Introduction:
As Lyft's pricing product manager launching operations in Toledo, Ohio, my goal is to maximize total net revenue over the next 12 months, particularly on the "Airport to Downtown" route. The key challenge is determining the best adjustment to Lyft's Take Rate to optimize its net revenue. Analysis result suggests that reducing Lyft's take rate by $2 could optimize net revenue. The analysis considers Lyft’s Take Rate, Match Rate, Churn Rate, Net Revenue, and Customer Acquisition Cost (CAC) for Riders.
Assumptions and Limitations:
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Route: From the airport to downtown Toledo, OH. (Prevailing rate is $25 and cannot be changed)
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Operational Parameters:
1) Please refer to the case prompt for foundational details and parameters. (e.g., churn rates, etc.)
2) Assumption:
a) Match Rate driven by Lyft’s Take Rate: 11% When reducing Lyft’s take from $6/ride to $3/rider, match rate rose from 60% to 93% - Change in Match Rate = (93%-60%) / (6-3) = 11%
b) Customer Acquisition Rate (CAC) for riders: $15 (The average within the $10-$20 range)
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Main Metrics: Lyft’s Take Rate, Match Rate, Churn Rate, Net Revenue for Lyft, Customer Acquisition Cost (CAC) for Riders
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Assumptions:
1) Maintain a target of 100 riders per month as the Total Demand Rides KPI. Given the rider churn rate, factor in the monthly costs associated with acquiring new riders, including the Customer Acquisition Cost (CAC).
2) Driver churn and average monthly completion rides are NOT considered in this analysis due to lack of clarity on changes. The case mentions a 5% monthly churn rate for drivers completing 100 rides per month but lacks clarity on the specific method of change. Further details will be discussed in the conclusion section.
3) Lyft's Take Rate is constrained within the range of $6 to $3. This limitation is set because a take rate below $3 would result in a match rate of 100%, which is not considered reasonable and would have minimal impact on revenue.
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Analysis:
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1. Structures:
The objective is to determine the optimal adjustments to Lyft's take rate to maximize net revenue over the next 12 months. The total revenue calculation involves two main components: Lyft's revenue from its Take Rate and the costs associated with acquiring new riders to meet the target of 100 rides per month (Rider Acquisition Cost). (Please refer to the breakdown metrics table)
Firstly, Lyft's revenue by Take Rate is calculated as the product of the Take Rate, Total Demand Rides, and Match Rate:
Lyft Revenue by Take Rate = Lyft’s Take Rate * Total Demand Rides * Match Rate
Net revenue is influenced by three key metrics. While improvements in any of these metrics might lead to higher net revenue, changes in Lyft's take rate affect the match rate, which in turn impacts rider churn rate and consequently, total demand rides and will also impact the rider acquisition cost to retain the total demand rides.
Within the formula there is the involvement of match rate, this is the formula:
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Match Rate = 60% + (6-Lyft’s Take Rate) * 11%
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The match rate, indicating the percentage of riders finding drivers, is influenced by the take rate. For instance, when reducing Lyft’s take from $6/ride to $3/rider, the match rate rose from 60% to 93%. The change in match rate is calculated as (93% - 60%) / (6 - 3) = 11%.
Secondly, the rider acquisition costs are determined by the Riders Churn Rate, which is influenced by the Match Rate. The formula for this cost considers both successful and unsuccessful ride requests, multiplied by the customer acquisition cost (CAC):
Rider Acquisition Cost =
[(Match Rate * Total Demand Rides * 10%) + ((1-Match Rate) * Total Demand Rides * 33%)] * 15
• 10% - Churn Rate for “Good experience” riders
• 33% - Churn Rate for “Bad experience” riders
• $15 – Customer Acquisition Costs for riders
Ultimately, the net revenue is determined by subtracting the costs from Lyft's revenue. The interaction between Lyft's Take Rate, Total Demand Rides, and Match Rate drives changes in net revenue, with adjustments in one factor impacting the others. Achieving maximum net revenue over the following 12 months involves optimizing Lyft's Take Rate to balance revenue generation and rider acquisition costs:
Total Net Revenue = [Total Lyft’s Take Revenue] - [Rider Acquisition Cost]
Note: All formulas provided are based on monthly calculations. To project for the next 12 months, simply multiply the monthly results by 12.
2. Analysis Table:
Let's delve into the impact of adjusting Lyft's take rate on net revenue. The table below illustrates the changes resulting from adjusting the take rate from $6 to $3 (note: this table only reflect the first month and driver’s churn rate did not be considered):
Decreasing Lyft’s take rate from $6 to $4 appears to optimize monthly net revenue. Here's a breakdown of the metrics:
The analysis indicates that as the take rate decreases, match rates increase, and rider attrition decreases, contributing to potential revenue growth. Lyft’s optimal take rate to maximize monthly revenue appears to be $4, yielding a projected net revenue of $115.9 per month and totaling $1390.8 over the next 12 months.
Note: For the sake of ease and repeated analysis, I've designed an Excel calculator. Please refer to the attachment section for the file.
Conclusion:
Based on the analysis, the optimal Lyft’s Take Rate is $4 per ride, marking a $2 decrease from the previous rate of $6. It's important to note that the revenue projections are based on an assumption of 100 rides per month, but this assumption can be adjusted for comparison purposes without affecting the results.
While this analysis provides valuable insights, there are additional factors to consider. For instance, the case mentions a driver churn rate of 5% per month, which was not thoroughly explored in this analysis. Future investigations may incorporate this factor by adding new columns to the analysis table for more precise calculations. For instance, suppose start with a pool of 20 drivers. At the end of the month, with a 5% churn rate, you'll lose one driver out of 20. To replace them, Lyft needs to invest in driver acquisition, with an average cost (CAC) of $500 per driver. This suggests that a portion of the revenue generated by drivers will be allocated to cover these costs, impacting Lyft's net revenue accordingly.
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