December 27, 2020

Business Model of Uber and How it Makes Money?

December 27, 2020

Business Model of Uber and How it Makes Money?

Uber is known as an on-demand transport service application which, no doubt, has brought about a revolution in the taxi industry in major parts of the world. Uber’s business plan has made it possible for people who can simply tap on their smartphones and have a taxi arrive at their location in the minimal time, leaving a lot of budding start-ups yearning to create an app like Uber and wondering how Uber works.

Facts lay that Uber is one of the very few technological companies in the world that has been valued over $70 billion. As of today, Uber has already received an equity funding of $22.2 Billion and is present in 633 cities worldwide. These mind blowing facts surely reflect the trust of investors in the business model and make it easy for us to imagine how much revenue this organization will be churning when it attains liquidity.

In the following article, we have pointed out some unknown facts and figures, along with a detail explanation showing how this model works, using which Uber earns money and how Uber works.

What exactly is Uber’s business model? How does Uber work? How exactly does Uber make money? How is Uber so successful? What is Uber’s Business Strategy?

These are some of the questions that almost every budding entrepreneur in the space of on-demand start-up be curious about. These question come up before they start on working on their own “Uber” business model.

The business model of Uber, fortunately, has turned out to be so popular and successful so much so that it has fuelled a whole new start-up economy, known as the “on-demand economy”.

It can play a vital role in having a deeper understanding of Uber’s on-demand business model as it can help in modelling your own on-demand start-up business idea.

Since we are a leading on-demand start-up technology development partner, we would love to share the knowledge that you need with you through this detailed article.

Table of Contents

  1. Basics of Uber: Facts, Founders, Fundings, and Figures
  2. General Trivia
  3. Business Model of Uber: How Uber Works?
  4. Value Proposition of Uber for Passengers
  5. Value Proposition for Uber for Drivers
  6. The Canvas of Uber’s Business Model
  7. Key Partners
  8. Key Activities
  9. Key Resources
  10. Customer Relationships
  11. Channels
  12. Customer Segments
  13. Value Propositions
  14. Cost Structure
  15. Revenue Streams
  • 4 Step Model About How Uber Works
  • How Does Uber Make Money? Digging Deep Into Uber’s Revenue Souces
  • Commissions for Trips
  • Surge Pricing
  • Premium Rides
  • Cancellation Fee
  • Leasing to Drivers
  • Advertising / Brand Partnerships
  • Rapid Expansions with New Business Verticals
  • Uber Eats
  • Uber Freight
  • Important Takeaways for Budding Entrepreneurs from Uber’s Business Model Analysis
  • Build Solutions for Real-World Problems
  • Keep Innovating
  • Shoot for Scalability
  • Keep Overhead Costs Low
  • Wrapping Up Everything!

Basics of Uber: Facts, Founders, Fundings, and Figures

Before getting down into what Uber’s business model or how Uber makes money, let us first gain some basic knowledge about Uber, right from its inception to being a multi-billion dollar start-up.

General Trivia

Fun Fact: Uber was initially named as UberCab?

In the start, the application only had an option to hail a black luxury car.

Founders: Oscar Salazar, Travis Kalanick, Garrett Camp

Starting Year: March 2009

Legal Name: Uber Technologies Inc. (Crunchbase)

Headquarters: San Francisco Bay Area, United States America

Major Investors: Tencent Holdings, Toyota Motor Corporation, SoftBank Vision Fund, and others

Total Funding: $24.2 Billion (in 22 funding rounds as of October 2018)

Current Valuation: $120 Billion

Business Model of Uber: How Uber Works?

Uber is no longer known as the on-demand cab hailing service that we used to know. Now, this model has introduced itself into other territories as well, ranging from Uber Eats (an on-demand food delivery) to Uber Freight (an on-demand trucking).

In order to keep it very simple, in this article, we will keep our focus on Uber’s core business of ridesharing, which is its business model and how it makes money.

To bring it out in simpler words, Uber can be called a digital aggregator application platform which connects the passengers who need to travel from one place to another with the help of a driver who are willing to serve them.

Under this model, passengers are the ones who generate the demand and drivers are the ones who supply the demand. In this situation, Uber works as a facilitator/marketplace to make this all go seamlessly through a mobile platform.

Isn’t this great?

Using this model, Uber has been able to create strong value propositions for both drivers and passengers in order to get onboard on the platform and create disruption in the cab/taxi industry.

