trial. The company routinely hands out $20 first ride credits that let new users take a free Uber ride to try them out. This incentive removes any barriers that new riders may have and after experiencing Uber they are exceptionally likely to become a long-term customer.
The Remaining Pieces of Uber’s Growth Engine
Uber is by all measures a growth machine, and while it is easy to sit back and point to the press they’ve received as the main driver, it’s clear that the big idea, executed flawlessly is the true engine. The company has smartly built its team to fuel that growth engine to the full extent possible.
From public perception management, to lobbying, to relationship building with established taxi commissions and car drivers, to brand advocates and community managers who fan the word of mouth flames, to special promotions that highlight the potential that is Uber, the company spread the word, Uber has built not just a sustainable engine, but one powered by rocket fuel.
Now with a war chest of funds, and a powerful model, Uber’s job is to continue to execute and do the hard work of overcoming existing legislation and models to create the environment for them to excel. Uber is just getting started, and tenacious execution is what stands between them and their ultimate vision.
Uber is a fascinating case study because it is one of those truly disruptive ideas that completely redefine an industry and change the way people consider long-entrenched beliefs and habits. In addition, their success in a highly political arena, building a multi-sided marketplace among many disparate and entrenched interests is a model for anyone looking to take a moonshot with their startup idea.
We hope this case study helps startup founders and entrepreneurs who are looking to disrupt legacy marketplaces in formulating their growth strategy. While fighting political and entrenched special interests is very difficult, we believe that Uber shows that building a pro-consumer product that completely reinvents the experience can lead to sustainable growth and a lasting business success. Whether you’re tackling healthcare, government, transportation, or other well established marketplace, Uber’s growth provides insights on what it takes to find the growth you’re looking for.
What did we miss? What else was key to their growth in both the early days and today? Share your thoughts and insight in the comments, and help us make this the definitive piece on Uber’s meteoric rise.