Losses have narrowed, but new markets will mean new discounts and incentives.
Lyft, the ride-hailing service that’s been a perennial runner-up to Uber, is on track to be profitable by next year, according to its financial performance.
A bullish report in The Information revealed that in 2016 the startup lost $600 million on $700 million in revenue — a far better performance than the previous year, when it lost more than double its revenue. In other words, sales grew faster (at three and a half times) than losses (at 45 percent).
Those numbers are accurate, according to sources, but the suggested takeaway — that Lyft’s narrowing losses are “fresh evidence that the ride-hailing business can get to profitability, even if it’s a fraction of the size of Uber” — is harder to see.
Here’s why: Once Lyft gets the legal green light to enter new markets like upstate New York, Houston, Austin, St. Louis and Kansas City, it will also likely see a corresponding increase in losses as it works to ramp up both its supply of drivers and attract riders in these new cities. In other words, it will have to roll out subsidies again.
There is, of course, the added revenue of new markets, especially those as big as Houston, but there will be the proportional spending required on incentives.
To be fair, in its established locations, Lyft has grown revenue without those subsidies, which is why the company’s spending on sales and marketing was significantly lower in the fourth quarter of 2016 than it was in the second quarter.
Still, that decrease was not consistent throughout the year.
The company spent $91 million on “sales and marketing” — which can be generally defined as the cost of new driver and rider acquisition, such as subsidies — in the first quarter, $136 million in the second quarter and $80 million in the fourth quarter.
That jump in marketing spending was in response to Uber’s increased subsidies at that time, according to a source familiar with the matter. The ride-hail industry’s volatility is often attributed to the use of subsidies for both riders and drivers, which can often be used to artificially and temporarily game market share.
And it’s unlikely either Uber or Lyft can simply stop offering riders and drivers discounts and incentives, mostly because there’s little brand loyalty in the ride-hail industry. Both riders and drivers often flock to the service that is offering more money.
Naturally, ride-hail companies all over the world will offer discounts in response to competitors’ promotional discounts — an unending loop that caused Uber to pull out of China.
So while Lyft doesn’t expect to add too many additional fixed costs — like new offices — the company will have to continue subsidizing rides in new markets and in those where it competes with Uber.
All that said, a source close to Lyft says it has over $1 billion in the bank, and CEO John Zimmer told the Wall Street Journal that he eventually plans to take the company public.
Because of subsidies, ride growth isn’t always the best indicator of how well a company is doing, but for the record, Lyft did see more growth in number of rides between July 2016 and December 2016 than Uber did.
In July, Lyft did 15 million rides and saw a 33.5 percent increase in December, when it did 18.7 million rides. Uber, which still far outpaces Lyft in terms of total rides, saw a 25.8 percent increase in that time, going from 62 million in July to about 78 million in December.
Lyft booked a total of more than 160 million rides in 2016 — three times the number of rides in 2015.
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Author: Johana Bhuiyan
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