Upwork, Fiverr, & Freelance Marketplaces

In Practise Weekly Analysis

Why is this article interesting?

In Practise reflects on some of the key lessons and major questions explored in one or more interviews each week


This week we interviewed the Former COO of 99designs, a vertically-focused competitor to both Upwork and Fiverr, to discuss the dynamics of freelance marketplaces.

Beyond the typical dynamics, we think Upwork and Fiverr are particularly attractive internet marketplaces for three reasons:

  1. Aligned incentives of a pure transaction model
  2. Favourable supplier contribution margins
  3. Large enterprise opportunity

Pure Transactional Marketplaces

Upwork and Fiverr are transactional marketplace models. Tranactional marketplaces exist to facilitate a connection between suppliers and customers to exchange value. Given net revenue is a percentage of the gross transaction value, Upwork and Fiverr are incentivised to reduce friction between supply and demand and increase the value that is exchanged on the platform. This aligns incentives between the marketplace, suppliers and buyers.

Ad-driven marketplaces are different. In the UK, real estate agents advertise properties on Rightmove to drive leads from homebuyers. Rightmove gets paid a fixed advertising fee per month based on the number of properties listed, not sold. Rightmove gets paid regardless of conversion. The company earns ~70% EBIT margins and has shown little interest to add more value in the transaction unlike Zillow. The high profitability and scale advantages can lead ad-driven marketplaces to lose touch with the end customer experience. We prefer pure transactional marketplaces that are closer to the end-transaction and can increasingly add value to both sides of the exchange.

Supplier contribution margins

For any marketplace to be sustainable, all sides of the ecosystem need to be healthy. The core transaction on Upwork is suppliers selling labour hours in exchange for dollars. This exchange needs to add value to both suppliers and buyers. The value a transactional marketplace can capture is typically a direct function of the supplier contribution margin. Upwork generates leads and facilitates the transaction for individual freelancers selling high margin products (time). Compare this to food delivery marketplaces with restaurants and drivers that all take a piece of the pie. Or even Amazon 3P merchants that sell ~40% contribution margin widgets. Amazon had to build a physical FBA network and advertising infrastructure to grow the take per supplier. At scale, the relatively high contribution margin of Upwork’s freelancers could provide greater long term pricing power in the core marketplace business.

Upwork currently takes ~13% of the gross transaction value only from the freelancer whereas Fiverr has a 5% buyer fee and a 20% take rate from the supplier. This difference is mainly because Upwork serves a larger customer base than Fiverr. Around 30% of Upwork’s buyers spend over $5,000 per year compared to over 40% of Fiverr’s buyers spending less than $500. One other interesting statistic is ~15% of Upwork’s buyers spend over $1,000 per year on the platform. This is a strong cohort of SMB’s that are effectively 'enterprise' accounts with net dollar retention above 100%. The fragmented freelancer base, high alternative marketing cost for suppliers, high supplier margins, plus the huge value-add to core SMB cohorts presents Upwork with an opportunity to increase their take rate over time. Enterprise is a slightly different ball game.

Enterprise Opportunity: marketplace + SaaS

This quote stuck out from our recent interview: 

“Horizontal marketplaces create a moat or a competitive advantage in that customer acquisition engine, which then just allows them to make more money and then have the opportunity to invest in some other vertical areas.”

Horizontal marketplaces, like Upwork or Amazon, have a customer acquisition advantage over vertically-focused competitors because of the wider product selection. Upwork can afford to spend more acquiring SMB customers relative to 99designs because they offer more services which drive conversion, AOV, and LTV. The adjacent product opportunities is a long-term growth tailwind for most marketplaces but more importantly it cements the customer acquisition moat over vertical players.

In Practise has used Upwork for services such as transcription, audio and video editing, and other design tasks. The wide selection has formed a purchasing habit at In Practise. Upwork is now the first place we go to complete any non-core task. Our gigs are relatively low value but the frequency is high. We have downloaded the mobile app and are a perfect source of organic, direct traffic for Upwork. For the core SMB customer base, although there is natural churn, the LTV is attractive because low value, higher frequency purchasing is habitual and the traffic is organic.

The same person at In Practise also purchases all our services on Upwork. One individual manages our Upwork account and sources freelancers across transcription, marketing, and other jobs. This is similar to a consumer user journey on a marketplace like Amazon. We might be searching for a book but end up purchasing a phone charger and toothpaste for example. The user journey and the buyer are the same. In these cases, widening the selection of services on Upwork for SMB’s and consumer products on Amazon both drive purchasing frequency, AOV, and LTV. The added products are truly adjacent.

However, for enterprises, added products are not truly adjacent. The buying processes and value of a wider selection is different for enterprise buyers. If you’re the CTO of a Fortune 500 company, you’re looking for top engineering talent. You want the best programmers you can find. You also don’t get paid to source designers or back office staff. The incentives are different. Adjacent freelance services are worth more to an SMB than an enterprise customer. This is where vertical marketplaces or traditional agency partners could have an advantage over horizontal offerings. This is how enterprise clients typically use 99designs: 

A lot of times, enterprises had repeat work that they didn’t want their internal design team spending time on. They wanted their internal design team to be spending time on something else, so they would come to 99designs. Another example might be that they had this big project that wasn’t really in the wheelhouse of their existing creative team, so they might come to 99designs for that. We would have marketing managers or creatives in big companies, who might use 99designs to get things done faster than they may be able to do via their traditional processes. If you are an enterprise and you are looking for a great solution, the horizontal solution needs to be pretty great or you are going to go with the vertical solution.

Upwork’s Enterprise solution is a B2B SaaS product integrated with a freelance marketplace. It offers consolidated billing and invoicing, compliance and contract solutions, and, most importantly, ‘bring-your-own-talent’ capability. This allows clients to integrate Upwork’s marketplace of talent with their own freelance workforce and other traditional agencies. The Microsoft partnership with Upwork shares insight into the level of integration, training, and workflow changes required to sell such services to large organisations.

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