Public Square

Taking Taxis to the Next Level

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Photo courtesy of pikadilly

In a world where most taxi services are heavily regulated, “Uber” is managing to take transportation to a new level.

Its secret? Rafi Mohammad at the Harvard Business Review attributes it to two things:

  • Great customer service
  • An innovative pricing strategy

Government regulations mandate that in most cities, taxis have to purchase medallion licenses in order to have the right to pick up passengers who are flagging them. These medallions often cost up to a million dollars and require drivers to adhere to a rigid set of rules, including how much a taxi service can charge.

The rules that come with medallions hurt competition. It also means that small taxi companies who cannot afford to purchase medallions can only pick up customers who have prearranged rides, causing them to loose a great deal of potential business.

Uber, on the other hand, uses an app to circumnavigate these cumbersome regulations. Customers can track approaching vehicles, making it fast and easy to “prearrange” a vehicle on the spot. They can also prepay through the app.

Drivers through Uber are independent contractors who have an incentive to provide great customer service.

Drivers often welcome passengers with a bottle of water or even hard candy – a nice touch. Of course, drivers have an incentive to provide great service because at the end of each trip, passengers rate them on a scale of 1 – 5 (with 5 being the best). Uber drops drivers with low scores – market incentives tend to yield better service than the “who else are you going to use” attitude often associated with regulated monopolies such as taxis.

Even more important, Uber has a great pricing strategy that allows it to avoid regulation and to take customer demand into account – unlike most regulated taxi companies.

Uber…lets the market rule and drops prices. This discounting steals customers from taxis and, just as importantly, attracts new customers. This walk down the demand curve entices customers who otherwise might not have used a taxi or car service. This is the beauty of a smart pricing strategy – it captures value from customers who are willing to pay the most (reaping higher margins) as well as uses discounts to generate growth.

It’s just one more example of how innovation and free exchange is a positive-sum game.

Read the entire article here and leave your comments here.

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