Why has Uber cut costs so deeply that it makes a loss on each fare?

Uber launched as a luxury service but UberX was a transparent attempt to grab the low-hanging consumers that its nascent competitors were built for. Lyft and newcomer Hitch, for example, both keep prices low by ‘ride-sharing.’

But Uber have pushed the spirit of competition off a cliff: they’re losing money in a bid to steal market share. 

These price wars have another interesting implication for Uber and its industry. Writing for the US technology magazine Pando, Carmel Deamicis writes: “When you see rampant price wars in a particular sector, it can be a signal that what companies are offering is a commodity. If they have to engage in cutting costs to keep customers away from competitors, it’s likely their product isn’t differentiated enough to keep users around otherwise.”

What are Uber’s options? They could raise commissions again and provoke the ire of drivers (…again), or they could invest in their more expensive services, somehow creating higher margins, and make up the losses from UberX. It’d be very difficult without the figures for the number of people who use UberX versus premium services for this this to be possible. 

They may be able to encourage new and existing users to occasionally ‘upgrade’ their experience from UberX to more premium services. Or, more likely, they could be driving toward eventually making Uber a ubiquitous market experience – like Amazon in ecommerce – and then be able to raise their prices at a later date. 

The thing to note about Amazon, however, is that they are an aggressive competitior who either acquires ecommerce competitors (Zappos, Lovefilm, Audible) or chases them out the market: it famously maintains tight margins by reinvesting revenue back into capital. 

Could Uber emulate Amazon? It seems, for a variety of reasons, unlikely. Namely, Amazon has had more than a decade’s head-start, giving it a capital and consumer handicap a startup or young company just can’t match.

Despite that cynicism, Uber’s aggressive city-grabs and zealous fanbase embolden the arguments that they’ll pull through, or even come out with another success. Their valuation – $18bn (£10.5bn) – says they can afford to play for time.  But for how long? 

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