As a whole, our family now consists of three groups: parents, toddler, and newborn.
My wife and I, as parents, are the most “mature” of the bunch. Our needs are few (sleep, coffee!) and our “services” cover a range of general needs for our boys. We feed them, bathe them, clothe them, play with them, and, broadly speaking, provide the structure they need to grow and develop.
On the other hand, our first born son, the toddler, has his own specific needs. He knows exactly what he wants and he goes directly to the source to get it. When he wants to watch car videos on the iPad, he says, “vrooooom” and pulls up videos on YouTube. When he’s hungry, he goes to the cabinet and brings us food that strikes his fancy at the moment (usually marshmallows, peanut butter, or a box of mac and cheese). When he needs his diaper changed, he grabs the seat of his pants and says, “poop” (hysterical).
In our family, the toddler is a niche.
The newborn is also a niche, but his needs are much more “full-service” than the toddler at the moment. He can’t walk, talk, sit-up, hold a bottle, or even burp on his own. He needs for us to facilitate all the time.
Similarly, the freelance marketplace industry, as it currently exists, can be broken down into three market segments: general, niche, and full service. We'll describe each segment next.
General freelance marketplaces are the largest, most mature platforms. They serve thousands of functions including web development, design, marketing, content development, management, and operations. As the industry’s first movers, these marketplaces established brand recognition early, growing their user base enough to attract investors to the party.
Information about industry first movers: general freelance marketplaces.
Over time, funding enabled the largest industry players to build platforms capable of satisfying a huge range of client and freelancer needs, thus attracting more growth, followed by more funding and, ultimately, more growth. This funding/growth cycle has offered general freelance marketplaces many “blessings”, but has also created some “curses” as well:
The Best of General Freelance Marketplaces:
The Worst of General Freelance Marketplaces:
Eventually the growth and maturity of general freelance marketplaces created a cycle (see figure 1) that paved the way for niche and full-service competitors to emerge.
General Freelance Marketplace Competitors
Based on the cycle identified in Figure 1 and the material percentage of startup clients working through the worst of general freelance marketplaces (58% on oDesk in 2012), one can easily understand how entrepreneurship has been a driving force behind the growth in niche marketplaces.
Online dating followed the exact same progression. What started as an oligopoly between a handful of large, general players like Match.com and eHarmony.com, demand for more specialized dating options eventually spawned a series of niche dating websites like ChristianMingle.com, FarmersOnly.com, and OurTime.com.
For the most part, the structure of each dating website is the same – they match available parties through algorithms based on data entered into a profile. As we’ll outline momentarily, niche marketplaces also follow in the structural footsteps of their larger, more mature competitors. They do this to keep a consistent user experience while offering access to higher quality talent as a differentiator.
The quagmire for niche marketplaces, however, is scalability – also known as the “chicken and egg” conundrum. Niche freelancer talent is attracted by the supply and availability of projects on a platform yet clients need to know there’s enough talent on the platform to make posting a project worthwhile. Such a problem is one of the “curses” that accompany the “blessings” of being a niche competitor:
The Best of Niche Freelance Marketplaces:
The Worst of Niche Freelance Marketplaces:
Niche Freelance Marketplace Competitors:
MBAs (as Consultants)
Just as both of my sons fulfill a “niche” within our family (toddler and infant), freelance marketplace niches can be categorized by specialty as well as service orientation.
Piggybacking off the demonstrated success of niche freelance marketplaces, full-service freelance marketplaces jumped into the industry landscape in 2012/2013. The primary reason, which we will cover in detail in the fifth blog in the series, is “information asymmetry”.
In short, Information asymmetry is miscommunication. Such miscommunication can take many forms:
Full-service freelance marketplaces attempt to combat information asymmetry by screening talent and/or projects and providing hands-on consulting and project management services.
As such, full-service freelance marketplaces have a slightly different revenue model than traditional “contract medium” marketplaces (“contract medium” marketplaces include general and niche platforms that facilitate connections between buyers and sellers of skill for a fee based on total project cost).
In general, clients contract projects directly with the full-service company. The company will then assign the most relevant pre-vetted freelancers within their database to the project. From there, clients and freelancers collaborate and communicate with one another through the platform’s infrastructure, often with the help of a project manager provided by the full-service company. When the project’s end product has been approved by the client, the full-service marketplace will invoice the client and freelancers will invoice the full-service marketplace.
Full-Service Freelance Marketplace Process
This differs from the traditional “pass-through” model of “contract medium” marketplaces, enabling full-service marketplaces charge higher prices and generate higher revenue margins per project.
"Contract Medium" Marketplace Process
The Best of Full-Service Freelance Marketplaces
The Worst of Full-Service Freelance Marketplaces
Full-Service Freelance Marketplace Competitors:
Armed with knowledge about the three main types of freelance marketplaces, now we can dive deeply into the competitive landscape.
