Upwork: Can value creation spur value capture?

Upwork is a platform that connects freelancers to businesses with specific needs – whether short-term tasks, recurring projects, or full-time contract work. Below I’ll discuss the Upwork platform in terms of the five fundamental properties of networks.

Network Effects

Network effects on the Upwork platform are strong. Specifically, cross-side network effects enhance the value of the platform. As each additional freelancer joins, business looking to hire have more talent options to choose from, and a greater likelihood that someone will bid for their posted work. Similarly, as each new business looking to hire a freelancer joins, the freelancer community has more paid work opportunities to choose from. One could reasonably argue that there are negative same-side network effects, such that as more freelancers or businesses join the platform, competition for their work among peers increases, thereby decreasing the likelihood of getting chosen or “hired.” Net, I think the participants on the platform still benefit by building a larger community, which facilitates more transactions for all. Value is created by providing a means for freelancers to connect with businesses. Value is captured by Upwork on charging fees to participating parties.

Clustering

Upwork’s platform is structured as one large, global cluster, as projects rarely require an in-person exchange. Freelancers can complete most projects remotely, and therefore Upwork is less vulnerable to local incumbents. The lack of clustering also discourages new entrants from challenging Upwork, although many competitors have arisen with various degrees of success. While the lack of localized clustering is an advantage for Upwork, the force has not been strong enough to give it the market share it would like against its peers. Scalability, however, is enhanced by the singular cluster, as Upwork doesn’t need to enter new cities with a specific local strategy the way ride-sharing apps were forced to.

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Disintermediation

Upwork’s biggest risk is that of disintermediation. Once a business finds a freelancer whose work they value, they could easily hire them off-platform for on-going work. Given the fee-structure of Upwork, it’s actually more economical for participants to disintermediate, and herein lies a significant barrier to value capture. Upwork has struggled to implement a fee structure that both achieves profitability and keeps participants on the platform. In order to be successful, they will have to create stronger economic incentives for all parties to transact through the platform, otherwise disintermediation could lead to their downfall.

Multi-Homing

Second to disintermediation, multi-homing is another significant threat to Upwork’s business model. Nothing prevents a freelancer or business from posting the same project on several platforms. Given the prevalence of similar sites (e.g. Thumbtack, TaskRabbit, Fiverr), participants are likely motivated to multi-home to increase the chances of getting work completed. Upwork’s solution has been to charge upfront fees for participants, to make multi-homing more expensive. This has resulted in mixed success and is not a sustainable strategy. Multi-homing increases price sensitivity for participants who have alternate options, and therefore decreases a platform’s ability to capture value. Upwork needs to be thoughtful to avoid a price war with competitors, and instead focus on the quality of the platform.

Network Bridging

Upwork has succeeded in bridging its “connection” network to a “transaction payments” network. Upwork’s initial value proposition was introducing freelancers and businesses in need of labor. It quickly developed supplemental value drivers to enhance the value of its platform. These include payment facilitation, escrow services, and customer guarantees. These synergistic services reinforce the platform value, and work to create customer stickiness. Upwork should continue to identify and build out synergistic services that enhance the value of its platform for participants while bringing in new revenue streams.

While Upwork’s platform creates significant value for its users, it has continuously struggled to capture value to same the degree. One lever to drive revenue is to increase pricing, although given the analysis above, I think Upwork would be more successful if it focused on developing quality-drivers. Specifically, Upwork needs to address the rampant disintermediation and multi-homing in order to drive more revenue. With some creativity and additional investments, Upwork can create a stickier platform that participants are willing to pay a premium for over competitors. This path is the only way that Upwork will be successful in both creating value and capturing value for the long term.