Nigeria’s ride hailing market appears to be ripe for disruption. Drivers continue complaining about the tightening margins of dominant platforms, and riders are always looking for better prices. It’s the perfect opportunity for a challenger who can offer a better deal to win the day.
Nigeria’s startup scene is a graveyard of ambitious ride-hailing applications. Over the past decade an estimated 2,500 apps of this type have been launched, only to disappear weeks, months, or years later.
This constant failure has been framed in a way that startups are being outspent globally giants like Uber, Bolt and inDrive. This view is too simplistic. The real challenge is not access to capital but the economics of creating the network effect, which is what matters most in a platform-based business.
The network effect is a powerful phenomena where a product, service, or user becomes more valuable the more people use it. In a positive feedback loop, each party adds value. The more riders who express interest in a ride hailing service, the greater the number of drivers joining the network. The concept of network effect is at the heart of successful digital platforms. From social networks such as WhatsApp and LinkedIn to ecommerce platforms like Jumia and Selar, Chowdeck and ride-hailing platforms like Uber, Bolt and LagRide.
Building an atomic-scale network
The first challenge that every ride-sharing platform faces when implementing the network effect is the classic “chicken and egg” problem. A platform needs drivers in order to attract riders. But drivers won’t join unless there is a critical mass. A rider isn’t interested in a sleek new app or comfortable car options when the nearest driver is always 40 minutes away. They may never return and will instead choose apps with shorter waiting times. Drivers will also leave platforms with constant demand, even if they are offered lower commissions.
Experts argue that the solution lies in creating a atomic network – the smallest viable network with enough drivers and riders to ensure everyone stays. To build this network, it is crucial to attract and retain the “hard side”the drivers who generate the majority of the platform’s worth.
A good way to do this is to choose your battleground geographically. Uber launched in Lagos State in 2014 and focused on the island. GoKada launched in Lagos, Nigeria in 2018, with a focus on Yaba. This is a dense hub for students and tech professionals. By concentrating drivers into one area, a ride hailing service can improve perceptions of supply – like ensuring that goods are always available – and refine its model based on customer feedback before expanding in surrounding regions.
A network of atomic particles is essential. Laolu Inifade, the founder of now-defunct carpooling startup Hytch learned this lesson the hard way. It seemed like a good idea to have about 50 drivers and 1,000 riders before launch, without spending any money on marketing, but the locations of these people were too far apart. “We noticed that sometimes a rider would be on a mainland and a driver on an island,” he said.
Even if a service is successful in building an atomic network that works, it’s not easy to transfer this success to other locations or networks. Most platforms expand city-by-city, and some ride-sharing platforms have been described as a “network of networks”. Bolt exploited the situation by expanding into cities that Uber did not focus on. According to news Reports of the period show that Uber initially concentrated on its primary commercial hubs Lagos and Abuja. Bolt expanded rapidly into cities that were underserved, such as Enugu and Abeokuta. It captured market share in areas where there was little initial resistance and built a network effect locally.
The need to build a new network in each city creates an opportunity for agile competitors. A new company may be able to avoid established rivals if it targets secondary cities, suburbs, or regions within a larger city where they do not have a strong presence. Creating these networks from the ground up in each new location can be extremely expensive.
Keeping and wooing the hard side
In two-sided markets like ride-hailing, the consensus is to focus first on the “hard” side. Riders are seen as the easy side, since they are more numerous and less expensive to attract. The journey towards securing a dedicated driver base has changed dramatically.
Ugochi Ugbomeh is the co-founder of e-Tranzit in Nigeria, one of the leading ride-hailing platforms. He says that when e-Tranzit launched 12 years ago it began with company-owned vehicles and salaried driver. This strategy was designed to ensure that drivers were always available, and to control the first users’ experience.
She recalls that in a market where smartphone penetration was low, the idea of taxi drivers sourcing rides through an app was alien, and required extensive evangelism. She told TechCabal that “e-Tranzit” imported over 100 mobile phones from China and provided them to drivers free of charge with repayment tied to earnings.
In 2013, when Bankole Cardoso, Rocket Internet’s Easy Taxi-backed ride-sharing platform launched, he faced the same challenges. “The first hurdle was convincing Nigerian drivers of the innovation’s value,” he said. Easy Taxi found an easy-to-repay financing partner who would provide phones for drivers. In a year they had 500 cars in Lagos, and 200 in Abuja.
