Freelancing success?

Freelancing success?

Freelancer.com is the world’s largest freelancing, outsourcing and crowdsourcing marketplace. The company boasts an impressive 10 million users and 5 million projects. We wonder whether Freelancer.com has a network economy similar to other successful online marketplaces, such as Seek (ASX:SEK), REA Group (ASX:REA) and CarSales.com (ASX:CRZ)?

Freelancer.com is a website that allows users to hire contractors for a range of projects from software development, to marketing, to legal services. This medium has enjoyed success, which management is hoping to capitalise on. We note that this blog is not a commentary on the value of the company – its objective is simply to explore the dynamics of the digital freelancing industry, and how Freelancer.com’s network economy compares with other online marketplaces.

The so-called “network effect” is when a product’s value to the user increases as the number of users of the product grows. Websites such as Seek, Carsales.com, realestate.com and Facebook tend to have a positive feedback loop – the more users a site attracts, the more others will want to use it. Real value from the network effect comes when critical mass is achieved, which is when there are so many users of a service that it becomes too costly for these users to switch to a competitor.

Let’s first explore the network economy of Carsales.com. A strong network economy relies on both buyers and sellers having high switching costs. A buyer in the market for a used car would go to Carsales.com because it has the widest selection of used cars. The buyer can go to alternative sites, but the range and pricing may be inferior.

Sellers also want to post an ad on the website that has the highest addressable market, which makes Carsales.com the most attractive choice.

But what about Freelancer.com? With 10 million users, the site is certainly achieving scale and realising the benefits of a positive feedback loop. But the switching costs for buyers and sellers may not be as high as they are for Carsales.com.

Let’s consider the motives for users that are looking for contractors to complete a project, such as entering data or building a website. Employers would most likely frequent the site that provides the widest selection of contractors, as it ensures that rates are competitive, and also that a specific requirement can be fulfilled. Since Freelancer.com is the largest online marketplace, it is likely that users will switch between contractors, rather than between marketplaces.

But what about the contractors? Having access to a wide market is certainly desirable, but a crowded market can make it difficult to compete, particularly for the players that don’t have an established reviews catalogue. Just think, if two web designers have tendered for a contract, and both are charging the same hourly rate, would you most likely go with the more established player that has thousands of reviews, or the new entrant that has a handful of reviews? In this way, the contractors themselves are developing their own network effects within the market place.

So how can a new entrant compete? Well, it can stay with Freelancer.com and gradually build its customer profile. Or alternatively, it can join another freelancing site that has a relatively immature user base. Freelancer.com only clips the ticket when the user pays for a project to be completed, so there is a minimal cost to the contractor to tender on different websites. The more that these alternative sites achieve scale, the greater the threat to Freelancer.com – so it is in Freelancer.com’s best interest to handle these threats at an early stage, and to date it has typically done this via acquisitions.

Of course, acquisitions have become a necessity for Seek, REA Group and Carsales.com as they strive to maintain a high level of growth while their core markets mature. But these companies are still able to generate organic growth because their marketplaces offer unique products, and hence sticky buyers and sellers (whether it’s looking for a job, buying a house or selling a car, these products can typically only be acquired by one person).

Contractors on the other hand are relatively ubiquitous – there is a large supply of contractors that can enter data or build a website. So it will be interesting to see how reliant Freelancer.com is on acquisitions to grow earnings when it becomes a public company.