7 lessons to learn from Uber’s failure in China: winning business model case study
When it comes to building a new software product or expanding to new markets, nothing is as important as nailing the business model. Uber’s failure to conquer the market in China and merging with its competitor DiDi Chuxing is living proof of this statement.
Uber and DiDi, two of the leading ride-hailing services in the world, entered the Chinese market in 2014 and competed fiercely for market share. Despite investing more than USD 1 billion a year, Uber was unable to overcome DiDi's aggressive investment and marketing strategies and consequently merged with DiDi in 2016. But were these two factors the only reason for Uber’s failure? Not exactly. A comparison of the business models of Uber and DiDi reveals valuable insights as to how to approach the process and what details should be given utmost attention.
Value propositions of Uber and DiDi
In a recent study published in the Journal of Open Innovation, we find that each company adopted different approaches to the market, with Uber focusing on global expansion and DiDi focusing on local markets. The below canvas models illustrate these and other differences between each company’s competitive processes and strategic approaches. Such canvas models, typically developed during product workshops, are crucial for planning the development of any software tool, with its service offering as well as marketing strategy.
Both Uber and DiDi operate in the same, two-sided market in which drivers are being connected with customers. Uber has positioned itself as a luxury brand with a variety of high-end vehicles and services, while DiDi has chosen to focus on low-cost services that substitute for taxis. Both have sought to expand their services, but chose two different methods for expansion. What are the reasons for DiDi’s success and Uber’s failure? Here are 7 lessons we can learn by examining this specific case in detail.
Lesson 1: Brand power doesn’t matter when expanding to new markets
Uber was the first successful platform that built and launched the ride-hailing service and has a strong global brand power. However, this did not translate to the Chinese market. Despite 77.2% of passengers being aware of the Uber brand, DiDi had higher user recognition and was more often recommended via word-of-mouth, as it offered services that were more relevant to its users.
Lesson 2: Coverage matters when you’re building a location-based, on-demand service
DiDi took advantage of its local position and ties to domestic partners, which allowed it to quickly establish a competitive stance in the Chinese ride-hailing market. Although Uber was able to maintain a steady market share in some segments, DiDi was able to achieve higher market penetration across more service categories. Uber focused on China's largest cities, operating in fewer than 40 cities until the second quarter of 2016, while DiDi was able to expand its coverage to more than 400 cities by placing emphasis on collaboration with taxi drivers and utilizing subsidies. With that, DiDi was able to reach 58.86 million monthly active users in 2016 and outsmart Uber.
Lesson 3: Service offering and strategic positioning can give a competitive advantage
DiDi and Uber competed in China's ride-hailing service market, with DiDi offering a (including e.g. lower-level services such as DiDi Express and Taxi) that covered almost every segment of the market from low- to high-end. DiDi also provided additional content related to urban mobility (such as travel information), helping improve and expand its business ecosystem. This, coupled with its low fares, attracted a larger number of users than Uber's focused strategy and helped DiDi on its path to success.
Lesson 4: Your strategy and services must be aligned with the value proposition
Uber failed to succeed in the Chinese ride-hailing market due to its inability to align expectations and predictions with its marketing strategies. As the competition for market share with DiDi and other existing platforms intensified, Uber failed to clarify what it wanted to do and how it could best succeed. As a result, Uber's services such as Uber Black did not reflect the characteristics of the high-end segment of the Chinese market well and failed to maximize the network effect. Additionally, Uber's strategic focus on premium services did not match its actual revenue sources - the premium services Uber XL and Uber Black accounted for only 8% of the company’s revenue. That explains the rather modest success of Uber China.
Lesson 5: In-depth study of user preferences is crucial
Both Uber and DiDi adopted a peer-to-peer business model, which works as a two-sided market connecting drivers and passengers. The platforms can control and manage drivers through service fees applied to access and use the platform, while attracting users by setting a reasonable platform usage fee and providing incentives. An on-demand service business that serves two unique user groups, you must understand which group would be more sensitive to pricing tiers and manage that group in order to maximize benefits.
Differences in pricing and incentive schemes of Uber and Didi resulted in significant performance gaps between them. Although Uber didn’t offer a service fee for its carpool service “People’s Uber”, the 5% added by DiDi was acceptable for Chinese users. In addition, DiDi’s adherence to quality standards enabled it to rapidly expand and build its own ecosystems in different regions, maximizing the benefits of network effects.
Lesson 6: Leave room for business expansion from all sides
DiDi and Uber China had different approaches to their service processes: DiDi incorporated the needs of both its users and drivers, allowing for more service options, payment methods, and better overall user experience compared to Uber. DiDi was also able to provide a more detailed procedure for drivers and had a close partnership with WeChat and Alipay. Uber, on the other hand, focused on simplicity and global standards rather than meeting the drivers’ needs in the Chinese market, where these standards didn’t work as well as in other markets. This difference in service processes is reflected in the value curves, with DiDi having an overall higher satisfaction rate among passengers.
Lesson 7: Partnerships do make a difference
DiDi and Uber both had partnerships with various organizations in order to gain access to key technologies and user bases, but their approaches to expanding relationships with partners differed. DiDi had a more diverse and rich partnership structure with companies across a number of industrial sectors, while Uber relied more heavily on its global brand awareness and traditional marketing tactics. This allowed DiDi to develop a wide range of service offerings, while Uber struggled to expand its regional base.
Creating a competitive business model for a service business
The main conclusion we can draw from the comparison of business models of Uber China and DiDi is that Uber failed to properly recognize the differences between the US and Chinese markets. What works in one market won’t necessarily work in another. DiDi seemed to have a better understanding of this rule and was able to align its strategy with this principle, which is clearly reflected in the company’s business model canvas.
Uber’s case highlights the importance of understanding and adapting to local market characteristics to increase the chances of success in order to succeed when competing on a global platform. DiDi managed to dominate 80% of the Chinese ride-hailing market and had significantly higher user awareness and brand loyalty than Uber. DiDi was ahead of Uber in terms of providing greater availability and flexibility for users, which demonstrates that mobility providers should offer more of these features to succeed.
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The canvas model used in this study could be used to analyze other sharing economy platforms, such as Airbnb, which has been successful in the Chinese market due to its strategic implementation, including offering value propositions that are differentiated from local platforms, providing service offerings tailored to different target segments, and forming partnerships with local partners.
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