T The idea that companies like Uber and WeWork and DoorDash don’t make a profit might come as a shock to the many people who spend a fair amount of their take-home pay each month on ride-hailing, shared office space, or meal delivery.
There is a simple explanation for why they’re not making money. The answer, for finance people, has to do with something called “unit economics.” Normal people should think of it like this: Am I getting ripped off by these companies, or am I kinda-sorta ripping them off? In many cases, the answer is the latter.
Let’s say you buy a subscription to a meal-kit company, which sends you fresh ingredients and recipes to cook at home. You pay $100 a month. The ingredients are tasty, so you renew for the second month. And the third. But by the fourth month, you’ve decided that you’ve learned enough basic tricks around the kitchen to handle roasted chicken or sautéed cod by yourself. You cancel the subscription.
Your lifetime value to this company is $400—or $100 for four months. Since you quit, the meal-kit company has to find the next “you” to keep growing. So they advertise on podcasts. Let’s say that, on average, this company can expect to add 100 new users if it spends $50,000 on podcast advertising—or $500 per new user.
If the company spends millions on podcast ads, its user base and revenue base will grow and grow. Outside analysts will gasp and marvel: This meal-kit thing is on fire! But look closer: If it costs $500 to add a new user, and the typical marginal user—like you—only spends $400 on meal kits, there is no path to profitability. The road leads to the red.
Madison’s $500M taxpayer supported school district plans a substantial tax increase via 2020 referendum.