Disruptive elements in Lyft’s contribution towards the sharing economy.
Lyft, a ride-offering platform that works on-demand, had an increase in their market share in America from 18% to 25% within 5 months (the Economist, 2017). Lyft is an American based company that offers the service of providing rides to customers demanding a ride. Lyft uses a digital platform to provide this service. The rides are supplied by the nearest driver. The rides are provided at lower costs compared to the local taxi’s. The difference between Lyft and regular taxi companies is that Lyft does not own any cars, nor have any employees (only when referring to drivers) (Lyft, 2018).
With the up rise of technology, sharing assets has become much easier. By the use of technology, transaction costs are reduced, more data is available and therefore sharing is possible to a larger extend. Digital platforms provide the service of linking suppliers to demanders. However, when referring to the sharing economy, these suppliers must be individuals rather than companies. The growth rate of the sharing economy has created a disruptive element towards companies that do not contribute to this market (the Economist, 2013). The sharing economy poses a competitive threat to a range of industries. Whereas, Airbnb poses a threat to the hotel industry, Lyft, Uber and Sidecar pose a threat to the taxi industry. The regular taxi drivers offer their services at monitored prices, whereas the ridesharing companies are able to compete at lower prices (Wallsten, 2015).
Lyft is a digital platform offering the service of linking suppliers (drivers) to demanders (customers). Besides that, the drivers are not considered employees and therefore Lyft is a contributor towards the sharing economy. However, to what extend does Lyft contribute towards this economy and how disruptive is this contribution? In order to address to this question, a literature review will be used in this paper.
The paper is build up as follows; first of all, the following terms will be defined; digital platform, peer-to-peer platforms, and the sharing economy. Second, the purposes and the work of the platform Lyft will we elaborated. Third, there will be a focus on how Lyft implements the previous named terms and how it contributes to the sharing economy. After that, the disruptive elements of the sharing economy will be explained and finally, the disruptive elements towards the taxi industry, as a result of Lyft’s implementation of the sharing economy.
What is a digital platform?
Over the years, a demand in tangible resources is shifting towards a demand in intangible resources. (Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016). With the rise of technology, the digital platform has created a new form of competition. A digital platform is more resilient than their tangible non-digital competitor. The platform can be altered at any time without changing the product. This creates the opportunity to keep innovating. This flexible and innovative quality results in an advantage over the non-digital competitors (Saarikko, 2014). Digital firms operate at high fixed costs, however, the production has low to zero marginal costs. Whereas non-digital firms have low fixed costs and, compared to digital firms, higher marginal costs. Due to the low marginal costs, digital firms are able to reduce prices and sell larger amounts. These prices are competitive towards non-digital firms and in the long run, after the fixed costs have been covered, the revenues are higher compared to non-digital firms (Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016).
In this paper, the focus is narrowed down to peer-to-peer platforms, rather than regular digital platforms. A peer-to-peer platform matches two people to each other. These people are matched for a variety of reasons. The first reason is for linking demanders to suppliers in the form of sales, an example of a platform that links demanders to suppliers, is Ebay. The second reason is for linking people who share assets, an example of the second reason is Lyft. The third reason to link people through a digital platform, is to match people who share interests, an example is sharing movies. The peer-to-peer platforms usually receives a certain amount of money from either one, or both of the parties, in exchange for the service of linking these parties to each other. (Chandna & Salimath, 2017).
The sharing economy
As Adam Smith said in the Wealth of nations (1776) ” It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” By this, Smith explains that trade relies on the self-interest of the individual. The butcher doesn’t sell meat so that we can consume it, he sells it to exchange it for, in most cases, money. This money is paid by the consumer, not to be kind to the butcher, but to trade for meat to consume (Smith, 1776). People have been trading for a long time. However, this has always been among people that we are related to in the form of family, neighbourhoods, acquaintances or friends. With the upcoming sharing economy, a new phenomenon has evolved, ‘stranger sharing’. People who lack the resources of sharing among the people they know, are now able to share with people they don’t know (Frenken & Schor, 2017). Defining the sharing economy is a rather difficult task, there has not been a common definition and a lot of companies define it differently. For example, Uber, a ridesharing firm similar to Lyft, does not consider itself a part of the sharing economy, whereas, Lyft does consider itself a contributor towards this economy. The purposes of the sharing economy can be divided into 4 different groups. The first group has the purpose of recycling properties. This is usually done by second-hand sales, or exchanges. The second group has the purpose of using facilities that are not in use. For example, a household that has a basement which is not in use, could be rented to students and therefore, be used more effectively. The second group has evolved due to the economic crisis, people found ways of making extra money as addition to their regular wages. Lyft is considered a participant of this group as well. The third group is about transacting favours. It started about 20 years ago for people who were out of a job, they were offered a contribution in change for particular services. However, this group has not evolved a lot ever since. The last group is about sharing resources. This group is in similar to the second group, however, the difference between these groups is that the second group is for personal use and the last group is for manufacturing purposes (Schor, 2014).
