Outside the Box: Lyft’s subscription plan is a rare stumble as the company takes on Uber

Outside the Box: Lyft’s subscription plan is a rare stumble as the company takes on Uber

It appears that Lyft, the hail-by-smartphone car service that last year earned $1 billion in revenue, wants to be the Netflix of ride-sharing.

Last month, the San Francisco-based company announced it would continue testing its All-Access plan, a monthly subscription service for rides. The service, first made available to a select group of customers in March, charges an upfront monthly price of $200 to secure $15 off 30 rides. The price represents a savings of $250, assuming a customer takes a set of 30 $15 rides per month.

Price discounting in pursuit of market share is nothing new, but it’s a curious move for Lyft, a company that positions itself as a feel-good, socially minded brand. The deep discount not only conflicts with the warm, fuzzy image that Lyft has cultivated, it also endangers its relationship with customers.

From its inception, Lyft wanted to be known as the “good guy” of the ride-sharing industry. Its branding, which once took the form of a whimsical pink mustache, is fun and friendly — and stands in stark contrast to rival Uber’s current and past marketing messages. Uber is aloof, cool and a touch arrogant; Lyft represents a kinder, gentler ride.

Lyft has also long professed to strive for a more conscious capitalism by prioritizing more than just its bottom line. It offers continuing education credits to its drivers, for instance. Its management team speaks out on issues like immigration and climate change. And its “round up and donate” program, which allows customers to support their favorite causes, has raised millions of dollars for charity.

Over the past 18 months, Lyft has flourished. Last year, more than 23 million people took a Lyft, up from 12 million in 2016. In addition, the company doubled its number of drivers to 1.4 million and launched in Toronto, its first international market.

Uber, on the other hand, has stumbled from one crisis to another. The year 2017 began with the #DeleteUber campaign in which hundreds of thousands of customers — angry at what they perceived as the company’s hostile stance on immigration — ditched the app. In short succession, Uber faced allegations from employees about its toxic and sexist company culture, lost its sharp-elbowed CEO, Travis Kalanick, and had to overhaul its executive team after an exodus of top leaders.

Uber, it must be said, is still dominant. The company, which operates in 600 cities around the world, provided four billion rides in 2017. Uber also remains one of the world’s most valuable private companies, estimated to be worth about $72 billion.

How to win customers

Still, Lyft has an opportunity to further win customers and seize the moral high ground. But an invitation-only subscription service that competes on rock-bottom pricing is not the way to do it.

For starters, research shows that price discounting is not that effective for generating long-term sales. It may work for a while, but discounts appeal to customers who have a transactional mind-set. This is why these customers do not remain loyal. Brand trust, on the other hand, increases market share.

A second problem is that discounting goes against what Lyft’s brand represents. Why would a company that claims to care deeply about corporate citizenship discount its services in a way that could potentially harm the earnings of its employees? Being a good employer and being good to your customers are not mutually exclusive, of course, but in this case, there is a contradiction.

At a time when income inequality plays a prominent role in the national dialogue, the paradox is not likely to be lost on customers. Sure, they may enjoy the extra money in their bank accounts, but they may also be troubled by what their cut-rate subscription will do to Lyft drivers, who already must work long hours to make a living wage.

Consider the kind of customer that Lyft attracts. The majority of ride-share customers are young, educated, affluent urbanites. Given the competitive nature of the industry, it’s likely that customers who opt for Lyft over Uber do so on purpose. They want to support a friendly brand that seems to care about the greater good.

Losing trust

That’s why Lyft’s approach to selling a heavily discounted subscription service is so bafflingly counterproductive. The company has already gained the trust of its customers. The dramatic price discount, however, threatens to undermine it.

To be sure, a subscription model might work very well for the on-demand car service industry. (Uber is also said to be experimenting with this approach.) Subscriptions provide clear benefits: guaranteed revenue, steady ridership and monthly liquidity that can be used for investment. But while those things are important to the business, they’re not the only things Lyft purports to care about.

Lyft has successfully built a brand centered on social-mindedness and congeniality. It mustn’t squander it.

Sharmila C. Chatterjee is a Senior Lecturer in Marketing and the Academic Head for the Enterprise Management Track at the MIT Sloan School of Management.

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