We don’t know if Uber’s new carpooling experiment will be successful in Seattle, but a few economic experts are bullish about its potential.
Uber today launched a pilot for uberHOP, a new transportation option being tested in Seattle that allows people to meet at designated pickup locations and ride together with as many as five others who are traveling on the same route.
Uber is initially offering three routes to pick from and will operate uberHOP during busy commute times: 7 a.m to 10 a.m and 5 p.m. to 8 p.m, Monday through Friday. It will cost riders a flat fee of $5 for each ride, no matter how many people are in the vehicle.
The idea is to pack more people in one vehicle, thus saving customers money and increasing efficiency for Uber drivers.
We tested the service on Wednesday, and it felt very much like a private bus. Unlike a public bus, it was nice to know exactly when the ride is departing and arriving — apps like OneBusAway offer something similar, but Uber’s technology seems more precise. Other perks include the fact that you get to sit in a nice SUV and pay directly in the app.
But while I could see myself using a service like this, I wondered if the model would work economically for drivers — and for Uber’s bottom line, too.
Gareth Green, who chairs the economics department at Seattle University, told GeekWire that uberHOP reminds him of the casual carpool model born in San Francisco and Washington D.C. more than three decades ago where people meet at random places and carpool in order to access the HOV lanes on highways.
uberHOP, he said, is the same idea — only this time, people are paying for the service.
Green noted that if consumers like the service, they’ll use it more and more. If drivers see it as a way to make extra income, they’ll use it more and more.
Ultimately, he said it comes down to whether the model works out for Uber as a company. Green said that one advantage for Uber is all the data it has tracked over the past few years that indicate which routes are most popular in Seattle, thus helping the company be strategic about where to set up uberHOP routes and meeting points.
“I think Uber will find the money-making routes and it’s going to work,” Green said of uberHOP, noting that “there are a whole bunch of reasons why trying this out makes sense.”
But perhaps the most important piece of the puzzle, economically speaking, is how many people are in each uberHOP vehicle and what it takes for Uber to break-even or start turning a profit. For now, Uber said drivers will earn at least $35 per hour as it tests this new service in Seattle, but it’s unclear how they will be paid as the service grows — for example, even if only one person takes an uberHOP and pays $5 for the ride, how will drivers earn enough money?
Green said that uberHOP cars won’t necessarily need to be full in order for both Uber to turn a profit.
“Typically, the way something like this works is that the car would not have to be full for Uber to be making money,” Green said. “This is common with a lot situations like hotels, airplanes, taxi cabs.”
Green added that even if Uber breaks even or loses money with uberHOP, there is a benefit of getting more people simply using Uber’s app.
“Now that the client is used to using Uber and has the app, they’ll be more likely to use it more often in times they wouldn’t have otherwise,” he said.
Stan Humphries, chief analytics officer at Zillow, agreed with that sentiment, telling GeekWire that uberHOP is not only viable, but “it’s pretty darn attractive, in my opinion, from a business model perspective.”
“Their ability to aggregate demand is also substantially increased by the multiple options they are putting into place in the market, from Uber Black, to uberX to uberHOP and UberPool,” he said. “They’re betting that they can get people to simply open the Uber app when they want to get somewhere versus mulling over a bunch of non-Uber options like buses, cabs, personal cars, or friends’ cars. More people using their platform leads to more efficiency which leads to lower prices which, in turn, leads back to more people on the platform.”
Svenja Gudell, Zillow’s Chief Economist, added that the uberHOP model reminds her a bit of how Starbucks operates.
“They cannibalize themselves by opening up multiple stores within close proximity, but it makes it tougher for competitors to enter the market and makes the consumer more likely to choose Starbucks, or in this case, Uber,” Gudell told GeekWire.
Ultimately, Green noted, the success of uberHOP will come down to customer response.
“Though Uber has the data to know this market has potential to be profitable, they don’t know how customers will respond and use it or not,” the professor said. “The human behavior of customer reaction is the unknown, the rest has been revealed in the data. Do customers want to share an Uber? Is the time/money saved worth the price of Uber-pooling relative to single Uber, own car or public transit? Customer response is the unknown.”