For many (digital) nomads, having some location-independent work or business is key to sustaining the lifestyle. It keeps the necessary amount of money coming in to pay for apartment rental, food, and travel, while not tying you to one place or employer. One of the challenges that comes with this nomadic style of working, is to find clients, make deals with them, and get paid.
To deal with this challenge, online freelance work platforms have been a great benefit. Sites like Freelancer.com, Upwork, and 99designs enable freelancers to offer their services to clients anywhere in the world; and they allow businesses to tap into a gigantic labour pool to find the perfect fit for their job. I’ve always liked working with oDesk, or Upwork as it’s now called. They have a large database of freelancers, and their web interface allows for easy recruitment and selection.
The oDesk-Elance merger
Two years ago, oDesk and Elance, at the time the second and third largest online marketplaces for freelancers after Freelancer.com, merged to form Upwork. The merger was justified in typical M&A speak: the new company would achieve better economies of scale and provide even better service to customers. In reality the reason for the merger was the same as for so many others: to gain more market power, which could be exploited to seek greater rents.
See, as a small-ish freelance platform you have to go out of your way to provide value to your customers, while keeping prices reasonable. Otherwise freelancers and clients will just go to another platform. No big deal. But as an online behemoth covering more than 50% of the total market, your users have less choice. Clients can’t easily switch to another platform, because there is a much smaller labour pool available. Freelancer’s can’t leave Upwork because that’s where all the clients are.
How Upwork quietly cut back on services
The rewards for the merged company are clear: the ability to charge higher prices and provide
worse more cost-effective service. It’s the same with every other (semi-)monopoly: from your local cable company to Google AdWords. And indeed, since the merger between oDesk and Elance occurred we’ve started seeing signs of Upwork’s rent seeking:
- Since April 2015 Upwork has started sending invoices to clients in the name of their freelancers rather than in their own name. This has made freelancers rather than the company itself legally responsible for those invoices. And it has shifted the burden of compliance with tax and labour laws to the businesses using the freelancer services. In many cases invoices sent through Upwork are no longer compliant with local tax laws, thus making tax deductiblity of those costs problematic.
This has resulted in large savings for oDesk/Elance in risk mitigation and legal costs. How much of those savings have been passed on to freelancers or clients? Eaxactly: $0. Upwork has quietly* cut a chunk of its added value out of its services, and kept charging the same fees.
- In the same month Upwork (still using the oDesk brand name) introduced the option to pay in your local currency. That seems like an excellent added service, until you get your credit card statement and see that the company has added quite a markup to the currency conversion fee. That there would be a cost for this service, and how much, was not made known to customers. It took me many emails back and forth to figure out that the freelance marketplace adds 2.5% to the forex spot rate to convert your currency. If you would use a currency conversion service such as TransferWise instead, the same thing would cost only 0.5%. This is similar to how Ryanair stole millions from its customers. And where does the extra profit go? Certainly not to the freelancers or their clients.
Upwork jacks up its prices
The above two changes are but mild examples how Upwork has started exploiting its market power. It gets worse. On 3 May 2016 Stephane Kasriel, Upwork’s CEO, sent an email to all clients announcing a change in the online marketplace’s pricing policy. And you may have guessed it: it isn’t a change for the better.
- First the company announced it would start charging all its clients an additional 2.75% payment processing fee “to offset high payment servicing costs.” Really? Processing payments is one of the few useful services that an online freelancer platform delivers on a continuous basis and that justify the fee it charges (which was already 10% on top of all work done). So if clients are charged a separate fee for that, it begs the question: what were they paying for in the first place?
- Second Upwork also announced a hike in its base fee structure on top of the extra payment fee. On new contracts up to a $500 value the platform fee has been doubled from 10% to 20%. So if you’re a freelancer, your clients end up paying 28% more** for your services through Upwork than if they would have if you had done business with them directly.
The double markup applies only to the first $500 billed per freelancer-client relationship. But that’s the vast majority of contracts. It’s also the part where a marketplace adds the most value. The main use of a marketplace to both clients and freelancers is that they can advertise their services or needs, select candidates and interviews, and set up an initial working relationship. Once a good working relationship has been established between freelancer and client, the online marketplace becomes superfluous*** (except for invoicing and payment processing, the two services Upwork has cut out of its service package).
