Q – Prowess

How much more or less do you pay drivers per trip (by changing Lyft’s take)? Your goal is to maximize net revenue for the next 12 months on this route.

Pretend you’re the pricing product manager for Lyft’s ride-scheduling feature, and you’re launching a new city like Toledo, Ohio.

The prevailing rate that people are used to paying for rides from the airport to downtown (either direction, one way) is $25. The prevailing wage that drivers are used to earning for this trip is $19.

You launch with exactly this price: $25 per ride charged to the rider, $19 per ride paid to the driver. It turns out only 60 of so of every 100 rides requested are finding a driver at this price.

(While there is more than one route to think about in Toledo, for the sake of this exercise you can focus on this one route.)

Here’s your current unit economics for each side:

Drivers:
- Customer acquisition cost (CAC) of a new working driver is roughly $500
- At the prevailing wage, drivers have a 5% monthly churn rate and complete 100 rides / month
Riders:
- CAC of a new rider is $10 to $20 (it’s sensitive to the rate of acquisition, since existing marketing channels are only so deep)
- Each rider requests 1 ride / month on average
- Churn is interesting: riders who don’t experience a “failed to find driver” event churn at 10% monthly, but riders who experience one or more “failed to find driver” events churn at 33% monthly

You’ve run one pricing experiment so far: when you reduced Lyft’s take from $6/ride to $3/ride across the board for a few weeks, match rates rose nearly instantly from 60% to roughly 93%.

Your task is to maximize the company’s net revenue (the difference between the amount riders pay and the amount Lyft pays out to drivers) for this route in Toledo for the next 12 months. Let’s assume that you cannot charge riders more than the prevailing rate.

The core question is: how much more or less do you pay drivers per trip (by changing Lyft’s take)? Your goal is to maximize net revenue for the next 12 months on this route.

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Answers (1)

Ana Rodriguez

My task is to maximize the company’s net revenue for the next 12 months.

Is the 33% event churn in line with industry standards or high or low?

From our experiments, it looks like when we increase the drive payout by reducing Lyft’s take. Match rates rose from 60% to 93%.

What is the industry standard for match rates?

Did this driver payout increase also affect the monthly churn rate?

Out of 100 drivers, only 60 of them accept this route when Lyft takes $6. In a given month, these 60 drivers complete 100 rides.

(# of drivers * # of rides)*Lyft payout= Lyft net revenue

60*100*6= $36,000 gross review for Lyft in a given month.

Given a 5% monthly churn rate for Lyft drivers, we need to know how this would affect us. CAC for Lyft drivers is around $500 per month.

$35,500 net revenue per month.

I will assume that the number of rides will stay the same if we increase the incentive for a driver to accept a request for this route (match rate).

100*100*$2.50 = $25,000

93*100*$3 = $27,900

50*100*$7=$35,000

70*100*5= $35,000

65*100*5.5 = 35,750

55*100*6.5=35,750

60*100*6=36,000

After playing around with some numbers, a 60% match rate with 100 rides with Lyft taking home $6 per ride is our best bet.

We could propose an incentive to have Drivers stay on longer by offering a tiered program. So Lyft would take more money upfront from the driver. Then as the driver gets more experience (except more rides) and good ratings, we could take less from them. This would also help us to weed out the bad drivers while maximizing our revenue by incentivizing new drivers to expect more rides. We could also change our take on the ride due to demand and seasonality. Can we encourage more significant tips from our drivers from their customers?

But 12 months is a short time to try some of these concepts.

Based on the above numbers, the ride count remains the same, no matter the amount Lyft makes on a given ride. Therefore, Lyft should charge $6 a ride with a 60% match rate with 100 rides in a given month.