IMO Unfair Analysis: The Fall of Lyft and the Pink Mustaches in Boston

Despite experiencing it in their own lives all the time, people have trouble understanding that sometimes (but not always) lowering the price of a good or service, increases the volume of that good or service provided  enough to INCREASE the earnings of the service provider. This is often the case when there is dead time between providing the service to different consumers. The dead time will never be available to use, unlike a good stored in inventory.

For Hire Vehicles are one of the best examples of this. Ask any owner/operator of a taxi. They say to make money, you need to get passengers in the cab ASAP and “keep rollin’ all the time”.

Before reading the post below, please read my comment. I thought at the time and continue to think now that the removal of guaranteed driver earnings was more than counteracted with the pricing policies after the removal. This is why the article’s analysis is unfair.

The policy changes by Lyft early in 2014 triggered exactly what textbooks call “positive elasticity of demand”. Personally my weekly earnings average increased from $20 to $23 per hour.

Comments April 30, 2014 at 1:12 pm Gordon Gossage says:

I’ve been giving Lyft passengers rides since Aug 21, 2013. I just passed the 2000 ride mark. Full disclosure: I’m a passionate Lyftangelist!

I agree that after the floor payments were ended on January 19 many of our passengers were busied out for several weeks. As you suggested we needed to do, we’ve made a whole lot of changes since then to correct this problem. As a driver speaking with passengers, I’ve heard that it’s become much easier to get a ride with us.

For the passengers out there, on a scale of 0 to 10 would you recommend using Lyft to a friend or colleague?

Any questions or comments, please contact me at gordon.gossage@willibehappy.com  617.694.1624 Thanks so much

THE FALL OF LYFT AND THE PINK MUSTACHES IN BOSTON

By Jervin Justin
Harvard Business School
Class of 2014
Published March 6, 2014 in:
Digital Business Design Network Economics and Digital Product and Service Innovation

If you’re a Lyft user in Boston, you’re probably used to seeing this: “All drivers are currently busy”.

[Screen shot of Lyft app, with Lyft green balloon pointer over Harvard Business School]

Which is strange because a few months ago, Lyft drivers were everywhere, and there were usually several within a 5 minute radius. So what happened?

This is my best understanding from having had several conversations with Lyft drivers over several months. As with many of today’s online services, Lyft is a two-sided platform, bringing together providers (drivers) with consumers (users). And is common with multi-sided platforms, the challenge of mobilization is figuring out how to mobilize both sections of the network simultaneously. Drivers won’t join unless there are users, and users won’t join if there aren’t drivers. One way to overcome this is to subsidize one (or both) sides of the network. So when Lyft launched in Boston, they subsidized drivers by providing a minimum hourly fee that drivers received regardless of whether or not they provided a lift. If drivers did provide a lift, they could get fees in addition to the base pay.

However, once Lyft had seeded the market and gained market share, they (as expected) removed the floor wage that drivers received. This wasn’t unexpected; people knew this change was coming in order for Lyft to be profitable. Unfortunately for Lyft, what happened next was that without the minimum wage, drivers weren’t getting quite as much as they were used to getting and in non-peak times, wasn’t worth their time to be on the app. As a result, driver numbers dwindled, and when users got on the app, up came the message we are so used to seeing now – “All drivers are currently busy”. In addition to simply not being on the app, I’ve met several drivers that have switched from Lyft to uber-x because to the slight price premium they can command (along with surge pricing).

So what can Lyft do to make a comeback? Well, in a multi-sided platform, they need to rebuild the network – both sides of it. But how can they go about this?

When Lyft was still popular, its main competitive advantage over uber-x was that it was slightly cheaper than uber-x (and a lot cheaper than taxis and uber). Lyft might claim that their philosophy/positioning of drivers as being a friend giving you a lift is a key differentiator, but at least in Boston, I’ve never heard of anyone choose Lyft over uber-x because of this. In fact, many people avoid Lyft for this very reason because they’d rather avoid the forced conversation with this new temporary friend. So “cheaper” is their primary advantage. And herein lays the problem to a comeback. Because to also get drivers back, they need to make sure drivers are making money. This is tough to do in a scalable and sustainable fashion (i.e., reverting to a minimum wage floor) without raising prices to users and thereby losing their primary competitive advantage.

My guess is that absent a drastic shift in strategy (say by adding new features and increasing stickiness – one idea is implementing a loyalty program), Lyft (in Boston) will continue to be the AMD to uber-x’s Intel – alive but a perpetually very distant second.

 

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