What you can do as a freelancer or client
It will be interesting to see what these changes will do to the success of Upwork. With the platform’s current market position, many companies and freelancers will be hard-pressed to leave. The most likely result is that Upwork, like most semi-monopolies, will become more profitable. And those profits can be put to good use to buy up even more competitors, to further increase market power.
There are certainly alternatives out there, but most of them are much smaller, and require more investment of time and energy. This may be worth your while if you have a very specific job in mind. For example, Codeable is a major player in high-end WordPress development outsourcing (although it charges a hefty 15% too). Fiverr is an option for tiny gigs without high quality standards. PeoplePerHour is a small but well-priced platform, where you pay a 15% fee on the first $280 billed, and only 3.5% after that.
Meanwhile there remains one competitor out there that still has a large portion of the market: Freelancer.com. Where they were previously more expensive than Upwork, after the latter’s service cuts and price hikes, Freelancer.com now looks like the general freelancer marketplace of choice. I will start working with them, and I’ll report on my findings after I’ve tried recruiting some freelancers for a few new projects that I’m working on.
As for my existing freelancers: I will encourage them to quit Upwork and start invoicing me directly. It is easy enough to manage freelancers via email and Skype, and I have little reason to keep using Upwork, especially when working with people I already trust. I can make payments at a much lower cost through TransferWise. If many other businesses follow my lead, it may bring back some sense of customer value to Upwork.
* The change was not even communicated to clients. From one day onto the next invoices just looked different, and it required close scrutiny to realize the large legal implications of the change.
** Upwork keeps 20% of the amount the client pays (up to $500), which is 25% of the amount you get. On top of that they pay the 2.75% ‘payments processing fee’, which comes down to 3.34% of the freelancer earnings. Add the two together, and the company charges a markup of 28.34% on top of the freelancer income.
*** For completeness I must add that Upwork has simultaneously cut its fee for client-freelancer relationships above $10,000 down to 5%. That is after the company has already made $1,325 in fees from the relationship, and its added value has all but disappeared.
I am a freelancer on Upwork and I agree with you but the problem is that you cannot move a established profile with portfolio of work and clients’ feedback to freelancer.com now can you? So it sucks for us. Once we get some clients (for long or short) and start a career profile on Upwork (or any other freelance platform for that matter) with some positive feedbacks, we’re kinda stuck with them forever. If only we could take our career profile and portfolio with us and switch to other freelancing platforms. Oh well…
P.S. I hope Upwork atleast adds TransferWise as a payment/withdrawal method soon cause it really sucks when converting to my local currency.
You raise a good point. This is one of the ways in which a network like Upwork can use its market power. The same goes for clients, though to a lesser extent: as a client I also have positive feedback from previous freelancers, which will make other talented freelancers more likely to work with me.
I think there is an argument that you can make to existing clients to switch your contracts to another platform. Normally I would consider that somewhat unethical towards the current platform, but if Upwork is no longer providing satisfactory services at a reasonable price, you have a lot of reason to move. And so do your clients. If a freelancer were to ask me to switch their contract to another platform, and it would also save me on platform fees, I would certainly consider it.
Thanks for the informative article. However, I don’t understand your math: “Upwork keeps 20% of the amount the client pays (up to $500), which is 25% of the amount you get. On top of that they pay the 2.75% ‘payments processing fee’, which comes down to 3.34% of the freelancer earnings. Add the two together, and the company charges a markup of 28.34% on top of the freelancer income.”
Aren’t they taking 20% of $500 ($100) of your money plus charging 2.75% to the client ($13.75)? So if a client is charged $500 for a service, $400 goes to the freelancer and the client is charged $513.75 and they pocket $113.75 – forgive me but math is not my strongest suit.
@Stephen: Thanks for your comment. Indeed the 2.75% “payments processing fee” works out to 3.44% of freelancer earnings, not 3.34%. So it is as you say: if a freelancer makes $400 through Upwork, the client pays $513.75. The $113.75 is a 28.44% markup on the freelancer’s income. Thanks for keeping me sharp. 🙂
You wrote this article last year. Please tell me how was your experience with Freelancer.com?