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Negative Gross Margins
- ameyamk 11y agoI wonder if companies like door dash/ instacart are operating at negative margins? Uber tinkering with price too much has not gone down well with uber drivers in bay area either.
- sokoloff 11y agoUber is [edit: almost] certainly not operating at negative gross margin.
- kasey_junk 11y agoMy hunch is the same, but why do you say "certainly"?
- sokoloff 11y agoThe only thing of significant value that they give away is $20 credits to new riders and some new driver bonuses. The number of full-fare (no subsidy to either rider or driver) Uber trips surely absorbs these incentives, leaving a positive gross margin. (There's also a miniscule computing, bandwidth, and payment processing cost to a marginal ride, marginal being defined as the nominal X+1th ride after all the costs for X rides are already paid for.) Perhaps absolute certainty is a slight overstatement, but here's one where I'd bet eating my hat on it. I edited to insert an "almost".
- dllthomas 11y agoIn new markets, I have seen Uber guaranteeing "if you work this much of these hours, you will make at least $X or we will make up the difference."
- rahimnathwani 11y agoHere in China Uber has various subsidy programmes for drivers and customers. These eat into margins and make them negative for some (but probably not all) trips. Example: a few weeks ago, I paid ~3USD for a 13km ride that took 90 minutes (due to Beijing traffic). The driver was definitely paid more than that for the ride.
- prostoalex 11y agoThey prefer to open an office and hire support staff within each location they operate. In some markets (LA, SF) the revenue from rides quickly outpaces the cost of supporting those offices, in others (Spokane, Halifax) it remains to be seen.
- kansface 11y agoUber makes a nice profit in mature markets, but that does not mean their current margins are sustainable. Its hard to imagine a future where they don't pay drivers more.
- jonknee 11y agoIt's actually hard to imagine a future where they pay drivers at all. Uber is tailor made for autonomous vehicles.
- jameshart 11y agoThen they will pay vehicle owners to lease their cars short term instead.
- username223 11y agoEvil... And I'm almost certain it's what they'll do. Owner pays for purchase, upkeep, parking, and insurance, covering all the capital outlay, depreciation, and risk, while Uber skims off the profit. It's sort of "insurance in reverse."
- kasey_junk 11y agoAnd almost exactly like the taxi model they replace.
- morgante 11y agoWhat is "evil" about instigating a more efficient use of capital?
- username223 11y agoWhere do you get efficiency out of their plan? People tend to underestimate the true ownership cost of their cars, and Uber uses that to make them believe they're making a lot more per hour than they actually are.
- 7Figures2Commas 11y agoThe even bigger question is what their margins will look like if they're forced to reclassify all or most of their contract workers as employees. Both DoorDash[1] and Instacart[2] are facing class action lawsuits over this. [1] http://www.latimes.com/business/technology/la-fi-tn-grubhub-caviar-lawsuit-20150923-story.html http://www.latimes.com/business/technology/la-fi-tn-grubhub-... [2] http://www.xconomy.com/san-francisco/2015/08/06/instacart-extends-job-offers-to-its-ca-shoppers-but-labor-lawsuit-continues/ http://www.xconomy.com/san-francisco/2015/08/06/instacart-ex...
- deleted 11y ago[deleted]
- evtothedev 11y agoIt'll be a sad (and pricey) day in San Francisco when everything starts costing the right price. (I'm looking at you, Lyft Line and Caviar and Square.)
- enahs-sf 11y agoWe're losing money, but we're doing it at scale.
- deleted 11y ago[deleted]
- anjc 11y agoWell, yeah. That's what the current bubble is based upon, private equity speculation. It should be pointed out, though, that you can't really analyse many of these startups by looking at their income statements in this fashion, because even their future monetisation strategies are being speculated about. That is, they aren't expected to have healthy bottom lines yet. They're doing this on purpose. Ultimately, private and public investors will analyse the bottom lines of these companies, but when that happens, there'll be bigger problems to face than a few orgs with unhealthy gross profits struggling, i.e. the bubble will burst. Incidentally, I'm not sure why the article is specifically talking about gross margin. Especially since most of these company's costs relate to human resources and servicing debt and so on, and not inventory and production. It seems like operating profit or net profit would be a better single figure to focus on.
- cs702 11y agoReading this, an old joke and something Hemingway wrote come to mind. The old joke is about a retailer whose margins were very thin but wanted to attract more customers, so the retailer decided to have a big sale. After looking at the proposed discounts, an assistant questioned the strategy, noting that they would lose money on each transaction. The retailer said, "That's okay -- we'll make it up on volume!" The Hemingway bit is this gem from The Sun Also Rises: "'How did you go bankrupt?' Bill asked. 'Two ways, Mike said. 'Gradually and then suddenly.'" It's understandable for startups who don't yet have a business model not to make any money. In fact, that's what one expects of them. But unicorns are NOT startups; they're fairly sizable businesses that already have a business model, with large organizations, lots of overhead, repeatable processes, etc. It is very risky for companies at such a late stage in their life cycle to still be losing money on every incremental dollar of revenue! Someone should start a Unicorn Death Watch ;-)
- jameshart 11y agoPaging @pud.... he still owns fuckedcompany.com, maybe it's time to bring it out of retirement?