Value Proposition of Uber for Passengers

  • Real-time tracking
  • On-demand cab bookings
  • Cashless rides
  • Accurate ETAs
  • Multiple ride options
  • Lower wait time for a ride
  • Upfront pricing

Value Proposition for Uber for Drivers

  • Better income
  • Flexibility to drive on their own terms
  • Training Sessions
  • Lower idle time to get new rides
  • Better trip allocation
  • Assistance in getting vehicle loans.

The Canvas of Uber’s Business Model

  • Key Partners
  • Drivers
  • Investors / VCs
  • Technology Partners (API providers and more)
  • Key Activities
  • Add more riders
  • Add more drivers
  • Expand to new cities
  • Add new ride options
  • Offer helps and support
  • Add new features
  • Key Resources
  • Technology Team
  • AI / ML / Analytics Expertise
  • Brand Name and Assets
  • Network Effect (drivers and passengers)
  • Data and algorithms
  • Customer Relationships
  • Ratings and feedback system
  • Customer Support
  • Highly Automated
  • Self-service
  • Meetings with Regulators
  • Channels
  • Mobile App
  • Word of mouth
  • Social Media
  • Offline Advertising
  • Online Advertising
  • Customer Segments
  • People who can’t drive on their own
  • People looking for convenient cab bookings
  • People who need a quick ride
  • People who need a premium ride
  • People who need an affordable ride (Uber Pool)
  • People who don’t own a car
  • Value Propositions

For Passengers

  • Real-time tracking
  • On-demand bookings
  • Cashless rides
  • Accurate ETAs
  • Multiple ride options
  • Upfront pricing

For Drivers

  • Better income
  • Work flexibility
  • Training sessions
  • Lower idle time
  • Better trip allocation
  • Cost Structure
  • Research and Development
  • Salaries to employees
  • Driver payments
  • Technology development
  • Legal activities
  • Marketing
  • Revenue Streams
  • Surge Pricing
  • Commission per ride
  • Premium rides
  • Leasing fleet to drivers
  • Cancellation fees
  • Brand partnerships / Advertising

Uber has a vast customer segment and it has got something on offer for everyone. Ranging from Uber Taxis to Uber Black and from Uber X to Uber SUV, this company has a vast range available for its customers to make a choice from.

Uber greatly helps professionals as they hire Uber cab to move from point A to point B. To make this possible, Uber did a few tie-ups with corporates in the beginning and does so when it launches in a new city in a few country. Keeping aside the professionals, Uber tries to reach the hearts of people by offering special services like:

Uber for Kids: this is a special service by Uber which is dedicated to parents who wish their kids to reach home from school in an Uber taxi.

Uber for Senior Citizens: this is another special service by Uber which targets the senior citizens. As the statistics say, Senior citizens make for up to 30% to 40% of total rides in many cities. This made Uber have some special features for seniors and hence attract more senior citizens on the platform.

4 Step Model About How Uber Works

  • Step 1: Request a Cab

The very first step in the business model is about creating a demand. People use smartphones, download the app which lets them request a cab instantly or schedule it for some time later.

  • Step 2: Matching

Once the request is made, a notification with all the details are sent to the nearest driver. Now, the cab driver has the option to reject or accept the ride. If he rejects, notification is sent to another driver in that area.

  • Step 3: Ride

Customers will be able to track the taxi about when it is arriving and the ETA is also shown to the customer. The tracking starts as soon as the customer sits in the cab which can be tracked through the customer app as well. Drivers always make sure that the ride is comfortable for the passenger.

  • Step 4: Payment and Rating

Once the ride is completed, the customer receives an option to rate the driver. The rating system is an important part of the business model as it lets a person know about the driver before booking a ride and helps him trust the driver.

How Does Uber Make Money? Digging Deep Into Uber’s Revenue Souces

To talk at a higher level, Uber make a chunk of money by taking out a cut on each ride (individual or shared) from the drivers. But on the other hand, as we go through a detailed analysis we have found that Uber’s revenue model is rather more complex than just trip commissions.

Commissions for Trips

Through this platform, Uber provides the drivers connected with them, also known as partners, with a great supply of ride options to accept, fulfil, and generate income.

While finalising a booking, the passenger is able to pay Uber for the ride through the mobile application. Afterwards, Uber transfers the payment to the driver’s account after taking a minimal amount of commission for doing the job of a broker. However, we would rather identify as digital brokers.

The commission rates vary from 15-30%. This is dependent on the market.

Surge Pricing

Also known as dynamic pricing, surge pricing is a large concept that was popularized by Uber and has been adopted in other verticals as well, for instance, food delivery.

In case when there is a higher demand for cabs as compared to what can be served at the moment (for instance, at the airport after one flight lands), the cab fare rises up based on the surge price calculation algorithm.

