Examination of Channel Functions: Efficiencies for TNCs
Reality Check
An Examination of Channel Functions and their Efficiency in the TNC Industry
Products and service all have basic functions that must be performed in order for a product to reach its end customer and satisfy the customers’ needs. These functions must all be performed and in general, as markets mature the overall allocation of channel functions amongst channel partners becomes increasingly efficient overall. Channel functions cannot be eliminated- but that can be reallocated as is the case with TNCs.
An examination of the allocation of distribution channel functions suggests that they have been re-allocated in a way that shifts the burden of costs to the driver- costs that used to be addressed by the Taxi Company- which in some cases may have been owner operator. In addition, the functions retained and performed by the TNC suggest a high degree of control over the “work” of the driver and present a justifiable case for drivers being employees. Finally, all though TNC apps/software present some efficiencies and novel approaches, they are readily copy able and likely insufficient long term distinctive competence and the economies of scale in fleet acquiring and fuel acquiring are not pursued by the TNCs which as publicly held corporations most certainly have the potential a lower cost of capital than individual drivers. The MN Study revealed that dedicated drivers spent $800 per month on average for car payments and most of them are below the poverty line suggesting lower credit scores.
There are some efficiencies gained through “economies of density” vs economies of scale, economies of density meaning coordinating a large number of drivers and a large number of passengers but such economies have shown themselves to be predatory and monopolistic in reality when the TNC benefits for every fare (approx. 25%) and the majority of committed drivers- who provide over 50% of the fares by quantity suffer and are known to earn less than minimum wage while really being sole proprietors (entitled to earn sufficient wages to cover costs, benefits, return on investment and profit) and reality in most cases employees.
Historic academic studies and analysis of financial data by some municipalities affirm that the Taxi Industry has very tight margins and some aspects of its service- some trips/fares are less profitable and even unprofitable. The industry overall gross margin is about 3% historically and roughly 1/3 of Taxi firms struggle with profitability- most typically the smaller firms. This affirms that the business models of the two largest TNCs, Uber and Lyft are likely to continue to struggle with profitability issues and rent seeking behavior- keeping a greater percentage of revenue from the driver.
The true costs of this business model failure are substantial to drivers, government (economic aid/welfare, lower taxes, and increased vehicle on the road, increased traffic and pollution) and society at large and contribute to the delusion of a false reality of lower than cost fares at driver expense. Note prior to going public, Uber charged a 20% lower fee and even with the increased fee which is not justified and does not show channel efficiencies has failed to create a profitable industry.
When corporations like Uber and Lyft strive to profit beyond the efficiencies or innovations they provide to the ecosystem while leaving an undue burden on their channel partners and even requiring ecosystem inefficiencies, this behavior is not just disruptive, it is “rent seeking”. Rent seeking is an economic concept that occurs when an entity seeks to gain wealth without any reciprocal contribution of productivity.
Distribution channels help create efficiency, reduce costs, reach a wider market, and provide customer convenience. Understanding the functions of distribution channels is essential for businesses to effectively manage their supply chain and reach their target audience.
A detailed examination is as follows:
Functions of Distribution Channels
Transactional ((Buying, Selling, Risk Assumption)
The transactional function of distribution channels involves buying and selling activities. It facilitates transactions between producers and end customers by providing payment options like credit terms or online payment gateways. It manages negotiations with intermediaries such as wholesalers or retailers for pricing and promotions. With TNCs, the purchasing of the automobile, fuel, its maintenance and cleaning and basic insurance is done by the individual driver vs a Taxi Company or The TNC with whom there might be volume discounts, lower cost of capital and a propensity for economies of scale. The rate for the network drivers for a given fare are determined by The TNC and are not subject to regulation as may be the case for a Taxi Company. TNC buying/selling of insurance and driver buying of insurance, TNC driver- risk assumption, which is considerable especially for committed drivers. Intrinsically, the TNC apps pit driver against driver to see who will succumb to the lowest fare for a given trip- at a rate not simply justified by efficiencies- driver proximity to customer.
