My 4 Concerns About Fiverr’s Business Model (Tech Strategy – Daily Article)

Fiverr is an Israeli company, so not an Asia tech company per se. But it has a lot of freelancers in developing Asia. And it has a particularly compelling marketplace strategy. So I thought it was worth covering.

First, a bit of background.

Fiverr is a typical marketplace platform for services. But for B2B, not B2C.

  • The primary user group is large and small businesses that buy work.
  • The secondary user group is individuals and small companies that provide work with a pre-defined price, scope and duration.

Basically, the platform is doing matchmaking for freelance services by creating SKUs for lots of specific activities, which they call “gigs”. And Fiverr began with gigs that were $5, mostly in digital services that could be done at a distance (graphic design, etc.). But the platform has since expanded to +200 categories of work and with a greater range in prices.

I’m not going to go through the basics more than that. It is available lots of places. And I have talked about marketplace platforms for services a lot. You can find those in the Concept Library.

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Ok. That said, there are a couple of things I really like about Fiverr’s strategy. And the more I read about the company, the more I like its strategy.

Stuff I Really Like #1: It’s a Platform With a Cheap and Necessary 10x Product.

To get a platform business model functioning, you need lots of ongoing users and engagement. That’s actually pretty hard to do. Especially if you have a mediocre product. You really need something that is so overwhelmingly compelling that lots of people sign up and keep coming back.

The best approach for this is a cheap and necessary 10x product.

A 10x product is something that is dramatically better that an existing service. It’s something people are already doing, so you don’t have to create demand. But your product does it much, much better. AND it also does it much cheaper. Or, ideally, it does it for free. That’s WhatsApp. That’s Zoom. That’s YouTube. All of these were great products that people loved immediately. And they were free.

It’s also better if they are necessary. They are not just something that customers like. Like luxury products. They are something they need and have to have. That is drinking water. Wearing shoes. Hiring accountants. These are not optional purchases.

Fiverr has all of this. It offers a cheap and necessary 10x product.

  • First, Fiverr has a great service that lets them hire freelancers, mostly in developing economies. That is a great product. And it makes their product much, much cheaper than alternatives.
  • Second, it is necessary. Businesses need to hire people to do certain tasks. It is usually not optional.

So for the buyer group, Fiverr offered a cheap and necessary 10x product. That made a big difference in getting the usage needed for a platform and a network effect.

Stuff I Really Like #2: It’s “Free Money” for Sellers.

Giving stuff to consumers for free is really powerful. It just works. You can’t do that as much in ecommerce but making stuff cheap is pretty good too. Airbnb is a lot cheaper than hotels in the US and Europe. And freelancers in India are a lot cheaper than hiring locally in the West.

The merchant version of free is “free money”. This is when a business can make additional money with no additional costs by using the service. A restaurant that is staffed and open but only half full of customers can start taking orders from Grab. It can use Grab to make money with its slack capacity. So those extra orders are basically free money for them. If you want to get merchants to use your service quickly, give them a way to make extra money with no extra work or costs.

Fiverr has this. Individual freelancers and small firms can go on Fiverr start making extra money. Their only real cost is their time. And if they are not operating at full capacity, then this is free money. Big surprise, lots of them signed up very quickly.

As a general rule, free stuff for consumers and free money for merchants are both really good.

Stuff I Really Like #3: It is a Global Platform With Global Network Effects.

Very few platform business models are truly global. Or have global network effects. A global platform is when users in one part of the world are mostly interacting with users in other parts of the world. So TikTok is not really a global platform. As Indonesian viewers are mostly watching videos made by content creators in Indonesia. And Brazilian viewers are watching videos made in Brazil. And so on. It’s more multi-local than global.

But there are a rare few platforms that are truly global. Payment networks like MasterCard and Visa are global. So is PayPal. Hotels and accommodations for travelers are, by definition, global. So Expedia and Airbnb are global platforms. The interactions the platform is facilitating are global.

And this can mean global network effects, which are next to impossible to copy. The more accommodations Airbnb has in Brazil, the more valuable the service is to travelers everywhere. And vice versa. You also have a massive chicken-and-egg problem where to get into this business, you have to have a pretty much global network of hotels from day one.

Fiverr has a global platform and network effect. That is a big deal. In fact, its more compelling services are those that connect Western buyers with developing economy freelancers.

A Few Last Things I Like About Fiverr.

The above three things are particularly powerful attributes to have in a business. They are rare. That Fiverr has three is impressive. But there are also some other less powerful things I also like about Fiverr.

First, it has no lower cost or free substitutes. External factors, like the presence of low cost substitutes, often determine the unit economics of a business. This is Uber’s problem. It has a powerful competitive position but there are cheap substitutes. You can also just take a bus or metro instead of an Uber. That limits the economics.

Well, low-cost freelancers from around the world are probably the lowest cost option for getting work done. AI and software tools may end up being lower cost and free substitutes one day. But today, international freelancers are usually the lowest cost option.

Second, Fiverr was an early mover. Timing is a big deal in business. And it is critical for the emergence of new platform business models.

Third, the interactions between buyers and sellers are long-term. This isn’t like a dating site where people use it for a while and then leave. This is closer to Facebook where people connect with the friends and then stay on the platform forever. That’s great.

And finally, the platform has direct relationships with both the buyers and sellers. Most of their traffic is probably not coming from Facebook or Google (like it does for Expedia). It is closer to Airbnb where the vast majority of the traffic is coming directly to the website or app. That’s good.

