The Biggest Ride Network Wins by Being a Little Better at Everything

The secret to winning a ride war is not simply charging less. It is being a little better at everything, until being bigger makes you cheaper in a way money cannot copy.

That is how Travis Kalanick, the founder of Uber, describes his fight in China against DiDi, the dominant local rival. Uber was spending "tens of millions of dollars a month," he says, cutting prices to gain riders. The goal was not the discount itself. It was what size would do after the discount worked.

The edge starts small, he says. If one app is easier to download and join, more people finish signing up. If it is easier to call a car without errors, there are fewer canceled trips and fewer calls for help. If its driver app points empty cars toward where riders will soon appear, pickups get shorter.

Each gain makes the network a little larger, and a larger network makes every ride a little more efficient. With more drivers spread across a city, the nearest car is closer. Less time driving empty to reach a rider means less wasted time, and drivers who are trying to earn a certain amount per hour can do it for less per trip. Rides get faster and cheaper at the same time.

That is when the math flips, Kalanick says. A rival can match a lower price only by paying the difference itself, a subsidy. But subsidies get heavier as you grow. At 10 billion rides a year, a $2 discount on each ride costs $20 billion a year, an amount he says no investor will fund. Realistic subsidies shrink as efficiency grows, until efficiency is larger than any subsidy a rival can afford.

At that point, the leader can make a profit at a price where the smaller company takes a loss. Price is no longer just marketing. It is the result of the system working better.