A little over a year ago, a flock of Birds descended on California cities, bewildering residents and striking fear into the hearts of city officials.
While it may sound like the opening of a Hitchcock classic, as some Twitter users humorously alluded to, the scene is no cinematic thriller. It describes how Bird, the electric scooter (e-scooter) service, flooded a handful of West Coast cities with two-wheelers virtually overnight.
Since its launch in 2017, Bird—along with Lime, Skip, and similar firms in the e-scooter space—has become ubiquitous in cities nationwide, and marks the entry of another player in what’s rapidly becoming a crowded market. The growing presence of e-scooters is a reminder that urbanites across the globe have access to more transportation options than ever before.
That is in large part due to innovations and diversification in the “mobility-as-a-service” (MaaS) economy—a marketplace of companies offering ride-hailing, bike-sharing, and other flexible services powered by mobile technology. Bird and its competitors represent a unique subset of the MaaS market: so-called “last mile services,” which offer a means of transport over the first and last stretches of a user’s journey to a destination not met by traditional transit options.
An interesting question related to this last mile idea is: Given the growing number of options consumers have today, what effect does this have on consumers’ willingness to pay for mobility options like Bird? And what are some of the main factors companies should be weighing in determining their pricing to accurately reflect consumers’ willingness to pay?
What Is Willingness to Pay?
Willingness to pay is a central determinant of economic demand and an important focus for businesses in determining how to price products and services. When a customer’s willingness to pay is higher than the price of a product or service, people will make the purchase.
But prices alone provide insufficient information about how a customer values a particular service and what represents the absolute most they would pay, as explained by Professor Bharat Anand in the online course Economics for Managers. Rather, seeing that one company charges $1 per ride, plus $0.15 by the minute, doesn’t necessarily reflect how much a customer would shell out to hop on an e-scooter.
A consumer’s willingness to pay for the first or last mile of a journey is dependent upon a number of factors. A principal one is how much they value the convenience of an option that eliminates the need to drive a car, walk, or bike. This is known as an “unobserved” factor, which reflects one’s personal preferences and the availability of competitive brands, as opposed to “observable” factors, such as income level, location, weather, and demographic profile.
One angle to the question of willingness to pay concerns shifts in the optics of the product. Consider one of the most infamous industry predecessors to e-scooters: personal transportation vehicles. The Segway, specifically, failed to gain commercial traction—largely due to its exorbitant price tag—and eventually became target practice for Hollywood humor. But as others have pointed out, e-scooter startups are approaching mobility with an entirely new business model: one that is rental-based instead of dependent on actual ownership of vehicles.
This “asset-light” approach to urban transportation is both more accessible to a wider spectrum of residents and has an aesthetic appeal that aligns with a hip, contemporary lifestyle. Mobility companies are signaling to consumers and regulators that e-scooters, and similar modes of transportation, are a proven, sustainable solution to issues like transport accessibility, congestion, and carbon footprint.
That invites another question, though: To what degree is consumers’ willingness to pay for such a service now a function of what could ultimately end up being a fad? More importantly, how do companies reliably set prices without knowing whether their product is popular due to ephemeral trends?
Another interesting consideration in weighing willingness to pay for e-scooters is the future outlook for Bird and its peers given pushback from municipalities. E-scooters’ arrival was engineered in the same way ride-hailing companies, like Uber and Lyft, took urban areas by storm. E-scooter firms’ same “ask for forgiveness, not permission" approach has riled up city governments—many of which have the pain points of sparring with ride-hailing groups fresh in their minds and, in some instances, have banned companies like Bird altogether.
Legality is a unique factor with regard to willingness to pay when you consider:
- Banning e-scooters would dramatically impact customer access to e-scooters and the appeal of their flexibility;
- On some level, stigma from public authorities could serve to enhance the popular appeal of e-scooters as a disruptive and chic mobility option.
The confluence of these factors, and uncertainty around how to weigh them comparatively, illustrates the significant challenge these startups face in their first few years of operation. That being said, their aggressive first-year expansion seems to reflect a strategy less concerned with immediate revenue. These startups are keeping their prices low and scaling rapidly with the goal of reaching a user base that’s self-sustaining—similar to how a communications company or social media platform would strive to leverage network effects during early stages of growth.
But to what degree is e-scooter rental a networked service? Or rather, a service whose value is a function of the number of customers it has? As Anand explains in Economics for Managers, a fundamental distinction between a standard product and a network product hinges on differences in the treatment of willingness to pay. For firms offering the former, features like price and quality define how managers determine the way consumers value a product. For networked products, a consumer’s willingness to pay is tied to the value of the appeal that the product has to other consumers.
Does the fact that all your friends are riding Birds impact your willingness to use the service? In most cases, probably not. But there’s no doubt these services are operating with a “winner-takes-all” outlook. It could also be argued that as more people use e-scooters, the more likely there is to be one available where and when a consumer needs it.
Whether the appeal of e-scooters has long-term potential to fit consumer preferences in what is already a diverse ecosystem of mobility options has yet to be determined. But as reflected in the amount of venture capital money flowing to Bird and its competitors, and their recent initiatives to expand globally, the companies are sure to be a significant player in what is already a diverse market. From the perspective of anyone interested in consumer preferences and how mobility will be priced, that is certainly a market worth watching.
Are you interested in diving deeper into fundamental economics concepts like willingness to pay? Explore our online course Economics for Managers, and learn how you can apply these concepts to critical business decisions.
(Featured image via Nathan Dumlao/Unsplash)