Transactional functions can be seen in action when a retailer purchases products from a manufacturer at wholesale prices before selling them to consumers at retail prices. The negotiation process between the retailer and manufacturer falls under this category. The TNC app provides in advance the fares available to passenger and driver who form an agreement without negotiations. In contract work, Taxi Companies negotiate rates with entities such as cities.
Logistical Functions (Assembly, Storage, Sorting, and Transporting)
Distribution channels handle the distribution process, ensuring that products are delivered to the right place at the right time. This function involves managing transportation, warehousing, and inventory to streamline the movement of goods from manufacturers to consumers.- The routing of the driving is addressed by the TNC vs the Taxi Company or network driver.
Logistics also encompasses order fulfillment, which includes picking, packing, and shipping products. For example, when you order a product online, and it's shipped from a warehouse to your doorstep, this is all part of the logistics function within a distribution channel. The vehicle, its maintenance, cleaning and fuel and a component of its insurance are provided by the driver vs a Taxi company or The TNC. The driving is provided by the network driver.
The service paid for is performed by the driver although its assembly-routing is provided by the TNC. The ownership and storage of the vehicle used to make the function happen is the responsibility of the driver, although the TNC likely has a lower cost of capital.
Facilitating Functions (Post-purchase Service and Maintenance, Financing, Information Dissemination and Channel Coordination of Leadership)
Facilitating refers to the support provided by distribution channels in marketing efforts such as advertising, sales promotion, market research, and after-sales services. This function helps create awareness about products or services while also addressing customer needs post-purchase. For TNCs, The TNC provides this function at minimal cost as it has become a household name and its promotion is to both drivers and riders via its app. The TNC plays a leadership role in that it provides the opportunities. The TNC manages the customer relations and billing functions and charges drivers a fee for doing so. The TNC provides the after sale sales support through its driver and passenger rating functions on its app.
From the perspective of the channel manager, there are five important flows.
Product flow- TNC Driver
Negotiation flow-TNC
Ownership flow-TNC Driver
Information flow-TNC
Promotion flow-TNC
Economist and Harvard Business School professor Michael Porter in his landmark book Competitive Strategy Techniques for Analyzing Industries and Competitors isolated three generic strategies that have long term viability.
The three generic strategies are:
1) Cost Leadership (no frills, offering the lowest price for a product or service while maintaining a reasonable level of quality, the strategy works by achieving economies of scale, reducing overhead costs and streamlining operations)- like Sears Roebuck or Walmart for the retail industry.
2) Differentiation (creating unique desirable products or services that sets itself apart from competitors. Businesses that implement this strategy typically target a broad market with a high demand for unique or premium products or services)- Apple-creating a unique product that is both visually appealing and easy to use
3) Focus (offering a specialized product or service in a niche market. This strategy can be implemented using either a cost leadership or differentiation approach. Businesses that implement this strategy typically have a deep understanding of the needs and preferences of their target market and can tailor their products or services accordingly)- Ritz Carlton hotels and 5 Star restaurants are examples of this strategy.
Uber and Lyft have now find themselves as market leaders with lower priced offerings yet their lower priced offerings do not always cover all of the costs of their channel partners- namely the drivers, meaning their strategy lacks long term viability and indeed Uber was only profitable in 2023 and it has been suggested and reinforced that this is a result of Uber Corporate taking a larger percent of the revenue from the driver than in previous years. (See “Transportation Network Company Driver Earnings Analysis and Pay Standard Options” (March 8, 2024, Minnesota Department of Labor and Industry )The MN Dept of study was done before this change in pricing and already manifested the impoverished conditions for the committed Uber driver in MN.
A cursory study of the Taxi Industry reveals it is not a high profit industry with many studies suggesting a 3% gross margin. Given the TNC strategy is to be a low cost supplier and/or charge less per trip than most Taxi’s and given that they off load labor and still for most years are not profitable- the viability of their business models warrant great scrutiny[SL1] .