The approach of the Nigerian pioneers like e-Tranzit and Easy Taxi to kickstarting their atomic network is known as flintstoning–manually bootstrapping the network by importing phones and providing financing to yellow cab drivers. Uber arrived in Nigeria in 2014. These platforms had less than 1,000 drivers between them. Uber’s launch in Nigeria changed the economics for driver acquisition, by paying to bring everyone into the network. The platform used a peer-to-peer (P2P), which looked beyond yellow taxis and began to recruit everyday people with cars that were not in the cab business. The initial investment in the previous platforms made it easier for drivers to understand and use smartphones. This also helped to broaden the profile of taxi drivers to include young, tech-savvy car owners. Uber had reached a milestone of 50,000 drivers by July 2016. Uber has accumulated nearly 1,500 drivers in Lagos and Abuja and completed more than a million trips. Uber partnered up with banks
to finance car purchases by its drivers. Some of them were leasing other people’s vehicles. To qualify for Uber’s lucrative vehicle leasing programs, drivers must maintain a performance score above 4.5, and earn more than N2.4 million in six months. The chance to drive to own a car encouraged drivers to be active on the app, and to pick up more riders. This model of hire-purchase, which aimed to reduce entry barriers and secure driver loyalty, was adopted later by other services, such as LagRide.
Some ride-sharing platforms are finding creative ways to find drivers for their atomic network. Bolt, for example, expanded the pool of potential drivers by relaxing the strict vehicle requirements that Uber mandated. InDrive, a competitor to Uber, introduced lower commission rates as well as features that allowed drivers to negotiate their fares.
Although sourcing vehicles and passengers remains challenging, today’s barriers are lower for new entrants. Many drivers now practice “multi-homing”–using several apps at once. Onifade pointed out that initially, attracting drivers is simple. “All you have to do is tell riders that they can earn more on your platform,” said Onifade.
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Scaling an atomic network is expensive.
After a critical mass has been reached, the focus can shift to acquiring riders – the “easy side” for the network. But easy doesn’t mean cheap. Rider acquisition is a delicate balance game. While driver acquisition is a brute force effort of direct incentives. If drivers are plentiful, they can offer cheaper rides and customers can wait less time. This makes the app more appealing to other users. This increased value allows the platform to scale at a lower cost than when it was launched. The fares must be high enough to encourage drivers to accept trips but low enough to discourage price-sensitive riders to use cheaper platforms or public transportation.
To achieve this delicate balance, from a small atomic service to a city-wide self-sustaining service, requires a large war chest. Most new platforms fail at the point where they are scaling an atomic system.
Historical spending on scaling networks has been staggering. Ugbomeh noted e-Tranzit spent approximately N100 million ($540,000 in 2014, when the company was at its most active) for marketing and incentives before closing down. Uber’s global subsidy strategy saw it lose billions of dollars until 2023 when it recorded its first annual net profit over $1.8 billion on a $37 billion revenue. Bolt continues to invest locally: By 2021 Bolt had invested more than EUR50 million ($57.3 million) in Nigeria. Bolt has pledged to invest an additional $107 million in 2023. In contrast, inDrive has pledged over N5 billion for driver welfare in 2024.
Onifade shut down his ride-sharing business after four months. He explained that while attracting the first 100 riders and 50 driver was easy, maintaining them was a constant battle against constant churn on both sides. It was hardly worth it. His startup could not afford the heavy subsidies that riders demanded, and drivers switched to larger platforms. “Even if suddenly I came into the required investments, I will not go into ride-hailing business,” he stated on a phone call.
Platforms use aggressive spending and sustained losses to gain market dominance. Subsidising users and service providers can help them win price wars, and create a powerful network. This strategy can be used to attract customers for more viable ventures. For example, the now-defunct ride hailing service ORide subsided rides from N2000 ($5.5 to N100 ($0.27). To build the user-base for OPay, a leading Nigerian finance app. The goal is to recover these initial losses by controlling the market in the future.
Even for the winner, the road to profitability is long. Bolt has publicly declared it is profitable but only in certain cities and product lines. Uber announced its first full-year profit fourteen years after it was founded in 2009. This was only possible after the company cut its spending and diversified its revenue. It leveraged the powerful network effect of its ride-hailing services to build adjacent businesses such as logistics and food deliveries in several markets.
Ride-hailing presents a compelling contradiction. Its low entry barriers, driven by limited product differentiation and minimal cost for users to switch platforms, make it seem open to disruption. Since it’s difficult to maintain and grow a strong network in a market where there is little to differentiate companies, the competition quickly shifts away from innovation to a long-term battle to see whose runway can outlast others.
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