Figuring out pricing for SaaS software is always hard. Figuring out pricing for a two-sided SaaS marketplace is doubly hard as I have blogged about previously with respect to Angie’s List and marketplaces generally. A recent price change announcement I received from Upwork reminded me of several of the issues.
Upwork
Upwork, as you may know, is the company that resulted from the merger of two freelance labor marketplaces, Odesk and Elance (see here). Upwork is a very useful site for finding freelancers, but has struggled with the same issues all marketplaces do:
- How much, if any, to charge buyers who bring the all-important demand
- What the “take rate” should be from the transaction
- How to keep buyers and sellers from going “off-market” after they have met “on market”
- How transparent to be about the take rate
Upwork’s new pricing demonstrates attempts to deal with all of these issues. Here is the email I received–almost in its entirety.
1. Buyer Fees. Note that Upwork now plans to charge the buyer a payment processing fee. Such a fee is fairly common, though it is more usually charged to the supplier, especially the credit card fee. (By the way, $25 per month for ACH processing is pretty steep.) Either way this establishes a fee for buyers, but does not force them to pay to play– an approach which even Angie’s List recently dropped.
2. Take Rate. Upwork’s take rate has traditionally been a flat 10%, meaning the marketplace took 10% of what the buyer paid before passing the other 90% on to the supplier. As you can see, Upwork is increasing the take rate on the first $500 (to 20%) and reducing the take rate to 5% as relationships grow. This change is designed to better fit with the value a marketplace provides: the introduction. The change also lessens the incentive for buyer-supplier pairs to go “off-market” once they have established a relationship. The new plan reduces the perception that a take rate of 10% forever is unfair. After all, forever is a very long time!
3. Transparency. Elance and Odesk moved to a reasonably transparent model a while back, following the eBay-type precedent. That is, the buyer sees a price that includes the take rate and then the marketplace takes its cut, rather than showing a supplier price plus a mark-up. Transparent, but not in your face! The buyer can easily see what the middleman gets, but is not constantly reminded. Note that Upwork is clear to point out that buyer will always see one rate and Upwork will simply reduce its take to increase the net amount the supplier receives.
The Net Effect of the Pricing Change?
That’s the beauty of “upcoming changes to our fees”. This change is not billed as a price increase–and is certainly not billed as a price decrease. So what is your guess about the net effect of these changes? I suspect if it were a price decrease Upwork would be tempted to market this fact rather heavily–and they are not. I also suspect the company is named Upwork for a reason–as in the prices of work are going Up! The processing fees, alone, are a substantial new addition and based on the shape and nature of their relationships, the sliding scale probably represents a net price increase as well.
Changing prices in an ecosystem is not an easy thing to do, so it will be interesting to watch how the community reacts and how well Upwork manages the changes.
Marketplace pricing is indeed tricky. I find it to be especially so when balancing simplicity (closely correlated to transparency, which Bob mentions) with optimization, which this is a clear case of. Simplicity has some clear advantages, especially in building trust. Yet simplicity often fails to monetize some value-creating scenarios or aspects of the marketplace (in this case the payment). It also alienates some parties where the fee seems misaligned with value (here the decreasing value of paying a fee for transactions with a party you already established a relationship with). This is a clear move towards optimization, in the ways Bob covers well above. My gut says this change will work out (the $25 fee does also strike me as steep though) and increase revenues over time. I don’t think it adds too much complexity. And it decreases the incentive to move relationships offline (Upwork should have a better sense of that based on their data). The trick with such changes is that you can’t make many of them, so for Upwork’s sake let’s hope it goes over well.
Agreed and well put! Thanks Alex.