Upwork, Fiverr, & Freelance Marketplaces

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.