Wednesday, December 10, 2014

Defensibility And Lock In: Uber & Lyft

One of the most common critiques an entrepreneur will hear is that their business is not defensible.  This was frequently stated about Google ("The switching cost is low - there are a dozen other search engines so you can just change web pages!").  Later, when I was at Google, a senior Google manager said the same thing to me about Facebook ("The switching cost is low!  First there was Friendster, then Myspace, now Facebook.  In 3 years everyone will be on something else!").

Many companies that appear to lack defensibility have strong lock in effects.  Others start off without a lock in strategy, and have one emerge over time.  Finally some businesses, such as marketplaces, inherently have lock-in due to their network effects.  The key is to think through how you can create a moat for your business.

Approaches To Defensibility
1. Scale Effects.
Scale gives you leverage when negotiating costs or special product features with suppliers or partners.  For some companies (e.g. steel, oil and gas etc.) this scale allows the company to outcompete and outprice its peers in the market.

2. Network Effects.
Marketplaces (AirBnB, Uber/Lyft, Instacart), social networks (Facebook, Twitter, LinkedIn, Pinterest), and even YC all have different network effects that help to lock in customers/users.  More on Uber/Lyft below.

3. IP.
Differentiated technology or technology leadership can lock in customers or customer cycles over time.  Intel was always one step ahead of AMD processor-wise, while some healthcare companies use IP litigation to prevent other entrants in certain markets.

4. Distribution and Sales.
Locking in sales or distribution channels is a classic form of defensibility.  Google gained searched market share in part via exclusive deals with Mozilla (back before Chrome became a dominant browser) and toolbar distribution deals.  Traditional enterprise companies like Cisco and Oracle have strategically locked in reseller and services focused channels to push their product and lock out competitors.

5. Data.
Google's mapping dataset, and Yelps business listings + reviews provide defensive barriers for each company over time.  Unique data can often help a business prevent its own commoditization.

6. Other.
There are a number of other ways to create lock-in.  Branding is one way to differentiate a commoditized service and cause people to use you over and over, even if you offer a commodity product.

Uber and Lyft As Examples
Uber and Lyft are examples of companies that have baseline defensibility due to the network effects inherent in their driver/consumer liquidity.  I.e. the more drivers they have, the more consumers want to use them and vice versa.  Lock-in by these companies could actually go quite a bit farther with specific features and products:

Driver Side Lock In
There are numerous services Uber and Lyft could potentially provide drivers who drive from them frequently enough to try to differentiate against each other.  Uber has already started some of these programs for things like car buying.  However, one can image offering discounts or other services to drivers who spend more then 50% of their time driving for Uber or Lyft.  If done quickly and correctly, this may create further lock-in for these services.

1. Bulk discounts (tires, gas, bodywork, etc.).  Uber should now have enough heft to negotiate differentiated bulk deals for tires, gas, bodywork, and other car maintenance & operations costs for their drivers.  These discounts could add up dramatically for a driver due to normal wear and tear while packing on the miles.

2. Driver insurance.  Since Uber and Lyft have driver specific data, they should be able to help price insurance differentially for the best drivers, driving down costs for the driver.

3. Loans.  Pay day or other short term loans based on past driver behavior/working hours.  Pay day loans can be onerous to people who get them, and Uber/Lyft could help their drivers decrease borrowing costs due to transparency on future cash flows coming from working for these services.

Consumer Side Lock In
While consumers are ultimately going to make decisions based on driver availability and price, there are added services that may help get consumers to stick with the service more.
1. Business services such as wifi.  Adding something like Karma wifi to cars may be a way to generate additional revenue for both the driver, and Uber or Lyft, while enhancing the experience for business passengers.  I know of a number of people who use Uber for long work-related drives.

2. Parental controls.
An increasing number of parents are using Uber or Lyft to deliver their kids to school, pick them up for afternoon activities and the like.  The ability to pre-set locations (e.g. "my child can only go to school at 9am or I get an alarm", or schedules for kids ("pick up every afternoon at 3:00pm") could help lock in parents to the service.

For every business there will be a set of features that help create defensibility.  The key is to think through what elements work best for your product, market, and business.

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