We now look at the third marketing mix tool—distribution. Companies rarely work alone in engaging customers, creating customer value, and building profitable customer relationships. Instead, most are only a single link in a larger supply chain and marketing channel. As such, a firm’s success depends not only on how well it performs but also on how well its entire marketing channel competes with competitors’ channels. The first part of this chapterexplores the nature of marketing channels and the marketer’s channel design and management decisions. We then examine physical distribution—or logistics—an area that has grown dramatically in importance and sophistication. In the next chapter, we’ll look more closely at two major channel intermediaries: retailers and wholesalers.
We start by looking at Uber, the fast-growing, app-based car-hailing service that has recently sprouted up in cities around the world. Uber has radically reinvented urban transportation channels, posing a serious threat to conventional taxicab and car service companies. As Uber grows, traditional competitors must innovate or risk being pushed aside.
UBER: Radically Reshaping Urban Transportation Channels
It’s rare. But every now and then a company comes along that completely disrupts the traditional ways of distributing a product or service. FedEx revolutionized small package delivery channels, Amazon.com radically transformed online selling, and Apple’s iTunes and iPod turned music distribution on its ear. Now comes Uber, the app-based ride service that is revolutionizing urban transportation. Fast-growing Uber is giving conventional taxicab and car services a real ride for their money. In just seven short years, Uber has revved up operations in hundreds of major cities in 67 countries, already booking more than $10 billion in rides annually through its massive network of more than a million drivers.
Why are so many customers around the world bypassing good old taxicabs in favor of newcomer Uber? It’s all about convenience and peace of mind. No more stepping out into busy city streets to wave down a passing cab. Instead, Uber’s smartphone app lets passengers hail the nearest cab or limo from any location, then track the vehicle on a map as it approaches. The Uber app gives riders an accurate estimate in advance of the fare to their destinations (usually less than that charged by a regular cab), eliminating guesswork and uncertainty. After the ride, passengers simply exit and walk away. Uber automatically pays the driver (including tip) from the passenger’s prepaid Uber account, eliminating the often-inconvenient and awkward moment of payment. And it’s the same process anywhere in the world, from San Francisco, London, Paris, or Abu Dhabi to Ashville, North Carolina, or Athens, Georgia.
Compare the Uber experience to the uncertain and often-unsettling experience of using a standard taxicab. One business reporter describes waiting in line at a taxi stand while a driver tried to convince another would-be passenger—a total stranger—to share the cab, thereby increasing his fare. The cab itself was ancient and filthy, with ripped and worn seats. During the entire ride, the cabbie carried on a phone conversation in a foreign language via his headset, causing safety concerns while distractedly navigating busy city streets. The driver spoke only poor, hard-to-understand English. “That turned out to be a good thing,” says the reporter, “because I couldn’t understand what he was trying to say when he insulted me for not tipping him enough.” The reporter’s conclusion: “I stepped out of the taxi in front of my house and realized I just don’t have to put up with this garbage anymore. Uber has changed my life, and as God is my witness, [wherever Uber is available] I will never take a taxi again.”
Uber drivers range from professional drivers who’ve switched over from conventional cab and transportation companies to regular people looking for a little adventure and some extra income in their spare time. All Uber drivers go through an orientation that requires proficiency in a market area’s dominant language, ensuring that they can communicate effectively with customers. Uber vehicles must be at least 2010-year models or newer, and customers can often choose the type of car they want, from an entry-level Prius to a stretch Mercedes S-Class. A two-way rating system—by which riders rate drivers and drivers rate riders in return—helps keep both sides on their best behavior. Poorly rated drivers risk being rejected by future passengers; poorly rated passengers risk rejection by drivers, who can choose which fares they accept.
Uber’s disruptive innovation has brought a breath of fresh air to an industry begging for change. Urban transportation channels have long been characterized by cartel-like relationships between cab companies and local governments, high fixed fares, poor service, and little accountability. As one economics professor points out, the taxicab industry “was ripe for entry [by start-ups] because everybody hates it.”
