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.
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.
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.
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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