One More Thing Uber’s New CEO Will Have To Fix

Travis Kalanick got just about as close as possible to being fully ousted from Uber this week as the board voted to severely limit his influence.

Major changes the board made in Uber’s governing structure include a new requirement mandating that any future CEO must be approved by a vote of two thirds of the directors.  That’s up from a simple majority vote, making it much more difficult for Kalanick to be approved for the CEO spot in the future.

The board also adopted a measure giving each member one vote per share of stock.  Kalanick had previously owned “super shares” that gave him ten times the number of votes compared to most other board members.

With these changes, it looks very unlikely that Kalanick could ever regain control of the company.  For now, he owns a sizable chunk of Uber stock, but his total voting power has been cut from 16% to about 11%.

This is great news to anyone who cares about the company and who is familiar with Kalanick’s legacy.  The legacy of the pugnacious Kalanick is well documented, and there are many parts of it that new CEO, Dara Khosrowshahi, will have to fix.

Power, Money, Scandals, and Relentless Competition

Kalanick’s time at Uber is filled with win after win; essentially redefining the way services are delivered in the current economy. However, his time at Uber is also rife with scandal; from software applications like Greyball to all kinds of public relations disasters.

For instance, in 2014 the head of Uber in New York City, Josh Mohrer, was caught tracking the rides of a reporter with a reported “God Mode” available to high-level Uber execs.

Google is suing Uber for allegedly stealing top secret info on its driverless cars.

For those of us who have some affiliation with Uber, whether as drivers or passengers, should be very happy the company’s culture will be improving under new leadership.

Passengers love Uber for its efficiency and convenience and of course its low, low prices.  Hundreds of thousands of drivers around the world depend almost solely on Uber for their income, although they hate the low, low prices!

But, they still need Uber to do well.  And they’re hoping Uber will realize it will do best by doing what’s right.  By being honest and transparent.

A Dynamic Shift

If Uber can become better known under Khosrowshahi‘s reign for integrity rather than scandal, that will be a major accomplishment.  And it will do wonders for the company’s bottom line.

One of the worst parts of Uber’s storied past is the cheating scandal Uber is involved in called “Upfront Pricing“.  The reason this is such a big PR blunder for Uber is because it directly affects passengers and drivers in the pocketbook.

All the other scandals, as bad as they are, do not directly affect Uber’s two primary constituencies, drivers and passengers, as profoundly as this one does.  This is something Khosrowshahi will have to fix if Uber is ever going to gain a reputation for integrity.

Uber has been losing market share to Lyft and others since the summer, and when this issue becomes more widely known, it could cause its market share to fall even further.

I’ve written about this before and had hoped that Uber’s “180 Days of Change” might bring some change to this issue – but I was presented with an invoice today from a driver in New York City, showing the problem is as pervasive as ever.

 

Upfront pricing is the price the customer sees when they order an Uber.  Originally, Uber didn’t give any price estimate when someone ordered a ride.  They simply displayed the per-mile and per-minute rates.  They then charged the customer for the actual mileage and time driven.  They paid the driver 80% of whatever they charged the customer.

Related: Uber Fees: How Much Does Uber Take From Drivers?

Later, after customers complained that their final charge was much higher than they expected, Uber switched to an estimate system, where they would give the customer an estimate of the total cost of their trip, when they ordered a ride.  A passenger would order an Uber and be presented with a screen that would tell them the trip would cost between $18-$25.

That was cool for a while, but finally, when passengers were consistently getting charged several dollars more than the upper end of the estimate they balked and Uber decided to switch to the “upfront pricing” system, where they would give the customer the actual price for the trip, before they ordered the car.

The Problem

Now, when someone orders an Uber, they put in their pickup and drop-off locations, and they’ll see a screen that tells them, ‘the total cost of your trip will be $23’.  And at the end of the trip, that would indeed be their final fare.

If you’re following along, you’re probably already starting to see the problems with this.

What happens if traffic is worse than Uber thought it would be when they gave the estimate?

What if they charged the passenger $23, but they had to pay the driver $22 for the trip?

Since they always pay the drivers the per-mile and per-minute rate, it is possible that they may underestimate the time and distance and end up paying the driver as much as or more than they charged.  In this example, instead of Uber earning $4.60 on this trip, they would only earn $1.  Cutting their commission from 20% to 5% (which is almost five times less than should have earned.  And you wonder why they’re losing money)!

The driver has always been paid on the actual time and distance, not the estimated time and distance.

So, the actual time and distance of a trip might leave Uber with a 1% commission instead of the original 20% commission (which is now a 25% commission).  Or in many cases, Uber could have an actual loss on the trip.

Maybe they gave an upfront price of $23 to the customer, but traffic got much worse and the driver decided to go a longer but slightly quicker way.  In those cases Uber might end up paying the driver $29 and taking a loss on the trip!

