Entrepreneur

Grab Vs Uber - Breaking Down The Economics Behind Their Price War And Sustainability

The fight between Grab and Uber has been a long and sustained one, buttressed by the fact that both companies are financially capable of dragging out one.

In November 2016, we covered the fight between the 2 companies with a detailed comparison of their features. In the end, the victory was determined by a mini landslide, with Grab taking the lead.

Now, here’s your chance to flex those polling muscles and pick the side that you prefer:

The interesting thought in the article was that even though Grab had significantly higher prices than Uber, the overall poll showed a win for Grab.

And although Uber’s central management has been undergoing some major upheavals with #deleteUber, the wave has not been felt close to home. It’s clear that Uber is here to stay for the foreseeable future, as they ramp up promotions and services in direct competition against Grab.

But how much of this war is actually sustainable?

We spoke to 2 NTU Masters graduates of Economics to help us break down the economics of the price war.

Warring It Out

The war strategy utilised by Grab and Uber is one of predatory pricing.

This means that companies set the costs of a service (i.e. rides) at a price lower than the marginal cost to the seller. These refer to the costs incurred by the seller when adding one more unit of service.

Through this, the companies are able to keep the costs of rides for passengers down, while upping the ante for low cost rides. All with the singular goal of eliminating the competition. Once that has been achieved, the victor gets ahold of the entire market demand, thereby exerting an almost-monopolistic control (save for taxi companies).

So the golden question would be, who would be the last one standing?

The Uber Advantage

Uber, owing to its presence worldwide has been successful in operating in loss-making markets. The losses incurred in these countries are supported by the gains they make in other markets where they have a stronger, more lucrative hold.

Secondly, event though Uber has constantly been reporting losses and a burning through of their war chest (especially in China against Didi), the company continues to raise money as if it is broke. In June 2016, Uber raised $3.5 billion from Saudi Arabia and the very next month, another $1.15 billion.

As such they have a massive war chest with which to compete, thus allowing them to cover any losses they might be making in countries where their market penetration rate is low.

Image Credit: oddup

Grab-bing The Win

Grab on the other hand has a presence limited to the Southeast Asian region.

This restricts them with respect to their market penetration rate, and in turn, their total revenue. Logically speaking, Grab has inadvertently set itself up as the player more disadvantaged to fight a prolonged war.

However, it’s clear that this is not the case as public opinion of the Malaysian startup remains strong. This is because the regional and local players often outperform foreign players as they understand their customers more closely.

They are more sensitive to fluctuating market trends and smaller nuances, and are in a better position to alter their business model according to market needs.

This places Grab at a place where they have better customer service optimisation than Uber.

Drivers signing up at Grab Singapore HQ / Image Credit: The Wall Street Journal

A Fierce Competition

Image Credit: Uber, Grab

According to one of the graduates, now an economics analyst, the price war can likely sustain for a while.

The strategies that Grab and Uber involved dynamic pricing, meaning that ride costs are subject to fluctuations in demand and supply, i.e. a high demand translates to surcharges.

Both Uber and Grab have since introduced 15% fare reduction at different points, with Grab going one step further by removing the base fare of $8. Upon reflection however, these reductions may seen attractive but are still somewhat offset by the dynamic pricing.

The only significant benefit that comes from the reduced prices are when you take rides outside of peak hours, which honestly speaking, how often do any of us do that?

How Long Can They Continue?

The war, while exciting as a commercialised marketing strategy for the companies to announce that they can provide better savings than the other, it is highly unlikely that they will be able to sustain a constant game of trying to one-up each other.

It is typical that price wars will stagnate after a while, followed by a slew of flashy price-slashing campaign. However, there’ll still be a limit as to how far they can take their discounts, estimated to be at most a few dollars less.

After all, drivers need to earn a profit to live, and Uber and Grab must not compete with official cabs like Comfort Delgro (although taxi companies have been innovating ways to stay relevant).

Otherwise, limited by these factors, the fares set by Uber and Grab can only go so low.

For consumers, the price war can appear to be a messy thing as rates can fluctuate within minutes simply by refreshing (try testing your UberX).

It’s always good to do a search and comparison of rate before making any booking, as the upfront pricing and dynamic pricing strategies have made it more difficult for passengers to estimate costs.

In case you have yet to hear about it, there are already such Skyscanner style apps and sites in the making, with one that will pull up promo codes for you.

Whatever the case, it is certain the fight will last a while, so just buckle up and enjoy it while it lasts.

A thank you shoutout to the 2 NTU Masters graduates for consulting with me on the article.

Featured Image Credits: Tech in Asia, digitaltrends

 

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