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Ride-Hailing Services: The Price Better Be Right

February, 21 2018

By Tim Dunne

Ride-Hailing Services: The Price Better Be Right

When buying a new car, few people think about the "cost-per-mile" to own and operate the vehicle, but the American Automobile Association (AAA) publishes a guidebook every year that examines just that called "Your Driving Costs." The publication helps vehicle owners understand the total estimated cost of owning and operating their vehicle each year and breaks that cost down to an approximate cost-per-mile driven. It is a useful resource for anyone looking to purchase a new vehicle. With the rapid rise of ride-hailing via companies like Uber and Lyft, does it make sense for a new-vehicle shopper to forego their purchase and simply transition exclusively to becoming a ride-hailing customer to meet their transportation needs?

Using AAA's guidebook as a baseline, additional research helped determine an answer. Truth be told, making the comparison wasn't easy; it required some effort.

According to the Department of Transportation, the average American vehicle owner drives about 13,474 miles per year, or about 1,122 miles per month. According to the EPA, the mean fuel economy of a new vehicle in America is 24.8 miles per gallon, which means the average vehicle consumes about 45.2 gallons of fuel per month. At the current national mean price of $2.58 per gallon (according to AAA), the average new vehicle owner spends about $116 per month on fuel.

With that information in hand, it was time to research other costs. Some monthly costs were pro-rated based on estimated average annual costs, while others are estimates based on personal and anecdotal evidence. Take a look:

  • Average monthly car payment: $503 (according to Experian)
  • Average monthly insurance payment: $100 (can vary widely, but estimate $100)
  • Average monthly price of vehicle registration: $20
  • Average monthly spend on gasoline: $116
  • Average monthly spend on maintenance: $20
  • Average monthly spend on car washes: $30
  • Projected monthly spend on tires (based on four tires that need to be replaced every four years at a cost of $600): $12.50
  • Average monthly spend on public parking: $10 Average monthly total: $811.50

So, the average monthly cost to own and operate a newish vehicle is a little more than $800 (just under $10,000 annually). And since the average consumer drives 1,122 miles per month, the cost to a consumer of owning and operating a vehicle is approximately $0.72 per mile.

Looking at the price of using a ride share service, there are many variables, including the type of vehicle booked, the location of the booking, the distance traveled and the time of day when the vehicle is booked (e.g., low-traffic periods vs. peak-traffic periods).

Using the UberX option as an example-which is the cheapest personal Uber available-the cost in the Los Angeles area is about $0.90 per mile, plus $0.15 per minute, plus a flat booking fee of $2.10 per ride, regardless of time and distance. I, for example, live 8.2 miles from my office. Uber regularly quotes a price of $10.57 for the trip, or the equivalent of $1.28 per mile. This is nearly 80% higher than the average cost of driving my own vehicle. While Uber's pricing is much lower than a traditional taxi, at this price point, it doesn't make financial sense to give up my vehicle and transition to ride-hailing.

Uber and other ride share companies are experimenting with different service packages (e.g., pre-selling 20 rides up front at reduced prices, ride share carpooling and others) to bring down the price-per-mile of using a ride share service.

However, ride-hailing services do offer some inherent advantages over vehicle ownership in terms of convenience: there would no longer be a need for administrative tasks like making car payments, insurance payments or registration payments; there would no longer be a need for vehicle maintenance tasks like refueling, car washes and oil changes; and worries about parking would be eliminated, while more time could be dedicated to other more relaxing and/or productive pursuits during a commute. Moreover, ride share drivers with whom I've interacted have been exceedingly polite and professional, their vehicles have been impeccably cleaned and maintained and the total experience has been hassle free.

These are all enormously attractive selling-points. But for consumers who first and foremost look at the bottom line, the key to converting new-car shoppers to full-time ride-hailing customers will require a substantial reduction in price. Until that time arrives, consumers-me included-will be heading to the showroom to pick out their next new ride.

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Tim Dunne is director for analytical center of excellence at J.D. Power. He will continue to do the math on ride-hailing but, for now, has no plans to give up his vehicle.

The information contained herein has been obtained by J.D. Power from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, J.D. Power does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from use of such information.

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