So, what would you do if you were Uber and you ended up in this situation?

The Solution

To solve this problem, I think Uber really only had three choices:

  1. go back to estimated prices
  2. go back to simply displaying the per-mile and per-minute rates without giving a total price
  3. overestimate all trips to make sure they don’t take a loss.

Well, they couldn’t really go back to estimated prices because that just angered people when the final price came in higher than the estimate.

And they couldn’t go back to simply stating the per-mile and per-minute rates, because they had already tried that and people didn’t like it because it gave them no idea how much the trip would actually cost. Although, that had been the way taxis have operated for over a hundred years and it seemed to work fine as people grew accustomed to it. But, Uber just wanted to stop the complaints so they kept getting more and more creative!

In the end, they chose Option 3 – overestimate. They must have felt they had to.

They probably didn’t know enough about the history of the taxi industry to know there was a reason that industry didn’t default to an upfront pricing system.  Instead they defaulted to a meter system that charges passengers by distance and time.

Taxi passengers always knew there was no way to know the final price until they arrived at their destination.  But Uber, in their short-sighted thinking, thought it would be better to simply overestimate and give passengers a final total before they take the trip.

Related: Uber vs Taxi: Duel of The Century

But the only way to do that and not go out of business is to always grossly overestimate.  What that means for passengers is that they’re almost always paying more than they should, based on Uber’s published rates.  And what it means for drivers is that they’re always making a far smaller cut than they were originally promised.

In essence, I think Uber has found a way to raise its prices on passengers without having to increase what they pay drivers.

In the beginning though, Uber had always told drivers they would be paid a fixed percentage of the fare the customer paid and that the customer would be charged for actual time and distance.  It was all above board, it was all very transparent and it was all ethical.  What they’re doing now is not transparent and, in my opinion, is arguably unethical.

Look at this example that a New York City Black car driver showed me yesterday.  This was a trip he drove on October 4, 2017 (well into the 180 Days of Change campaign).

In the top half of the screen, you see what the driver was actually paid.  In the bottom half you see what the rider paid.

In New York, Uber drivers make approximately a 67.3% of the published per-mile and per-minute rates.  That’s because of some city fees and taxes drivers have to pay.  In the Fare Details pictured above, I’m going to subtract the $5.76 toll from both what the driver makes and what the passenger paid, because that’s not part of Uber’s fare.

So, the passenger actually paid $107.40 to Uber.  The driver earned $61.06.  If Uber had paid him the usual 67.3% of the fare, he would have earned $72.28 or $11.22 more.

Another way of putting it is, instead of earning 67.3% of the fare the passenger paid, he only earned 56.8% – which is 10.5% less than he should have earned.

My Take

It should be obvious that drivers are enraged when they see these invoices.

I hear many drivers say, “if the passenger is paying for a 25-mile trip, then by golly, I’m gonna take them on a 25-mile trip!” when a 16-mile trip would have sufficed perfectly fine.

And drivers talk to each other about the longest routes between certain points in Manhattan and the airports.  They know the longest routes like the back of their hands.

Upfront pricing wreaks havoc on driver’s morale.

Most of them are working so hard to make ends meet, and then they see that Uber has effectively increased the rates they charge passengers, but have not increased what they pay drivers – it absolutely infuriates them.  It’s hard to see how Uber could possibly think having a bunch of angry drivers is going to help their cause.

If you’re not feeling sufficiently sympathetic to the drivers, because maybe you’re a passenger and you don’t want to pay any more than you already do, think about this – you are already paying more than Uber’s published rates say you should.

They’re charging you the published rate per mile, but what they’re hiding from you is that they’re charging you for far more miles than the trip should take.  That’s not transparent and it’s not ethical.

Taxi drivers have long been accused of taking the long way when they thought they had an out-of-town sucker in the back seat. (have you ever been to Vegas? ASK them to take the short way, trust me)

What Uber is doing is really not much different from that.  They are in essence taking you the long way around, without telling you they’re doing it.

Just look at the example above;a 16.48-mile, 33.65-minute UberBlack trip in New York City, should have cost the passenger $90.67 (not including the toll).  Instead, he was charged $107.40 (not including the toll).  In essence, he was overcharged by $16.73 – for a single half-hour trip!  So, if you’re a passenger, this should alarm you too.

This aspect of Kalanick’s legacy, could potentially do more harm than anything else so far to Uber as a brand, when it becomes more widely known among passengers that they’re actually paying much more than the published rates would suggest they should.  And it will do more harm to Uber’s image when they find out Uber has been charging them for more distance and time than they were actually driven.

I have high hopes for Khosrowshahi.  He seems like a good man and I can’t wait to see where Uber goes from here.

What do you think of Uber and the treatment in passengers and drivers? Let us know in the comments below!