The future success of any business arises from a range of possible outcomes that cannot be consistently predicted but demands the correct business level strategy that marries the internal capabilities with the external opportunities, in order to effectively provide the products or services to the customers upon which the business model is created.
If we look at Lyft’s business model found in its SEC filing, the company says it seeks to provide “a multimodal platform that offers riders seamless, personalized and on-demand access to a variety of transportation options. The success of our business model depends significantly on our ability to efficiently attract and retain drivers and riders in the local markets in which we operate and increase the amounts that riders spend on our platform over time.”
Pardon the play on words, but the road to increasing the amount of money riders spend over time is about getting repeat customers, it is not about raising prices. Keep this in mind as you read further.
While the SEC filing repeated claims of differentiation and the pursuit of competitive advantage, those are claims consistently made by companies which are sure they are differentiated in ways that allow them to not only claim competitive advantage but offer a basis for premium pricing, that is – what customers are willing to pay for the supposed unique services rendered.
As the filing offers a wealth of information amidst extended reading, it is my opinion that the company has fallen prey to a common mistake made by many, which is viewing their competitive position from the inside looking out. Making claims of having a business that provides services that are valuable, rare, inimitable AND non-substitutable (the basis for assessing competitive advantage) might make sense from an internal perspective; but the actual sale of the services demands understanding what the customer is willing to pay and why. Are the services uniquely different in ways that the customer believes is worth a premium price? Or are those services provided at a lower price that makes the cost of the service, not the service itself, the value proposition?
To answer one question or the other in the affirmative is critical for any company, as it will determine the business level-strategy they deem essential to the entire organizational effort needed to succeed. The right answer should lie in the nexus between the organizational capabilities and the market opportunity.
Let’s explore that concept and allow me to offer my perspective on Lyft’s competitive position and the business level strategy it must employ to succeed in the near term.
Framing The Discussion
As noted in Business Insider, the ridesharing industry has become one of the most transformational growth sectors of the US consumer market over the past five years, with Lyft (LYFT) establishing itself as the clear #2 player behind Uber (UBER), unquestionably the worldwide leader. Both have vertical extensions into the scooter and motor-bike businesses (as first mile-last mile to transit hubs/destinations, as well as for short rides in urban areas). Business Insider also noted a number of risks and uncertainty for Lyft which include competitive pressures, lack of a path to profitability in the near term, regulatory uncertainty, and positioning within the autonomous driving vehicle race.
Let’s begin with a comment about the latter – autonomous driving vehicles – which is the conventional wisdom as to how Lyft (and Uber) will get to profitability.
While I would admit that my research relies on limited evidence and anecdotal discussions with a few experts in Artificial Intelligence, the consensus is consistent about one thing – the widespread use of autonomous vehicles for ridesharing purposes is not around the proverbial corner.
In fact, one transportation industry expert on AI said the challenges with self-driving vehicles are complex and not easily solved in the next 3-5 years. Rather, he imagined that any resolution would be closer to ten years hence. Sobering indeed, but that fails to capture another issue related to profitability and that is of the cost to Lyft of a fleet of autonomous driving vehicles. Where does that money come from and how long does that delay becoming profitable? But that gets beyond the reality of today’s business environment and the ability of Lyft to compete in today’s ridesharing industry. With that, let’s focus on a singular aspect of Lyft’s operation – its business level strategy.
Business level strategies are actions companies take to gain operating advantages that enable them to compete successfully in a single market or industry. Generally, based on the internal capabilities they use to meet the demands of the consumer, companies must operate in one of two ways – through differentiation or through cost leadership.
Differentiation requires the ability to increase the perceived value of a business product or service so that it can charge the customer a premium or higher price than it would if the perception were not held. The challenge for a company seeking to differentiate itself is to create customer perception; something that is clearly subjective.
How a company achieves that perception is often borne of marketing and other comparisons to competitors through such means as product features, product complexity, location, reputation, distribution channels, service and support. But even with the aforementioned business operating effectively, it does come down to the customer. What is it that the customer wants and what are they willing to pay to get it?
If we are talking about differentiation, the customer needs to be convinced the value they receive is worth the higher price they pay for a perceived uniqueness. While one can argue this is true of all customers and the products they purchase, what is critical is that companies must understand customer demographics in order to make that pitch and catch. A relevant example of this is the automotive industry, where we have a range of cars to be purchased, some of which are considered luxury vehicles. So it is that the effort by luxury auto manufacturers at garnering consumer interest is not egalitarian; it is focused on those with higher incomes who are willing and able to spend more of a larger amount of disposable income to buy such a vehicle.
Conversely, there are a range of autos available at a much lower price that meet the needs of the customer – those with less disposable income or less willingness to pay a premium price for simple transportation. The manufacturers and sellers of cheaper cars know this from their research and seek to market their products accordingly, to the customers who are strongly cost-focused. It is not that these customers are not interested in luxury autos, it is that they are or choose to be financially constrained in their purchasing choices.
Which brings me to Lyft’s business level strategy.