Here is how Uber is able to manage the demand-supply mismatch situation better. Some partners (drivers) move to the surge earn in order to earn extra (this increases supply of services) and some passengers choose to wait to get a cab at lesser price (this reduces demand).

In this way, drivers are able to earn more money, Uber makes more money, and customers spend more money to get urgent rides.

Premium Rides

You find multiple riding options with Uber, ranging from Affordable hatchbacks to luxury sedans and SUVs. The margin for profit for premium rides is on the much higher end and it helps Uber to make more money.

Cancellation Fee

A passenger is charged a cancellation fee in case they cancel a ride after a set time-frame, for instance, five minutes.

Leasing to Drivers

A vehicle leasing program is run by Uber in majority of its target countries which helps new drivers get onboard faster. Drivers / partners are required to pay an upfront security deposit for the vehicle and payments are automatically deducted on a weekly basis from the driver’s earnings.

Advertising / Brand Partnerships

There are no two ways of saying that Uber is indeed a very popular application with millions of active users. Thus, this makes it a great option for brands to do promotions. The current interface of the app provides a feed style layout for intuitive content consumption. Over the time period, it may further go on in order to become a strong source of revenue by becoming a channel for sponsored content.

Rapid Expansions with New Business Verticals

As already mentioned, in the current times, Uber is much more than just a ride-sharing company. It is using its underlying technologies of cab bookings, for instance, optimal driver allocation, to further use cases as well.

These brand new businesses developed by Uber side-by-side have tremendous potential in generating revenue and fuel up to Uber’s grand ambitions.

Uber Eats

Uber is enlarging big on on-demand food delivery and we can’t find one reason for why not. Clearly, it is a very logical step for Uber to dip its toes into this enormous market since it aligns with its ridesharing business and it further helps it utilise its large fleet of drivers.

Uber Eats was launched as an individual application in 2016 and it has been growing in popularity at a rapid rate.

Uber Freight

Basically, Uber Fright is for trucks. In 2017, Uber launched its own on-demand trucking application with a basic idea of seamlessly matching shippers with carriers. In case Uber can execute on its strategy to become the freight matching platform of choice, the revenue opportunities are also very big.

Important Takeaways for Budding Entrepreneurs from Uber’s Business Model Analysis

Uber found a lot of rights in its journey of becoming a pioneer in the on-demand industry today. However, it has seen its share of challenges over the years but it also has been able to overcome those through most them successfully.

Undoubtedly, it is a great testament of a tech start-up that achieved success with a large business model and smart execution.

Start-up and tech entrepreneurs can learn a lot from studying Uber’s business case study. Now we have tried our best to make the job easier by jotting down a list of important takeaways / tips from analysing Uber’s massive success.

These are listed as follows:

Build Solutions for Real-World Problems

It is clearly obvious but we still need to mention this. As an entrepreneur, you should identify real problems and how technology can be leveraged to solve it, similar to transform on-demand transportation.

Keep Innovating

Uber does not rest on its laurels of being the very first and prominent rideshare applications. The company’s founders understood it really well that the competition will grow over years and they can only stay ahead using continuous product iterations. They kept on adding new features to app panels of passengers and drivers, invest on new technologies, and much more.

Shoot for Scalability

It is very important to build a scalable business in case you are to sustain your start-up in the long run. Uber has built this platform in such a way that it is easy for it to expand to new markets and serve multiple users simultaneously with confidence.

Keep Overhead Costs Low

Always run a lean business model that does not need large infrastructural investments. Additionally, in order to build a tech start-up, it is of utmost importance to have a skilled workforce. Also, this adds up to your cost overheads in terms of high salary payments. One very effective way of staying lean during the initial stages of your product development is through partnering with a third-party technology development company to build the MVP and over the time, do in-house hiring.

Wrapping Up Everything!

The proliferation of the on-demand industry owes a lot to Uber and rightfully so. The success of Uber, in many ways, initiated a chain reaction with numerous on-demand / “Uber for X” startups been launched after that and hopefully many more to come.

Especially in the industry of on-demand transportation and logistics industry, its effect has been profound. We hope that article provided you a great analysis of Uber’s business model and it would become a useful resource for upcoming on-demand start-ups.

TecOrb is a one of the reputed Mobile app Development Company prioritizing on developing intuitive mobile apps. Our few recommended application solutions are taxi application solution, grocery delivery app, food delivery application, and OTT video platform etc. Get in touch with our experts to know more about our application services. We have a tech qualified team of developers, who work around our customer’s need and requirements and serve them the best system solutions by testing applications on real devices emulators, and simulators.

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