14/2017 – Welcome to the new world business of customer acquisitions
by Tan Thiam Hock
Saturday, 26 August 2017
I JUST read a Bloomberg Technology news article online with a headline “Uber narrows loss to US$645mil (RM2.6bil), boosts revenue amid turmoil”.
Net revenue for the second quarter (Q2) of 2017 rose 17% to US$1.75bil, translating into an operating loss of 37 US cents per US$1 in revenue, which was 9% lower than the last quarter, which means Uber lost US$708mil in Q1 2017. This compares with US$991mil losses for Q4 2016. Losses are definitely decreasing as revenue grows. Travis Kalanick, the founder, was ousted as the CEO in the second quarter, hence the turmoil headline.
Gross bookings/fares for Q2 2017 was US$8.7bil, which means net revenue by commission on the bookings/fares is about 20%. Gross bookings for 2016 was US$20bil, with losses of US$2.8bil excluding China, so losses do exceed US$3bil for the entire year of 2016. Gross bookings for 2015 was about US$10bil, so Uber is growing booking revenues at a staggering rate, from US$10bil (2015) to US$20bil (2016) to US$15.9bil (first half 2017).
I estimate Uber losses since 2010 at somewhere between US$8bil to US$10bil to date. Certainly not an investment for weak-minded investors!
Despite the continuing losses, Uber investors have valued the company at US$69bil. Some investors have started writing down their investments by up to 15% due to the boardroom turmoil but hey, Uber is still valued at a minimum of US$59bil by some investors!
For those accountants who do not understand the valuation rationale, don’t worry. We are in the same boat. I have thrown out all my financial management and valuation textbooks together with what I have learned in Universiti Malaya and Harvard Business School.
I do believe some of these learned professors in finance will be out of job soon. Their fundamentals of valuation books will never ever be reprinted and consigned to the history archives of an electronic library.
Welcome to the new world business of customer acquisitions. First, you need a brilliant idea of world domination via digital technology, then you look for super-smart, cash-rich investors who believe in you and your ideas.
Create a lofty valuation based on the concept of potential world domination understood by only super-smart fund managers, so that they will invest in you. Always promise the investors a higher valuation (at least 10 times) by the next round of funding to create the “fear of missing out” syndrome and you will see funds flowing into your bank account.
Now you can start your rapid customer acquisition strategy. In Uber’s case, they use the investor money to acquire customers, offering discounted fares to customers to switch them from taxis, but paying full fares to Uber drivers thus subsidising in the pursuit of customer acquisitions.
To get more Uber drivers on the road, Uber pays them lucrative incentives. This is a no-brainer consumer sales strategy, offering products/services at below cost with super discounts that are much, much lower than your competitors to boost sales and to acquire new consumers.
Costly exercise for the company or as they called it acceptable “burn rate” by the super-smart investors. But after five years of increasing losses, investors start asking for a roadmap to profitability. So Uber management have to start showing lower customer acquisition costs and since they are not able to reduce the subsidy for customer fares, they start cutting incentives for the drivers.
Uber drivers, having been spoilt by a combined income of fares, subsidies and incentives, suddenly find that they are not earning as much as before. So now Uber introduces a tipping policy in its app and the Uber consumer faces the same pressure of tipping similar to sitting in a yellow cab in New York.
Besides showing an impressive growth in revenue, Uber has managed to reduce customer acquisition subsidy from one dollar loss per dollar revenue to just 37 cents loss per dollar revenue as shown in its latest quarter results. Profitability will be achieved once they remove the fare subsidies for the consumers, which means Uber fares will be similar to taxi fares.
The cost for running a cab or Uber car is similar. The only difference being the licensing cost for a cab as compared to the 20% commission on fares paid to Uber by an Uber driver.
When no subsides are involved, it is a straight fight between two rival taxi companies. GPS apps will soon be made available to all, so no distinct advantage for Uber over the long run.
Realising that this taxi competitive business will eventually be a zero-sum game, and the road to profitability is fraught with potholes and broken spirits, Uber is now banking on driverless electric cars to provide some glimmer of light at the end of this endless tunnel.
Unless Uber is able to kill off its competitors and achieve monopolistic advantages, which means overall taxi fares will increase by 20% all over the world. I believe this is what the super-smart investors would like to believe. World monopolistic domination equals opportunity to raise fares by charging a premium for the services provided.
Back home in this part of the world, besides competing with local taxis, Uber has to contend with competition from Grab of Malaysia and Go-Jek of Indonesia.
Grab and Go-Jek have equally super-smart, super-rich investors funding their customer acquisition quest. Both companies have achieved unicorn status and unicorn valuations despite continuing losses.
I have no clue as to how long this charade will continue but as long as we have super-smart investors believing in world domination, the subsidies will continue. My advice to Uber, Grab and Go-Jek drivers will be to enjoy the lucrative rides while you can.
It would be nice if all of you consumers send an appreciative thank you note to the super-smart investors for their continuing subsidies in reducing your daily transport expenses.
Just remember to remind them on the same note that you will not agree to any increase in fares once world domination is achieved. That will be the end of the fairy tale ride of your lifetime.