What is disruptiveness?
According to Christensen, Raynor & McDonald (2015) the term disruptiveness, has often been misunderstood or used in the wrong context. The term is not defined in the same way for every industry and therefore, should not be implemented the same way for every industry. The term is defined as follows; disruptiveness takes place when a firm less large compared to its competitor, and that owns less assets, would still pose a valuable threat towards this larger firm. These larger firms, tend to target the group of consumers that is the most beneficial in terms of revenues. Whenever, this new, smaller firm, enters the market and successfully gains a comparative advantage over the larger firm, for the group of consumers that is less lucrative to target, the first step towards disruptiveness is made. The larger firm will usually not act on this matter, since, this is not their main target group, and therefore, it will not impact their revenues as much. However, the second step towards disruptiveness, is for the new entering firm to start targeting the most lucrative group of consumers. When just entering a market, targeting the group where a larger competitor has a comparative advantage over by creating trust for example, is usually not successful. However, since the new firm has already proven to create trust for this less beneficial group and therefore, already put their name on the map, some trust is created. When the new firm has succeeded in creating a competitive threat to the larger firm over their target group, disruptiveness had been achieved.
As mentioned in the introduction of this paper, Lyft is a ride offering platform. They connect the so-called ‘riders’ to the drivers (Lyft, 2018). The drivers that work for this company are considered ‘independent contractors’, they decide their own hours. This is why a lot of drivers don’t consider in their full-time job, furthermore, they do it on the side of their regular job. The connection is being made through an application, when a ‘rider’ requests a ride, the application looks for the nearest driver and notifies them about the request. From the ride request, to the payment, everything goes through the application (Malin & Chandler, 2016). By the use of algorithms, the right connections are being made (Chen, Mislove & Wilson, 2015). A quote on Lyft’s webpage states the following: ‘Riding with Lyft costs less than a taxi, which makes getting around wallet-friendly.’ (Lyft, 2018). Concluding from this quote, Lyft’s target is people who don’t take taxies because the traditional taxies are too expensive, but are willing to pay the prices at which Lyft operates, and people who are taking taxies, but are willing a cheaper option.
To what extend does Lyft contribute to the sharing economy?
Lyft is a company that links riders to drivers, Lyft does not employ the drivers and therefore the platform is considered a peer-to-peer platform. As mentioned before, the platform is a resource sharing platform, some of the drivers try to make extra money by driving in their free time. The platform charges a small amount of the amount paid for the rides. This amount is charged for the service of delivering customers a ride and for providing the drivers with customers.
What are the disruptive elements of the sharing economy?
As mentioned in the introduction, the growth of the sharing economy, comes with a disruptive element towards the regular industries. As Oram already predicted when he wrote Peer-to-Peer: Harnessing the Power of Disruptive Technologies in 2001: ”Like many new ideas with substantial “disruptive” potential (that is, ideas whose impacts can fundamentally change the roles and relationships of people and institutions), peer-to-peer has been surrounded by a good amount of fear. (Oram, 2001, vii) ”.
First defining disruptiveness, Harvard business review says uber (and therefore Lyft) isn’t disruptive because of the way they define disruptiveness, definitions: 2 different definitions of disruption, implementing whether it’s disruptive or not based on 2 different definitions. Hypothesis: depends on how to define it so it there is no good answer possible, further investigation into what disruptiveness actually is and then answering the question better.
How Lyft is disruptive towards its economy (taxi companies)
As mentioned before, there are two steps towards disruptiveness. The first one was achieving a comparative advantage over the group that is not the market leader’s main target because they are not the most profitable. The second step was becoming a competitive threat towards the market leader, on their target group. This first step could also be focussing on the so-called ‘new-market foothold’ this is a target group that the market leader does not target (Christensen, Raynor & McDonald, 2015). Lyft’s strategy does not align with this theory. Lyft’s target group is the same group as the traditional taxies have. Lyft does not focus on a group that is either not targeted by the local taxi businesses, nor focus on a group that is the least profitable to the traditional taxi business. If Lyft would be disruptive towards the traditional taxi companies, Lyft would focus on either one of the previous named groups, so a group that never takes a taxi (‘new-market foothold’) or a group that is not beneficial enough to the traditional taxies, so they would not be a threat at first. As mentioned before, Lyft’s target group is people who don’t take taxies because the traditional taxies are too expensive, but are willing to pay the prices at which Lyft operates, and people who are taking taxies, but are willing a cheaper option.