Who Should Price a Gig?

Arriving at Boston’s Logan International Airport after a tiring journey, Mia opened the Uber app to find a ride home. Her relief at seeing the message “Your Uber driver is arriving in 3 minutes” was short-lived because the driver canceled. In the next 30 minutes, half a dozen Uber drivers accepted her ride request, then canceled, before one eventually arrived. What was happening?

Uber, like many platform companies, needs to efficiently match service providers (drivers) and customers (riders). To do so, it must ensure that pricing is competitive enough for riders to choose the service and for drivers to have the incentive to deliver it. Mia struggled to get a ride because Uber had started providing more earnings transparency for drivers by allowing them to see their expected compensation and route destinations before picking up riders. A change intended to benefit drivers had a significant downside for riders: More drivers began canceling rides they deemed unprofitable.

The question of who sets prices, and what discretion other parties in the transaction have to alter them in order to achieve mutually beneficial outcomes, is complex and nuanced for platform operators. In the case of Uber, the platform sets the price for the ride, and though drivers can opt out if their earning potential is unattractive, both drivers and riders have no flexibility for proposing different pricing. It’s one of the drawbacks to having the locus of control primarily in the hands of the platform provider.

While algorithmically determined prices set by the platform operator are common among ride-hailing and food delivery services, other kinds of platform businesses allow service providers or customers to set prices. Fiverr, an online marketplace that matches high-skilled service providers with customers for tasks such as programming or graphic design, lets freelancers name their rates. In contrast, Temper, a Dutch platform for shift work in hospitality, retail, and logistics, lets customers (such as restaurants and shops) determine what the gig pays.

Controlling all pricing can lead to unintended consequences for a platform, as the Uber example shows, but allowing other stakeholders to set prices can also have drawbacks. For example, Ring Twice, a Belgian platform business that offers a variety of household services, such as gardening and babysitting, assigned pricing control to customers. It turned out that customers knew what they wanted — but not necessarily how much time and effort a specific task would take. Allowing customers to set prices resulted in fewer matches because many customers offered lower payments than service providers were willing to accept. Fewer successful job matches meant lost revenue for the platform.

Granting price-setting control is a major strategic decision that ultimately determines value creation and capture and establishes the power dynamics between the platforms themselves, service providers, and customers. Creating a scenario where all three stakeholders find the pricing model sustainable and beneficial is the key challenge that platform leaders face. To help leaders work through this decision, we offer a framework for understanding the key trade-offs of different platform price-setting approaches. Beyond economic considerations, we emphasize the need for managers to anticipate power dynamics and adopt hybrid approaches to mitigate them. (See “Pricing Dynamics on Gig Platforms.”)

When Platforms Call the Shots

A platform can benefit from numerous advantages by retaining price-setting control, especially in certain segments. The practice is prevalent in ride-hailing, food delivery, and parcel delivery, where services are fairly standardized, volume is high, and logistics rapidly gain complexity with scale.

By retaining control, platforms can optimize for efficiency, particularly when they serve a large number of customers with similar needs. To set optimal prices, platforms leverage the large amount of transaction data they collect. Consider the Finnish platform Wolt, recently acquired by DoorDash, which offers food delivery, among other services. Wolt relies on parameters such as a courier’s distance from the restaurant, food preparation time, and distance from the customer. Using this information, it advises couriers on the best routes to take and provides relevant extra information (for example, building entrance locations) to ensure swift delivery — and time savings. As a Wolt manager explained to us, the platform’s interest in efficiency aligns with the couriers’ desire to take the optimal route, hence standardizing the delivery process as well as prices makes sense.

Controlling prices also allows the platform to maximize revenue by making quick adjustments based on market conditions: When demand is high, ride-hailing and delivery platforms commonly increase prices in real time. Platforms can also experiment with different pricing strategies.

Finally, by controlling the price, a platform provider can offer discounts and promotions to attract and retain customers. It may choose to offer personalized pricing based on customer behavior, preferences, and purchase history. Amazon, for example, utilizes such data to set dynamic pricing for certain items. When a customer views a product on Amazon, they may see a price that is different from what another customer might see for the same product. This is because Amazon’s pricing algorithms take into account the customer’s browsing and purchasing history, their location, and other variables to determine an individualized price that maximizes the likelihood of a purchase.

However, there are trade-offs to platforms retaining pricing control, particularly when it comes to the impact on power dynamics between stakeholders. In particular, service providers may decline to accept jobs if prices are set too low by the platform, or they may struggle to attract customers if their prices are set too high. In both cases, the service provider has less incentive to engage with the platform. A study examining posts to a forum for Uber drivers in U.S. cities found that they discussed intentionally turning off their apps to appear unavailable in order to get the algorithm to implement higher surge pricing designed to incentivize drivers to get on the road.1 The drivers essentially had to game the system to get the prices they wanted, reflecting — and exacerbating — a lack of trust between providers and the platform.

Platform-controlled pricing also goes hand in hand with a standardized menu of services that might not adequately meet some customers’ needs. They may use the platform for finding a service provider and then arrange subsequent interactions off the platform. A recent study indeed found that providers’ dissatisfaction with platform rules and fees, as well as customers’ desires for more personalized services, are among the main factors contributing to disintermediation.2 When customers and providers are dissatisfied with platform-imposed rules, they are less likely to transact on the platform (lowering revenues), and the platform’s reputation may suffer among all disaffected stakeholder groups.

