Uber’s Flywheel: How Liquidity Network Effects Spark Growth
One of the key elements of platform business models is their ability to create strong network effects. One major issue when kicking off a platform from scratch is to create “liquidity.”
This means the ability to generate enough supply, which improves the service. Thus it generates even more demand. This flywheel effect is the key to trigger the network effects needed to unlock growth.
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Source: Uber Financial Prospectus
Uber leverages on a liquidity network effects, which starts from creating driver’s supply, which determines lower wait times and fares for riders. In turn, this attracts more riders.
Thus, with more riders per hour, there is a higher earning potential for drivers. When this happens more drivers join the platform, thus making this network effect speed up. That’s how Uber kicks off growth from its platform!
As explained in its financial prospectus:
Increasing scale, creating category leadership and a margin advantage.We can choose to use incentives, such as promotions for Drivers and consumers, to attract platform users on both sides of our network, which can result in a negative margin until we reach sufficient scale to reduce incentives.
Therefore, to focus on growth, Uber kicks off a market by eating up its margins, that become negative, until sufficient scale is reached. At that stage, incentives are reduced. Thus, Uber subsidized a market when it first enters it.
That is also why and how Uber has been able to build up a global presence:
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Source: Uber Financial Prospectus
In certain markets, other operators may use incentives to attempt to mitigate the advantages of our more liquid network, and we will generally choose to match these incentives, even if it results in a negative margin, to compete effectively and grow our business.
Uber here clarifies even further how Uber eats up its margins, by making it them negatives, and to prioritize on Growth. This aggressive growth strategy, it’s described by LinkedIn’s founder Reid Hoffman, as Blitzscaling:
[image error]At its core, the concept of Blitzscaling is about growing at a rate that is so much faster than your competitors that makes you feel uncomfortable. In short, Blitzscaling is prioritizing speed over efficiency in the face of uncertainty.
Generally, for a given geographic market, we believe that the operator with the larger network will have a higher margin than the operator with the smaller network.
In short, Uber prioritizes in making its network larger, so that over-time it can gain higher margins on its operations.
To the extent that competing ridesharing category participants choose to shift their strategy towards shorter-term profitability by reducing their incentives or employing other means of increasing their take rate, we believe that we would not be required to invest as heavily in incentives given the impact of price and Driver earnings on consumer and Driver behavior, respectively.
Therefore, according to Uber, those players that prioritize on “short-term profitability” makes it easier to Uber to be competitive.
In addition to competing against ridesharing category participants, we also expect to continue to use Driver incentives and consumer discounts and promotions to grow our business relative to lower-priced alternatives, such as personal vehicle ownership, and to maintain balance between Driver supply and consumer demand.
That’s why we can expect in the coming years, Uber to keep using this strategy to fuel growth. This isn’t that far from Amazon cash machine strategy, where Amazon voluntarily reduced its margins to prioritize on aggressive growth and acquisition of market shares.
It is important to remark that Amazon has been profitable for many of its years of operations.
This business strategy used by Uber is a clear example of how platform business models can gain long-term competitive advantage by tapping into larger and larger networks!
Related:
The Framework To Build A Successful Two Sided Marketplace
How Does HyreCar Make Money? HyreCar Business Model In A Nutshell
How Does Uber Eats Make Money? Uber Eats Business Model In A Nutshell
Lyft Transportation-As-A-Service Business Model
Resources for your business:
What Is a Business Model? 30 Successful Types of Business Models You Need to Know
The Complete Guide To Business Development
Business Strategy: Definition, Examples, And Case Studies
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
What Is Market Segmentation? the Ultimate Guide to Market Segmentation
Marketing Strategy: Definition, Types, And Examples
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
Micromanagement: How To Avoid To Micromanage Your Business
What Is The AIDA Model And Why It Matters
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