Will Lyft Have Its Avis Moment?

The ridesharing market is probably not a winner-takes-it-all market, but can Lyft, who is no. 2 in the U.S. market, still succeed when Uber is so far ahead?

This I believe is one of the main questions investors who were approached earlier this year by Lyft had in mind. The company tried to provide some answers in a presentation it prepared for the investors, which was later leaked to Bloomberg.

Apparently, the investors were satisfied with the information Lyft presented as the company managed to raise $530 million in a series E funding, led by Japanese online shopping company Rakuten, which agreed to invest $300 million.

The leaked document provides some interesting insights into the growth of Lyft and the economics of its operations, but it still left me with one unanswered question:

Will Lyft have its Avis moment?

I’m referring to the efforts of Avis, the car rental company made in the 1960s to successfully compete against the market leader, Hertz. In 1962 Avis launched the “We Try Harder” ad campaign, with the tagline “When you’re only No. 2, you try harder. Or else.” This smart campaign made the point that as number two in the car rental market, Avis can’t take customers for granted and has no choice but to work harder. Hertz ignored the campaign and the result was that in just four years (1963-1966) “the market-share percentage gap between the two brands shrunk from 61–29 to 49–36.”

Lyft has a much larger gap to close. According to the leaked document, Lyft had 51,000 active drivers and 2.2 million monthly rides in 2014. Uber, on the other said in January that it has more than 160,000 active drivers in the U.S. who provide more than a million rides a day, the equivalent of about 30 million monthly rides. Hence, the ratio between Uber and Lyft in active drivers and rides in the U.S. is 3.14:1 and 13.6:1 respectively.

Before diving into the importance of having an Avis moment, I want to explain the importance of closing the gap for Lyft. Obviously Lyft wants to grow and have a larger share in the market, but it’s more than just growth inspirations – Lyft’s ability to succeed depends on scale. Lyft CEO Logan Green explained it in his 2015 SXSW Interactive Keynote:

“If you think about this network that we’re building, a great parallel is the wireless industry. It’s phenomenally expensive to put up 4G cellphone towers across the country…for us, our cell towers are having drivers, having a great driver about three minutes away. That’s the network. If you have 10 drivers in a city the closest driver is probably going to be 10-15 minutes away, but if you have 100 drivers in the city at the same time then the nearest driver is maybe 2 or 3 minutes away.”

In other words the ability of Lyft to effectively compete with Uber depends first and foremost on its ability to build a reliable network of drivers so customers can find an available driver whenever they want one, no matter where they are (within one of the 65 cities in the U.S. where Lyft operates) or what time of the day it is. This capacity-building effort is not only challenging, but also very expensive – according to the leaked report “Lyft estimates that the company spends a combined $530 on marketing to each driver and 22 passengers in San Francisco.”

This is why Lyft needs money and has been raising so far a total of around $800 million, which is impressive but still falls short of Uber’s $5 billion. Just for comparison, according to the New York Times other ridesharing services operating outside the U.S. like Kuaidi Dache and Didi Dache in China have raised more than $1 billion combined.

Still, taking care of the supply side is not enough. Even if Lyft builds a reliable network of drivers it still needs customers to choose Lyft over Uber. Finding how to make that happen at scale proves to be as challenging for Lyft as the effort to build its driver network.

Indeed why would one choose Lyft over Uber? In his SXSW keynote CEO Logan explained that “once you have a great, reliable driver just a few minutes away, you have a network to operate and compete, and when you are in that space you’re competing on experience and brand and the different type of services that you offer.”

Given that Uber and Lyft provide similar if not identical services and that once one of these players comes up with a new service the other one quickly offers it too, we should probably look at experience and brand as the best ways for Lyft to compete with Uber.

When it comes to the experience, price is not really a factor - there seems to be little to no difference in the price of similar Lyft and Uber services. In terms of the user experience, Lyft was hoping to make its experience more social, by encouraging passengers to fist-bump their driver, sit in the front seat just like you would with a friend and have a conversation with the driver. Yet, today Lyft exercises more flexibility (it’s OK to sit in the back seat and check your emails) and with more drivers working for both Lyft and Uber it seems more and more challenging to differentiate between the Uber and the Lyft ride experiences.

So we’re left with the brand. In the leaked presentation Uber was described “as a "top-down model," with an "exclusive mentality" and "anti-social culture."” Lyft, on the other hand was described as a  "trusted brand" with a "social experience." I would add "fun" into the equation, although the pink mustache is no longer obligatory on Lyft cars.

The problem is that it might not be enough. Apparently most ridesharing customers don’t care enough about the "anti-social" behavior of Uber to switch to Lyft. While I support Lyft’s social values and their vision as expressed by Green (“making car ownership unnecessary. We never set out to make a good taxi cab”), I believe Lyft greatest challenge is to find its Avis moment.

It means not just showing everyone they work harder, but also making the case why people who just want a better taxi ride experience should use Lyft. If they get it right, they will win, even as no. 2.

Image credit: lizasperling, Flickr Creative Commons