Time running out
The recent announcement that Uber is pulling out of the Chinese market, selling its positional strategy in a merger of Didi Chuxing and Uber China, means the "fight" is over between local Chinese ride apps and Uber that has heavily discounted prices through subsidies had reaches an unsustainable position for Uber (1). Both Didi and Uber had sunk billions into China to fund competing growth strategy, seeking to keep one step ahead of Chinese regulators through a multitude of local ride services in the many local markets in China that had yet to be state regulated.
But time seems to have ran out for Uber citing challenges of regulation that eventually caught up with the market to direct control back to government owned organizations and controls that regulate both who is allowed to operate as well as the data and services that are approved by state-run regulators. These nuances in regulating the market in China perhaps are specific to that market and may not necessarily reflect western or other market forces but nevertheless exist as a key global market with a fifth of the world's population (2).
Chinese Lessons
If investment to gain market capacity has been through pricing strategies requiring huge subsidies to offer often lower than economically viable business for Uber, it was also been the nature of how capacity is regulated in the Chinese market that has increased complexity of deals and the need to partner rather than continually through billions into artificially funding a price war.
Walmart has had a similar recent challenge to growing the Chinese market and changes strategy towards partnering with one of the country's largest e-commerce players divesting its Yihaodian website to JD.com inc the second largest side to Alibaba in return for a 5 percent stake in JD.com worth $1.5 Billion (3).
While customers may be gaining benefits of lower prices in their car rides or retail products driven by fierce competition clearly the issue of funding to grow market capacity to get economies of scale that drive more customers and share can fall over if either regulation stops access that either slows down or prevents the ability to offer the range and scale of service versus competitors.
Market price matures in the Race to the bottom in digital pricing online
With lower prices for customers the down side is even lower profit margins for the operators, this "race to the bottom" of the lowest price may be fought out to grab customers and market capacity. In the case of a wide choice and lots of supply to meet demand, customers can be choosy.
With Uber now out the frame in China, the prices may then rise as Didi have the market and the regulation within their business model. Uber China tried to run against this and eventually ran out of time and strategic investment options.
In the US this competition continues with Uber and Lyft in a price war but the question is if this has reached a lowest price plateau. Where will future growth and high profits come from?
Some key predictions for competitive digital pricing
Fighting the 800 pound digital gorilla
Creating a sustainable digital business platform where a large enough market capacity at a profitable price that offers a margin clearly rat out time with Uber in China. The operating costs of multiple markets and costs of regulation has to be factored into digital platform design for enterprises in any market.
The demand side nature of digital real-time mobile apps and pricing mean customers can compare and chose rapidly with a ride or in retail, this reality means a powerful supply side digital platform economies of scale to be able to offer this experience "anywhere at anytime". The problem and paradox is that both Uber and Walmart have found is in investment to get demand capacity when the pricing strategy becomes a race to the bottom and a starvation of the looser.
New Digital Metrics
Getting the scale of Digital platform as Didi and Alibaba and JD.com have done in China. This has also been a hard lesson for Walmart with its urgency to invest in online retail as it sees Amazon and its prime offering and same day to hourly delivery service outstripping its number of SKU products of choice and its rapid hourly delivery (4)(5). These are the new digital performance metrics that threaten the old guard as well as the new startups that bring this alternative world to the customer.
Walmart in a potential acquisition of Jet.com to try to boost sales in online, Jet.com was created with a mission to challenge amazon.com is a recognition of the urgency to be the agile and rapid online business it must now also be (6).
Pricing for better return on market capacity
At what point will the fares go up again in the Uber and Lyft price war in the US may be in the need to seek out new premium services as growth from more demand capacity slows down. If one competitor "starves" the other out of business then it acquires the capacity of that market may be one option but in the Uber China case became untenable.
The cost-plus-pricing is ok in situations where companies are able to set a recoverable margin but this strategy will lose out if the elasticity of the demand in pricing becomes untenable. This is risky in highly elastic and price sensitive markets such as rides and retail goods.
In digital business it is possible to create personal price differentials on an individual case creating a price discrimination that in past has raised concerns with fairness of intercountry or regional pricing for local demand. In other cases found in examples such as cloud computing pricing for subscription models, "over charging" has also been a criticism levied at some suppliers selling a capacity subscription for a digital service that the consumer pays for but does not fully consume in the allotted subscription period. These are examples of digital pricing strategies to target and encourage local pricing but only work if the capacity and customers are able to pay the pricing models. Again in highly elastic market demand where competition is on the lowest cost and yet real -time rapid service quality that requires extensive agile and performing infrastructure such as the rides network or retail logistics chain this is an expensive game to be in.
I am reminded of an economic pricing method call "Ramsey pricing" that seeks to increase margin on in-elastic goods as there is always demand for these. This is related to models of pricing policy in a monopoly that restricts profit and supports social wellbeing of services necessary for society applicable to public utilities or natural resources including energy and telecoms (7). While transport and commodity retail could be seen as a necessities market it is ran for commercial profit so these kinds of rules seem to be for regulated market pricing.
Pricing and margin growth by proxy
Partner strategies are an optional way forward in dealing with regulation and race to the bottom strategies as these digital companies seek to sell more services on top of their core business. If the capacity is matured or has become regulated then new or existing markets can be opened up through partner strategies with same services to the market. This seems to be the case with Uber and Walmart examples in the realization of presence in a market that is dominated. It is interesting to observe Facebook, Google, Microsoft and other west companies and remain in these overseas markets and how to navigate these regulatory challenges.
"uberization" and the horizontal pricing
Another may be to see ways to invent new service categories through innovation to create price tariffs that offer a range of service choices beyond lowest cost. We have seen one such effect described as "uberization" where other categories of customer demand become as-a-service.
If the analyst experts are suggesting the ride and retail markets online are now maturing, then the next stage of this cycle are evolutions in products and services that follow the digital world as well as that seen in the physical world.
If Digital markets are maturing in terms of capacity like the we have seen in the mobile phone market and the "law of numbers" running out of physical customers to buy more Apple iPhones, then new markets must be created or redefined. So with the US the Uber and Lyft price war in full swing, as these businesses run out of capacity they may well seek new pricing strategies through premium or partner services to expand and preserve growth and share.
References
1. Uber China Merges with Didi Chuxing https://newsroom.uber.com/uber-china-didi/
2. The real reason Uber is giving up on China https://hbr.org/2016/08/the-real-reason-uber-is-giving-up-in-china
3. Walmart to Sell Chinese E-Commerce Business to JD.com http://www.wsj.com/articles/wal-mart-in-talks-to-sell-chinese-e-commerce-business-to-jd-com-1466423930
4. Walmart Loses Ground To Amazon in E-Commerce Battle http://fortune.com/2016/02/18/walmart-amazon-2/
5. Walmart in talks to buy web retailer Jet.com: DJ, citing sources http://www.cnbc.com/2016/08/03/wal-mart-in-talks-to-buy-web-retailer-jetcom-dj-citing-sources.html
6. This is why Amazon is dominating Walmart now Sept. 18, 2015 http://time.com/4040160/amazon-walmart/
7. Ramsey problem https://en.wikipedia.org/wiki/Ramsey_problem