Throughout our research process, K4DM identified over 70 competitors and thoroughly studied 18 of them – six for each group. From this research, we were able to pull quite a bit of data about the industry at large and each individual market segment (general, niche, full-service).
The bubble chart above outlines the size and level of service of each competitor we studied. Each bubble tells you three things:
As you can see in the chart, general freelance marketplaces tended to be bigger yet scored lower on levels of service. Conversely, niche competitors tended to be smaller but they offered higher levels of service. This is the difference in the market maturity of general and niche marketplaces, visualized.
While smaller niche players certainly have a lot of room to grow, I believe there will be an inflection point where user growth begins to diminish service quality. It will be interesting to see how each freelance marketplace decides to scale accordingly. Will they curtail their growth to maintain a project price premium or will their growth aspirations (likely driven by funding sources) cause service-oriented marketplaces to follow the maturity cycle referenced in figure 1? Only time will tell but my guess is we will see a sharp divergence in business strategy – some will morph into giant entities foregoing service in lieu of users, others will choose to stay small and build a brand based on rock solid service. A select few will likely be acquired by general marketplaces, thus tapping into the their parent’s resources while continuing to operate under their full-service brand.
In 2013 we already got a glimpse of such M&A activity with Elance and oDesk announcing their merger. Both companies said they will continue to operate as individual brands. Pundits claim this is unlikely – they expect Elance to emerge as the top dog, even if eventually the combined entity does business under a different name. An alternative option would be for oDesk to operate as the “enterprise” side of the marketplace business. One key differentiator of oDesk is its Payroll platform which is a place for businesses to manage W-2 employees. Offering flexibility between 1099 workers and W-2 employees could offer large enterprises an attractive option, one that only the combined Elance/oDesk platform could offer.
Before we dive into what differentiates each competitor, we’ll start by describing the twelve primary features we consistently encountered through our research process.
As you can see from the aggregated results of our study, virtually every marketplace offers some sort of payment service feature. “Contract medium” marketplaces, which we described earlier, generally offer some sort of escrow service by which clients deposit funds in advance of project completion, only to be released upon confirmation of a completed milestone. This service is offered to give freelancers confidence they’ll be paid so long as they do their job. Similarly, escrow services are meant to give clients confidence that freelancers can’t take their money and run without completing a project.
Dispute resolution, a feature included in 72% of marketplaces studied, is another backstop for clients and freelancers to ensure both parties treat each other fairly.
Besides the practical utility of project management/collaboration platforms – of which 83% of marketplaces offer – historical activity can be tracked through said collaboration platforms which can be used during a dispute resolution process.
Some full-service marketplaces did not include dispute resolution in their terms of service because there is no direct contractual transaction between a client and freelancer. Because freelancers in full-service marketplaces are 1099 workers (the marketplaces contracts freelancers on their clients’ behalf), there is also less risk for disintermediation (receiving payment outside the marketplace).
Disintermediation clauses were included in 77% of the marketplaces we reviewed. Most had a perpetual exclusivity clause, meaning freelancers and clients that originally connected through the marketplace can’t ever conduct work outside of it. 24 months was a standard exclusivity period when a timeframe was included. Additionally, penalties for disintermediation are typically written as the greater of fees lost plus legal and administrative costs incurred to settle the dispute or a monetary amount ($2,500). Beware, though: in TopTal’s case, the penalty for disintermediation is $30,000.
Please take a look at the following three charts to see how features were broken down by company within a particular group:
General Freelance Marketplace Feature Comparison
Niche Freelance Marketplace Feature Comparison
Full-Service Freelance Marketplace Feature Comparison
The freelance marketplace industry is thriving. There are now more than 70 competitors, each of which can be classified into one of three groups: general, niche, and full-service marketplaces. General marketplaces are the largest players in the industry. They connect buyers and sellers of thousands of skill sets. As general marketplaces have grown in size, competition and high pricing power for clients have contributed to bidding wars that have catalyzed a new breed of marketplaces: niche marketplaces.
Niche marketplaces, as the name implies, focus on a specific industry or skill set. Most niche marketplaces started in the wake of the success of general marketplaces so their features mimic those of the more mature players. There are some exceptions, though: full-service marketplaces, the third industry classification, are niche marketplaces that offer hands-on structure via screening, project management, and consulting services.
While gaining users is a problem for new industry startups – a problem people within the industry have called the “chicken and egg” conundrum – barriers to entry are relatively low. Increasing numbers of competitors entered the market in 2013. More are expected in 2014.
As competition has spurred industry growth into newer, more service-oriented models, other models have emerged, too. Crowdsourcing is one of them. “Tasking” is another. Curious to learn more about such alternatives to freelance marketplaces? Check out the next blog in our series at K4DM.com!