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However…

Stuff I Don’t Like About Fiverr.

Just a couple of things to point out here.

One big concern is multi-homing. It is really easy for freelancers and businesses to use multiple freelancer apps. And they are doing that for sure. This space will likely not consolidate to one global app.

Second, it is easy to move off-platform. Once you find a freelancer, you just hire them directly for repeat, ongoing work. This is a big problem with freelancer sites in China.

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Ok. That said. Let me (finally) get the 4 questions I think will likely determine the trajectory and value of Fiverr longer-term.

Question 1: How Much Will Work Transform and How Big is the TAM?

You can see a classic platform strategy in Fiverr. They focused on a small, simple and discrete unit for the core interaction (i.e., $5 gigs). This is like how Jeff Bezos initially focused on books for ecommerce. These small, simple transactions scaled easily and got the platform going. If this is about the digital transformation of work, then a $5 gig is about the smallest unit of work.

But this is going to evolve and develop. Just like how book sales led to ecommerce. And how it slowly transformed retail sector by sector. Could this do the same via freelancing? Could it go from simple to complicated services? From remote to local services? From services to employment itself? Could it eventually transform the nature of work?

It’s a really interesting question.

What Fiverr is doing looks a lot like the unbundling of employment. Aren’t jobs just a bundle of discrete work activities? Fiverr is letting companies and workers do work in small discrete units.

It reminds me of how Steve Jobs started selling individual songs on iTunes. And he effectively unbundled the CD, which is a collection of songs. However, Spotify later came along and re-bundled lots of songs under a subscription model. And Fiverr is similarly starting to offer subscriptions. Instead of buying one gig for $5, you can buy 50 of the same type of gig. Or you can buy an unlimited number of certain gigs per month.

So is the Total Addressable Market for Fiverr the current freelancer market?

Or is this really about unbundling work and employment? And then rebundling in new ways?

And we can take this further. Because employment is not just work. Employers also provide a location to work at. And a team to be part of. They usually provide health insurance and pensions. And so on.

  • Couldn’t Fiverr bundle freelance gigs with a location to work at? Like at a co-working space?
  • Couldn’t Fiverr start to bundle freelance workers into teams that collaborate? Note: They are already launching a collaboration / coordination platform.
  • Couldn’t Fiverr bundle gigs with health insurance? Or a pension 401k contribution?

You do get the sense that Fiverr is at the beginning of a potentially large transformation of work going forward. We are likely only seeing the very beginning.

So what is the TAM? How far could this go?

Question 2: What Are the Likely Regulatory Actions?

If you are changing employment, governments are going to get involved. And if you are putting lots of people out of work, it will probably happen fast. Uber, which is in local services, put lots of taxi drivers out of work and governments reacted almost immediately. We already see legislation in the UK and California around the idea of gig workers. Unions, in particular, are very active on this question

Regulation is a big question for Fiverr going forward. But it is beyond my expertise.

Question 3: How Will Management Behave?

Coke and Pepsi are dominant and they don’t fight much. They certainly don’t get into price wars. So they both make lots of money. They do compete in areas like marketing spend. But that is a somewhat friendly-type of competition. And it has the added benefit of further crushing smaller competitors with their economies of scale.

The art auction giants Christie’s and Sotheby’s similarly dominate and don’t fight very much. They have historically done this by focusing on different areas of art. They sort of avoid each other. Although the Chairman of Sotheby’s did end up going to jail for price-fixing. So you can be too friendly with your competitor.

I put this all under the category of management behavior. Sometimes a few dominant companies get along and profit. Sometimes they fight. Note: in China, they usually keep fighting forever.

Will Upwork and Fiverr viciously compete? Or just sort of get along?

Right now, Fiverr is doing a lot of marketing spend. But this is probably more about growing the overall market, as opposed to taking market share. And these competitive questions usually play out when the market is more mature and companies turn their guns on each other.

But it will come down to the behavior of the management teams at the giants.

Last Question: Will This Business Ultimately Have Really Attractive Economics?

Hamilton Helmer’s 7 Powers is about identifying truly exceptional digital companies that create lots of value for shareholders. And that means companies with three things:

  1. A large market with lots of growth.
  2. A powerful competitive position within that market.
  3. Attractive unit economics (relative to the cost of capital).

I like #2 for Fiverr. And this factor is most of what I focus on.

I said #1 (i.e., the TAM) is the biggest unknown with this company. It depends how much of a believer you are.

But I think we really don’t know #3 yet. We don’t have that great of a picture of the ultimate economics. Fiverr is still flooding money into marketing. The operating leverage hasn’t played out yet. Regulations could change the economics significantly. And we don’t know the management behavior versus their main competitors.

So we really don’t know what the eventual unit economics will be. And perhaps the comapny will just keep evolving its service perpetually. So it may always be a moving target.

Today, Fiverr has a 25% take-rate. That is a good sign. And there is every indication the unit economics will be attractive. So we’ll see.

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That’s my take.

There is a lot to like about this company. That it was founded by a serial entrepreneur is not surprising. Somebody really knows what they are doing.

Cheers, jeff

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Related podcasts and articles are:

From the Concept Library, concepts for this article are:

  • Platforms: Marketplace
  • Network Effects

From the Company Library, companies for this article are:

  • Fiverr

Photo by Brooke Cagle on Unsplash

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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