Freelancer's fleas

Behind an ingenious concept is an unremarkable business.

Why pay $50 per hour for a local website developer when you can pay $5 for one in Bangalore. That's the premise behind Freelancer, Australia's wage arbitrage website.

Freelancer.com provides access to a pool of talented labour in low wage countries, from website and app developers to graphic and computer-aided designers. The attraction to employers in high wage countries is the prospect of big cost savings.

But despite an ingenious concept, Freelancer hasn't been a windfall for its investors, as it continues to bleed red ink and display concerning declines in gross payment volume (which is a measure of the total work facilitated by the site). What gives?

You get what you pay for

Opinions seem to be polarised on the quality of Freelancer's work. I've used it a few times and I learnt two things.

The first was that you need to be very careful about what you use it for. I found that competitions worked well for simple graphic design work, but it was a complete disaster for website development, as language and cultural barriers proved to be big stumbling blocks.

In selecting Freelancer I was making the same mistake as an Uber driver that ignores depreciation. Freelancer's low hourly rates looked attractive but they overlooked the cost of my time spent selecting and managing the freelancer. The project wasn't so cheap after all on a fully costed basis.

If my experience is representative of the general experience (and I concede there's a low chance that it is) then Freelancer's (ASX:FLN) cost savings aren't as strong as they appear and its usefulness is highly limited.

Long term is best

Freelancer's competitors seem to appreciate the hidden costs more than it does. 

As it takes time to select and manage a freelancer, it's most efficient when an employer uses one for long, or repeat, jobs. That way the selection costs can be amortised over a large hour base (which makes the total hourly rate more competitive).

Freelancer's 13% take (with 3% from the employer and 10% from the freelancer) offers no incentivisation for long-term employment.

By contrast, its direct competitor Upwork reduces its take from 10% to 5% for cumulative work above $10,000. By doing so, it's incentivising long-term use and reducing those hidden costs for its users.

Limited use, many alternatives

Freelancer seems to show some of the hallmarks of network effects – as the value to employers increases when more freelancers offer their services, and vice versa – but it's economics suggest otherwise.

The central issue is that Freelancer doesn't have a ‘lock' on its users and the pricing power this brings. Businesses like REA Group (ASX:REA) generate exceptional financial results because they display almost every property for sale in Australia. A buyer or seller has little choice but to use it.

Freelancer, on the other hand, lists a tiny fraction of the total vacant jobs and employers are only willing to use it for a fraction of their needs.

This inability to corner its market severely limits its earnings power – as well as our interest in the business.

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Disclaimer
Intelligent Investor provides general financial advice as an authorised representative under the AFSL held by InvestSMART Publishing Pty Limited (Licensee). InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and funds and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share.

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