With IPOs on deck, Lyft and Uber seek to win loyalty from drivers, consumers
March 1, 2019 | Blog

With IPOs on deck, Lyft and Uber seek to win loyalty from drivers, consumers

The ridehailing industry is entering a new phase of competition: loyalty.

Lyft, which officially filed for its IPO Friday, and Uber have been working hard to court both drivers and riders.

Since last fall, the two firms have introduced monthly subscription plans and loyalty programs designed to attract repeat riders. And now the Wall Street Journal is reporting that Lyft and Uber both plan to offer cash to their best drivers that they can use to purchase stock at yet-to-be-determined IPO price.

An expensive slugfest

Since Lyft and Uber launched about a decade ago, the ridehailing industry has consisted mostly as an expensive slugfest for market share. Both companies have spent considerable cash trying to sign up drivers and gain customers.

But many customers and drivers have been content to just play one company off the other. Depending on rates and bonuses, drivers often work for Uber on Monday and then switch to Lyft for Tuesday. As a result, retention has been non-existent.

In the early days of Uber, the company offered $2,000 or $5,000 to just complete a few rides on the app. Today, Uber spends as much as $1.3 billion in one quarter alone on incentives, promotions, and sales and marketing, according to a report by CB Insights.

Yet Uber only retains about 20 percent of its drivers after one year, which amounts to a 12.5 percent monthly churn rate, the report said.

Uber and Lyft have largely been able to offset these costs because the overall industry has grown so rapidly. But U.S. market growth rate is slowing, which puts pressure on both companies to either generate new sources of revenue or cut costs.

Asia offers the best growth prospects but Uber has pulled out of Russia, China, and Southeast Asia though the company has acquired stakes in local competitors. Lyft has only expanded to a few cities outside of the US and only in Canada.

Need stickiness

To manage spending and promote profitable, sustainable growth, Lyft and Uber need drivers and customers to stick to their platform.

In October, Lyft launched its All Access program that allows customers 30 rides (of up to $15 each) for $299 a month. Uber Rewards provides customers different levels of benefits. For example, Uber Platinum riders can lock in prices for certain routes, cancel rides without paying fees, and earn “Uber Cash” to use on its Uber Eats food delivery platform.

The companies’ plan to offer stock to drivers is particularly bold because regulators have traditionally frowned upon offering equity to independent contractors. Uber and Lyft don’t consider their drivers full time employees, which means the companies don’t have to pay them benefits like health care.

Flexibility and extra cash not enough

However, on demand companies are increasingly realizing that they must offer their gig economy partners something more than promises of flexibility and extra cash.

Last year, Airbnb wrote to the U.S. Securities and Exchange Commission, requesting the agency allow the company to issue stock to hosts.

“Airbnb believes that twenty-first century companies are most successful when the interests of all stakeholders are aligned,” the letter said. “For sharing economy companies like Airbnb, this includes…our hosts who use our marketplace to list unique accommodations and experiences.”

“As a sharing economy marketplace, Airbnb succeeds when these hosts succeed,” it continued. “We believe that enabling private companies to grant hosts and other sharing economy participants equity in the company from an earlier stage would further align incentives between such companies and their sharing economy participants to the benefit to both.”

As Uber, Lyft, and Airbnb prepare to become public companies, they will likely face scrutiny on how they compensate their contractors at a time when economic populism is sweeping across the world. Democratic congressmen in Washington, DC and presidential candidates have called for government to guarantee jobs, healthcare, and livable wages.

So offering stock may just be a first step to finding alternative ways to compensate gig workers without sacrificing the business model that has made on demand services so successful.

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.