The Biggest Question About Lyft's Unit Economics

Ridesharing platform Lyft is preparing to go public, and the company's S-1 Registration Statement filed with the SEC earlier this month has provided the first official glimpse of the industry's economics. Spoiler alert: They're not great. At least not yet -- Lyft's operating losses have been consistently widening over the years, even as core rider metrics put up remarkable growth. Generally speaking, one of the most prominent criticisms of the ridesharing industry has been that rides are offered too cheaply. While that dynamic has helped decimate the traditional -- and highly regulated -- taxicab industry, the practice may not be sustainable.

Even after sifting through the filing, one big question remains.

Image source: Lyft.

How much is Lyft spending on incentives?

Ridesharing is a commoditized industry. Customers just want to get from point A to point B, and price tends to be the overriding factor in which platform they choose. Since every ride is different, calculating the average price per ride isn't all that useful, because it depends on numerous factors, most notably distance and time. You would need to standardize based on those two factors to come up with relevant conclusions and comparisons. But how Lyft gets to that price is of critical importance, since the company often offers various discounts and promotions to spur usage.

Here's the tricky part: Lyft accounts for promotions as either a reduction to revenue or a sales and marketing expense, depending on the type of promotion being offered. That makes it impossible to know just how much Lyft is spending overall in rider incentives, one of the most critical aspects of pricing rides and rider adoption. Sales and marketing expenses have been marching steadily higher over the years in dollar terms, although the company has gotten more efficient in that spending, which is declining as a percentage of revenue.

Data source: S-1.

Lyft also has a driver referral program as part of its efforts to grow its driver base (1.1 million drivers at the end of 2018). Lyft discloses the cost of its driver referral and targeted rider incentive programs within sales and marketing. However, these figures are aggregated together, further obfuscating just how much Lyft spends on rider incentives.

Data source: S-1.

While both the driver referral program and the rider incentive program help grow the overall network of drivers and riders, they do so in very different ways. Driver referral bonuses vary by region and can be paid out in various ways but aren't really ongoing costs once the referred driver is onboarded. Rider incentives aren't technically ongoing since all promotions are only available for a limited time, but Lyft offers discounts so regularly that they might as well be. Getting a breakdown of the costs of each program would be supremely useful for prospective investors.

Still, even that breakdown would not include any incentives that are recorded as revenue reductions. Lyft needs to disclose the grand total amount that it spends on rider incentives to give investors a better sense of the real underlying unit economics around ridesharing.

Check out the latest earnings call transcripts for the companies we cover.

Risky business

Lyft is keenly aware of the risk it faces regarding competitive pricing, dedicating an entire risk factor to it. "Demand for our offerings is highly sensitive to the price of rides, the rates for time and distance driven and incentives paid to drivers and the fees we charge drivers," the company wrote.

Lyft added, "There can be no assurance that we will not be forced, through competition, regulation or otherwise, to reduce the price of rides for riders, increase the incentives we pay to drivers on our platform or reduce the fees we charge the drivers on our platform, or to increase our marketing and other expenses to attract and retain qualified drivers and riders in response to competitive pressures."