Like any innovator, upstart Uber faces some significant challenges. For example, Uber has been criticized for exercising too little control over driver quality and security. So far, the company has ridden beneath the radar of industry regulators by not directly employing drivers (all Uber drivers are independent contractors) and not owning any vehicles (all vehicles are driver-owned). However, although some municipalities have passed ordinances favorable to Uber’s operations, others are imposing new regulatory restrictions and licensing requirements or even banning ride-hailing services altogether.
Uber has also been criticized for its “surge pricing” practices—a dynamic pricing mechanism that kicks in to raise prices when demand exceeds supply, sometimes resulting in shockingly high fares and accusations of price gouging. Uber justifies surge pricing by pointing that it provides an incentive for more drivers to be available during periods when passengers need them most. According to Uber, if a passenger faces a higher-than-normal fare because of surge pricing, the alternative without Uber would more than likely be no taxi at all. Moreover, Uber informs passengers in advance what the fares will be. If they don’t like the fare, they can find another cab, take public transportation, or walk.
Uber’s huge success has attracted a garage full of competitors, such as Lyft, Gett, Carma, and Curb. Even Google (itself a major Uber investor) is reported to be readying the launch of its own ride-hailing service, one that would eventually utilize the driverless vehicles Google is developing. But Uber has a huge first-to-market advantage. Its bookings are 10 times those of nearest competitor Lyft, and Uber is adding new customers at a faster rate.
Uber lets passengers hail the nearest cab from any location using its smartphone app, then track the vehicle on a map as it approaches.
PAUL J. RICHARDS/AFP/Getty Images
Moreover, even as competition stiffens, Uber has little to fear from like-minded competitors. In fact, the more competitors adopt the new model, the more the revolutionary channel will grow and thrive versus traditional channels, creating opportunities for all new car-hailing entrants. Instead, the new distribution model poses the biggest threat to traditional taxicab and car-for-hire companies, which are now losing both customers and drivers to Uber and its competitors.
Based on its U.S. success, Uber is now expanding rapidly abroad. Huge markets such as China and India are especially attractive, with their massive populations of people who don’t own cars. Uber is already operating in 37 Chinese cities and plans to be shuttling riders around 100 large metro areas in the country within 12 months. In China, however, Uber is playing catch-up to market leader Didi Kuaidi, which already operates in 360 Chinese cities and towns. Similarly, in India, Uber is taking on established market leader Ola.
Despite its explosive growth, Uber—like every other ride-hailing company—has yet to turn a profit. Like Facebook, Amazon, and so many other revolutionary companies in today’s internet-driven economy, Uber’s start-up model is to build a big user base first, then worry about making money later. Uber keeps 20 to 30 percent of each fare—the rest goes to the driver. But Uber plows back most of its take into expansion and promotional expenses. Investors seem confident. Uber has raised more than $10 billion in venture capital and currently has a valuation of more than $62 billion, making it the world’s most valuable privately held technology firm.
Uber-mania is even catching on in other industries. It seems like there’s an app-based on-demand “Uber” for almost anything these days—laundry and dry cleaning (Washio), in-home massage (Zeel), 24/7 delivery services (Postmates), and even booze (Minibar). In fact, Uber CEO Travis Kalanick sees no end of future applications for Uber’s services, well beyond just delivering people to their destinations. Once Uber has established a dense network of cars in every city, he predicts using the network to deliver everything from packages from retailers to takeout food. As Kalanick puts it, “Once you’re delivering cars in five minutes, there are a lot of other things you can deliver in five minutes.”
AS THE UBER STORY SHOWS , good distribution strategies can contribute strongly to customer value and create competitive advantage for a firm. But firms cannot bring value to customers by themselves. Instead, they must work closely with other firms in a larger value delivery network.