The hidden cost of being an Uber driver and why fare cuts really do hit their bottom line
Uber knows its numbers. With tens of millions of fares delivered worldwide over the last few years, the company has gotten transportation and market expansion down to a science. So when Uber says reducing rates will actually lead to its drivers making more, not less per hour – as it did yesterday in 48 cities – it’s likely speaking the truth. It’s also being slightly disingenuous at the same time.
Where the sleight of hand comes in is that drivers must drive more miles in an average hour to earn their increased income, and must absorb the operating costs of doing so. Remember, Uber drivers are independent contractors, not employees, and thus they must pay their own vehicle operating expenses, including fuel, maintenance, insurance, and car payments.
This is not Uber’s first attempt at reducing rates. In its blog post announcing the latest round of cuts, the company cites examples of similar cuts enacted in Chicago and New York City throughout 2014 to justify its claims. A look at these two markets offers a potentially revealing picture of the less-than-appealing situation drivers face.
Following two rounds of cuts in Chicago, the average cost of an Uber trip fell from $14.25 in December 2013 to just $11 in 2014 – a decline of nearly 23 percent. Over the same period, the number of trips completed per hour rose nearly 45 percent, from 1.34 to 1.94 per hour. The end result was an increase in average hourly bookings from $19.10 to $21.34, nearly a 12 percent improvement, meaning drivers' gross income (at an 80 percent take) rose the same percentage from $15.28 to $17.07 per hour.
While Uber doesn’t provide data on average miles driven per hour, we can make a few educated guesses based on the information provided. The US government has deemed the average cost of operating a vehicle to be $0.56 per mile, $0.235 of which are variable costs based on mileage. If we make the simple assumption that the average Chicago fare is 5 miles, then the increase in hourly cost of operating a vehicle for the 0.6 additional fares per hour, then is $0.71 (18.8 percent more). This expense comes out of the drivers’ gross income, such that more miles a driven per hour, the less efficient a driver's income becomes.
So if a Chicago driver’s number of fares per hour increased by 45 percent from 2013 to 2014, we can assume this hourly operating cost increased by a similar amount – meaning from about $3.75 per hour to $4.46. That $0.71 operating cost increase negates almost half of the $1.79 hourly gross earnings increase the drivers saw over the same period. In actuality, it could be that these drivers are doing 45 percent more work for just $1.09 more per hour (after-operating expenses), a 9.4 percent increase.
(*Updated 1/9/14, 6:30pm: The above calculation was updated to reflect the difference between fixed and variable vehicle operating costs. The original analysis concluded that Chicago Uber drivers were earning only $0.11 more per hour, or a 1 percent increase, based on the 45 percent increase in fares per hour. h/t @tnabielec)
The numbers in New York look a little better. In New York, the average fare in September 2014 was $27.11, down nearly 22 percent from the $34.65 average of a year earlier. Over the same period, drivers’ average hourly income rose more than 35 percent from $26.76 to $36.16. In its NYC analysis, Uber does not provide data on the number of trips per hour, but based on the the above gross bookings and average fare data, we can deduce that drivers saw an increase from 0.87 to 1.67 trips per hour following a year of price increases. The company does stipulate that the average time per hour spent “on trip” (versus “idle’ or “pick up / wait”) increased from 17 percent to 29 percent over this same period.
Using the same analysis, but with a 3 mile average fare, we arrive at an hourly increase of $8.91 (35 percent) in after-operating expense income in exchange for doing 73 percent more work. [Note: it's unclear if the NYC gross hourly income data provided by Uber is income to the driver or to the company. For this analysis, we've assumed the former. If it's instead the latter, this analysis looks slightly worse for the drivers.]
But, given the imbalance between income and operating expense growth as the number of hourly fares increase, drivers are seeing diminishing returns by completing more fares per hours amid declining rates. The drivers may not be working more hours in an average shift, but they’ll certainly be doing more work per hour.
(*Updated 1/9/14, 6:30pm: The above calculation was updated to reflect the difference between fixed and variable vehicle operating costs. The original analysis concluded that NYC Uber drivers were earning only $8.22 more per hour, or a 33 percent increase, based on the 73 percent increase in fares per hour. h/t @tnabielec)
To be clear, the above analysis is based on a few assumptions and may vary slightly from the true economics of driving for Uber. But these numbers should be directionally correct. And thus, this paints a different picture of the impact of fare cuts on drivers.
As Uber has demonstrated in the past, drivers typically don’t lose money when fares fall and, in fact, they may earn marginally more. The company has even gone so far as to guarantee the hourly income of its drivers in each of the 48 markets receiving fare cuts yesterday. But an Uber spokesperson tells Vox these guarantees are likely temporary:
[Uber Chicago regional manager Andrew] Macdonald says Uber won't be guaranteeing driver earnings forever. "In some cities, you may see driver productivity jump so quickly that in four weeks they're already doing 30 percent more trips per hour." Macdonald says that at that point Uber would likely eliminate the guarantee because drivers were making plenty of money without it.When the Uber guarantee goes away, these drivers may continue to see larger paychecks. The data suggests this will be the case. But after all expenses are accounted for, the bottom line is the impact on their bank accounts will probably be minimal, and it will be up to each driver to determine whether the additional work is worth the return.
But, as we’ve demonstrated above, the one thing that is clear is that the hidden costs associated with being an independent contractor make this trade off less attractive than the company would have you believe.