Cost Leadership Is Lyft’s Business Strategy
If we look at Lyft’s business model, we can see the unveiling of the business level strategy that has emerged from its operations… and it is NOT differentiation.
Lyft’s business model specifically says it provides “a multimodal platform that offers riders seamless, personalized and on-demand access to a variety of transportation options. The success of our business model depends significantly on our ability to efficiently attract and retain drivers and riders in the local markets in which we operate and increase the amounts that riders spend on our platform over time.”
I believe the use of the word “efficiently” is revealing, as it ties directly to Lyft’s recognition of where its core or repeat customers’ rides begin and end…
According to our internal data, 44% of all rides on our platform start or end in low-income areas.
Think about it… forty-four percent of Lyft’s rides begin or end in areas where incomes are lower and, by practical necessity, the price of things matter! And, if we consider that in Lyft’s SEC filing the company identified that the average cost of a new vehicle in the United States has increased to over $33,000, we recognize it has made the cost of transportation ever more expensive for those in lower income areas. In fact, as noted in research, lower-income households have lower vehicle ownership rates, and for those with cars higher insurance rates, which have directly led those household members to an increased use of alternative modes of cheaper and convenient transportation.
In fact, limited vehicle availability and fewer affordable transportation options afflict this cost-sensitive group, which tends to be located in more urban areas – many of the very markets Lyft has entered. And, while those markets also contain the more affluent, the affluent have access to alternative modes of transportation including higher levels of car ownership. So, their demand for a Lyft might well be limited to an occasional night out that includes food and adult beverages and, while it is an excellent alternative source of customer business, they are not Lyft’s core customers. This is an important distinction because Lyft’s core customers are those likely to need services daily or at various times weekly and, based on the beginning and end of the rides, those customers are in lower income areas that suggest they are very price-sensitive. And, through my own anecdotal evidence, it also appears that Lyft is less expensive on a comparative basis to Uber; with both less expensive than taxis and limos.
This is no small observation because it suggests that, in the absence of any clear means to differentiate itself to its core customers, Lyft must recognize that its core customers are price-sensitive and, should it raise fare prices, it would risk losing a substantial portion of its core, repeat customers; particularly those who most likely migrated from Uber because of the comparative difference in the price of the fares.
But why take my word for it? Anyone standing on a street corner trying to hail a ride on their smartphone can quickly and easily compare the prices of Uber and Lyft (OBTW: an app may soon compare the two for you — and hail the cheaper ride that likely would be Lyft).
Though there are cost and tech barriers to entry, it remains true that, should another ride-sharing service come along that prices its services lower, while providing a comparable experience, Lyft might find its revenues decreasing and its path to profitability, already in question, impossible to attain.
There will be, undoubtedly, an argument made by Lyft that it has the technological capabilities to achieve differentiation and, thus, charge higher prices for rides. Perhaps, but as I noted that is looking from the inside out and, thus, lacks the core customer’s perspective on price. Again, with 44% of its customers beginning or ending their rides in low-income areas, it is an incontrovertible fact that Lyft’s core, repeat customers will be largely focused on the price of a ride. Since it has done the heavy analysis and should have arrived at the position that its core customer is price-sensitive, Lyft must ensure the entire company is organized to implement a cost leadership business strategy and that means the organizational structure must be controlled not bloated, with fewer layers and smaller staff in the reporting structure. It also means there is a need for management controls that include close supervision on labor and other operating costs, along with a focus on compensation that rewards and incentivizes employees for cost reductions.
When effectively aligned toward cost leadership, Lyft would be able to market its form of transportation business as a low-cost, good-quality service that provides value to the cost-conscious consumer. Going beyond its core customers, a focus on cost would also appeal to the business customer seeking to control budgetary expenses, as well as to any customer who might want to save money; an approach that allows it to shift from transportation costs borne of ownership to transportation as a service, with the potential that its savings might be shifted to spending within the local economy; something that Lyft has suggested is an ancillary value of its service. (Well that along with reduced traffic congestion; but that appears more aspirational at this point.)
Lyft likes to think of itself as a tech company and, as such, believe it affords it differentiated competitive advantage. I have to disagree with that argument, but would suggest Lyft’s focus on technology, as a driver of efficiencies and economies of scale, could provide access to increased productivity that would be the basis for keeping its fares low and furthering its ability to focus on being an effective cost leader. And, there is nothing wrong with that. As Walmart (WMT), Southwest Airlines (LUV) and McDonald’s (MCD) have long proven, there is “gold” in cost-conscious, repeat customers.
Therefore, consistent with the reality that 44% of its rides begin or end in lower income areas, the value for Lyft will be in maintaining low cost fares that appeal to its core, repeat customers. But it will require execution across the value chain. This means Lyft must maniacally focus on costs at all levels and all points of the company, not merely on the drivers who deliver the ridesharing services as contractors.
For Lyft, near-term success lies on the altar of a cost leader business level strategy that is enabled by gaining new customers who see the price-value proposition they offer. It is not by profligate spending on self-driving vehicles. Lyft will face a rude awakening come quarterly report time if it fails to grasp that reality. This is not to say that autonomous driving vehicles will not claim the roads one day, just not today.