- toomuchtodo 11y agoI got in touch a few weeks ago and it seemed like he wasn't interested in reviving it for the next onslaught of failures. I'd be game to run fuckedunicorns.com if anyone wanted to contribute with me.
- thaumaturgy 11y agoContact @pinboard, he loves poking his finger at all this stuff.
- eropple 11y agoI own "unicorngrill.com". Could fire it up. Email's in my profile.
- jlarocco 11y ago
- thaumaturgy 11y agoThis reads like another iteration of a bubble alarm, which has been going off since 2007 at least (https://news.ycombinator.com/item?id=9860603 https://news.ycombinator.com/item?id=9860603). I like the sound of what Fred's saying, it gives my sensibilities about business a soothing caress, but the reality is that people have been expecting these businesses to start failing en masse for almost 10 years now and so far most of them are still around. As long as there's no better vehicles for investment, these companies will probably be able to keep doing what they're doing.
- the_watcher 11y agoThere are plenty of businesses with net gross margins that have failed. The difference this time is that there are more companies with net gross margins reaching "unicorn" status.
- aidenn0 11y agoMost of the businesses with negative gross margins from 2007 aren't around, a few managed to become profitable, some failed, and many were acqui-hired. I think we are just starting to hit the point in the last year or so in which you can really say "bubble" but it could pop tomorrow or in 5 years... there's a famous quote about trying to invest by betting against a bubble that is roughly "The market can stay irrational longer than you can stay solvent"
- idlewords 11y agoIt (sincerely) baffles me that Fred has to make this point, and that it's not treated as obvious. People who are deeper into startup world than me, what is the thought process that makes you think you can scale up a money-losing venture and have the math work out? Is it based on the hope of raising prices, or being acquired before funding runs out, or pivoting? There are a lot of smart people in this game, so there has to be some intermediate mental leap that I'm not understanding.
- the_watcher 11y agoBecause it has worked. That's the main reason. A related reason is the volume strategy Wilson mentioned. If you are in a business where you know that you can get discounts with bigger volume, there is a coherent business case to acquire customers at a loss until your per-unit costs fall sufficiently. The problem is that, like Fred writes, this is much harder in practice than in theory.
- x0x0 11y agoA guess: take Instacart. Plan A: They know that people spend $x billion on groceries per annum in sf. They also know that a big chunk of that has to be very expensive real estate and relatively expensive employees who have to be able to afford to live relatively close to sf. If you can build a warehouse an hour out of sf on dirt cheap land and recover the cost of grocery stores in sf, plus shave some off employee wages, maybe you can make a profitable business out of grocery delivery. This business will need a lot of volume to cover fixed costs. Why will they succeed when Webvan failed? More comfort with online shopping and delivery, cheap labor via exploiting underemployed people, including dumping infrastructure costs off onto employees by making them use their own cars. Plan B: Google is in a death match with amazon. To first approximation, G's business is taxing ecommerce by owning discovery. If people start on amazon not google, google loses. So google is building out google express because if they don't, amazon ends their business. Therefore maybe instacart is strategic to google. I don't think I believe A or B, really, but VC is a gamble. If someone can make it work, it's a $1.4T/year market [1] Oh, and people don't earn billions by taking safe bets. [1] http://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/food-prices-and-spending.aspx http://www.ers.usda.gov/data-products/ag-and-food-statistics...
- adventured 11y agoThe example of this I've been benefiting from lately, is Jet.com. They keep handing out $x or 20% type discounts, to go with free shipping on items already priced for low margins. I can't imagine how much money they must be burning right now. With Jet recently abandoning their business model, they're either somehow making enough on what they're selling as is, or they're in bad shape and desperate to bring in customers.
- pixelparts 11y agoIt took Facebook quite a while before they became profitable. The issue is with the lack of lock in. The "on demand" and service type startups are easier to substitute. It's just another challenge though. I could see Uber reach a point where they raise prices by 25% and I'd still pick them over another service with fewer drivers available.
- azylman 11y agoComparing to Facebook seems like comparing apples to oranges. The article is about selling physical goods and services for less than it costs to produce them, which is different than allowing people to access a service that you don't yet know how you're going to pay for. A better analogy might be companies that manufacture video game consoles, where they almost always sell at a loss when a new console is first released, with the hope to make profit in the long term - but there you're locked in to some extent, as you pointed out.
- jakobegger 11y agoThe bigger problem I see is that all the service oriented startups are getting into a market that can't work. Yes, there obviously is demand for cheap services. But there is no way to provide cheap services at scale and turn a profit. The costs of providing a service don't go down as you get bigger. At some point you just can't drop wages anymore. At the same time, you can't just increase prices, since that would immediately kill demand. There is demand for cheap services. There is no demand for reasonably priced services. The problem is not that raising prices would allow the competition to undercut them. If they raise prices, people would just clean their homes themselves etc.
- tedmiston 11y ago> But there is no way to provide cheap services at scale and turn a profit. The costs of providing a service don't go down as you get bigger. Unless you automate it. Maybe Uber's plan at scale is to replace all humans with self-driving cars (http://www.theverge.com/2014/5/28/5758734/uber-will-eventually-replace-all-its-drivers-with-self-driving-cars http://www.theverge.com/2014/5/28/5758734/uber-will-eventual...). Maybe SpoonRocket's plan at scale is to effectively be mobile vending machines for hot food. Obviously I'm speculating, but the general principle applies to a lot of what startups do already as they grow.