Keeping Your Users On Platform
Today I got an email from Upwork with “Important Updates to [their] Terms of Service”. Normally this is one of those emails that I delete without opening. But I am so glad that I did. Because they’re addressing one of the primary issues a digital Marketplace faces - disintermediation or “platform leakage”. And I’m curious to watch from the sidelines how it plays out.
Platform leakage is when a platform’s consumers and producers complete a transaction outside of the platform.
Why is platform leakage bad?
Because the marketplace isn’t getting their “take rate”, or the commission taken for each transaction. They are doing the hard work of bringing the Buyers and Sellers together, but they aren’t monetizing the actual transaction.
I’ve used Upwork a handful of times. In two of my most recent negotiations, both potential freelancers offered to work for a significantly lower price if we completed the transaction “off-platform”. Turns out that Upwork has a take rate that’s upwards of 20%. So 1/5 of the price I’m paying to the freelancer is going to Upwork. High enough that some users are doing a cost-benefit analysis for themselves and are willing to take the risk of working off-platform.
How do you prevent disintermediation?
Sounds obvious, but. . .
The best way to keep users on platform is to provide them enough value that they want to stay on platform
Upwork offers value in a number of ways:
Easy tools to communicate through their platform and manage the workflow
Ability to manage a team of freelancers
For larger companies, they offer data, IP, and privacy protections, plus optional compliance services
Handle payments - providing reassurance to each side that either they’ll get paid for their work or that they’ll get the work they paid for; with advanced features for enterprise companies
Despite all this value, both sides are still finding it enticing to transact off-platform.
So what did Upwork do? They updated their Terms of Service.
At a recent talk I gave on marketplaces, I spoke about how your Terms of Service are your product, especially when building a marketplace. It may seem like mere legal schmegal, but these are the rules of engagement. They define how your product actually works, and as such, informs how you design your product.
Your Terms of Service (or SOP, or Terms & Conditions) should be clear and explicit to everyone within the company and to everyone engaging with your product.
Upwork announced two interesting changes to their TOS (summarized):
Any unsolicited contact off Upwork or attempts to transact off-platform are a violation of their terms of service and can be removed from using Upwork.
They are enabling relationships to “graduate” from Upwork via a Conversion Fee.
Will these changes actually work to prevent platform leakage?
Hard to say. But these are big changes and actually have big implications, especially the second one.
By allowing users to “graduate” off Upwork’s platform, they are essentially admitting that they don’t have a robust long-term solution for companies and freelancers that work together frequently and over a longer period of time. It’s clear that it doesn’t make sense financially for the two parties and kudos to Upwork for finally admitting that. It will be interesting to see if they are able to actually enforce the conversion fee.
I’m interested to see how they communicate these changes throughout their product and what this does to their stock price over the coming months.
We saw a small uptick (after a long decline over the last 6 months), so perhaps this is a step in the right direction? Time will tell and we’ll keep an eye on it here.
