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At What Price? (Gwen Moritz Editor’s Note)

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I have a love-hate relationship with Uber. Uber technology is fantastic. I travel by air a few times a year, and I love being able to call for a ride and to pay with my phone. I love having a receipt in my email, and I love having a paper trail in case anything goes wrong. (And I’m always sober enough to match the license plate on the app with the license plate on the car before climbing in.)

But when I think about patronizing Uber as a company, I feel a little creepy. The original management seems to have been a club of horrible people who created a horrible corporate culture, and I don’t feel good rewarding horrible people. There is also a lingering question over whether the drivers — the indispensable providers of customer service — are being paid fairly.

While I trust the pay issue will eventually work itself out, Uber’s more immediate problem is the fact that it loses money. And while losses are not unusual in startups, Uber is now 10 years old and has such name recognition that Uber has become a verb like Google. And it is gaining more competitors in a market that will soon be saturated. Will having more ride-sharing options make any of us more likely to need a ride, or will ride-sharing become a commodity in which price is the primary differentiator?

When Uber took its stock public earlier this month, the share price dropped from the initial ask of $45 to as low as $36.08 during the second day of trading. As The New York Times reported last week, Uber’s market value had been estimated in the $120 billion range by both Morgan Stanley and Goldman Sachs as recently as last September. The $75.5 billion market capitalization contemplated by the $45 IPO price was already a deep psychological discount, and the market thought that was too aggressive.

So what is Uber stock worth? Like everything else, including the service it delivers, it’s worth what people are willing to pay.

For someone who never has to make pricing decisions — those are made above my pay grade at Arkansas Business Publishing Group — I spend an inordinate amount of time thinking about prices. Pricing has got to be the most difficult decision most businesses must make. What is the sweet spot where you can cover your costs plus enough profit to make the undertaking worth the effort and risk while still being perceived as a fair value for your customers?

When your costs increase, how much of that can you pass along to your customers before they start to drift away? Last week, Walmart CFO Brett Biggs warned that higher tariffs on imports from China will mean higher prices for his customers, and I heard from a Twitter user: “Because, heaven forbid they take a cut in profits.”

But Walmart’s profit margin for its most recent fiscal year — net income of $6.67 billion on revenue of $514.4 billion — was 1.3%. That’s mighty thin in the first place, and you can be sure it wasn’t Walmart’s idea to sock Chinese imports with big new tariffs.

Apple, which also imports from China, enjoyed a 22% profit margin in fiscal 2018 — nine times Walmart’s net income on barely half its revenue. But pushing the price of the iPhone to four digits has cut into sales by discouraging consumers from upgrading as frequently, so now Apple is in a pickle. Even if the management determined that its premium brand could afford to start discounting, JPMorgan analysts estimated last week that President Trump’s latest tariffs will add 14% to the price of an iPhone — unless, of course, Apple and/or its suppliers absorb some or all of the additional costs.

I recently purchased a used car, and I’d rather stab myself in the eye. I knew which functions were vital (starting with towing capacity since boat season is upon us), and I knew which models met my needs, and I knew my budget. But I am resigned to the fact that I’ll never know whether I got the best price I might have. Ultimately, the car was worth what I was willing to pay for it, which was enough for the seller to turn loose of it.

I sometimes envy a friend who works from home and determined that it was cheaper all around to sell his car and call an Uber whenever he needs to run an errand.

Email Gwen Moritz, editor of Arkansas Business, at GMoritz@ABPG.com and follow her on Twitter at @gwenmoritz.
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