Putting Service Providers in Control

There are also advantages when service providers are in control of price setting — common practice on freelance marketplaces such as Upwork, Toptal, and Malt. Granting this autonomy provides a competitive and flexible pricing environment, which is particularly advantageous for customers seeking specific capabilities for unique project needs. Similarly, providers can more effectively monetize their skills or unusual talents.

When providers set prices for a project, they can account for their costs, the effort they are willing to exert, and the service quality they can offer — information that the platform doesn’t have but needs in order to set an adequate price. Price setting also lets service providers exercise their entrepreneurial freedom and adjust prices based on intangible factors such as their personal interest in a particular project. For example, they might charge less to land an assignment that will help them build valuable expertise, according to a manager at Malt, a European platform for services such as consulting and software development.

When service providers are able to set their own pricing and offer differentiated services, the platform can meet long-tail demand for niche offerings. Helpling, a platform for housecleaning services in Germany, France, Switzerland, England, Ireland, Italy, and Singapore, provides a case in point. The platform initially had a model where, within a given market, it set a standard price per hour for recurring cleaning jobs. (The slightly higher price for one-off jobs was also standardized within markets.) However, after a few years, Helpling changed its approach to let providers set their own prices. Our research shows that prices for some jobs subsequently increased as providers became willing to do different kinds of jobs (for example, after-party cleanups) for a higher fee.3 The platform’s policy change apparently revealed unmet demand for additional services.

Allowing service providers to set prices also improves the customer experience in categories where the quality of service is more likely to vary by provider. Different quality levels for comparable services can create uncertainty and diminish satisfaction. Lower quality is often due to providers lacking incentive to exert the required effort when customers pay a standard price set by the platform business. If providers get to set their own prices that reflect their true value, they can reap the rewards of their greater efforts and deliver higher customer satisfaction.

This approach does have downsides. When platform operators relinquish price-setting control and providers overcharge, that can lower overall matching and transaction volumes; if providers undercharge, that can leave money on the table. At Malt, where service providers have full control of price setting, they tend to underprice themselves despite deep knowledge of what’s required to perform tasks and their level of expertise. But that can be a vicious circle, according to the Malt manager we interviewed: Clients who are attracted to low-cost providers may be less discerning. Without a way for customers to differentiate between high- and low-quality providers listed on the platform, there’s a risk that low prices will increasingly attract clients looking for more basic, lower-quality services. This drives out high-quality providers and potentially downgrades the brand equity and reputation of the platform. It might also lead to a race to the bottom, with providers consistently lowering prices to outcompete one another, reducing the platform’s margins and providers’ earnings (and their willingness to remain on the platform).

For customers, provider pricing puts other dynamics into play. Providers that choose to focus on lucrative niches may leave some demand unmet. And the greater variability in provider-set pricing makes it more difficult for customers to fairly compare prices and find the best value for their money. If selecting a service provider becomes too time-consuming, customers may abandon the platform altogether.

Customers Name Their Price

Temper, the Dutch shift-work platform, allows customers to decide what they are willing to pay and matches skilled workers, such as baristas, with venues, such as restaurants. This approach is most appropriate when customers are businesses that have precise requirements for the services they need and the amount they are willing to pay.

Under this model, customers can set prices that reflect their budget and desired level of service, and service providers can choose to accept or reject offers based on their own pricing policies and cost structures. At Temper, restaurants looking for shift workers have different cost structures — for example, those in a city center pay higher rents. They also vary by service quality (for example, fine dining versus fast-casual), which affects the skills profiles they need and therefore the pay they will offer to attract workers. Customers can control their costs but also have flexibility to adapt to the competitive environment — for example, by offering higher compensation for weekend shifts. The platform exposes the going rate that other businesses are offering for the same services, which can also inform pricing decisions.

Finally, customers may be more motivated to use a platform if they have greater control over the pricing process. If they are given the power to determine the value they place on the service, they may feel more satisfied as well as invested in the transaction. Being more in control on the platform may deepen a sense of ownership and increase engagement and loyalty.

Naturally, customer-set pricing has trade-offs that can affect platform operators and providers. If customers set prices too low, service providers may be unwilling to take the task or they may be incentivized to cut corners to maintain profitability. This in turn could lead to a decline in the overall quality of products or services, reducing the platform’s attractiveness and growth potential. Similarly, customers may not have access to complete information about the market dynamics, costs, and competitive landscape, leading to suboptimal outcomes for both providers and customers.

Strike a Balance With Hybrid Approaches

Whether pricing is controlled by the platform, service provider, or customer, under appropriate circumstances each choice has the potential to maximize value creation and efficiency. Nonetheless, dynamics that unfold among platforms’ different stakeholders may outweigh some of these benefits and lead to unintended consequences. To ensure long-term sustainability and enhance a platform business’s financial performance, platform managers may want to share some control over pricing.

Platform providers can consider hybrid approaches to do this. For instance, TaskRabbit sets standard prices for different types of tasks based on factors such as complexity, duration, and market rates. These standard prices are initially determined by the platform to provide consistency and guidance to both customers and gig workers. However, TaskRabbit also allows service providers to adjust prices based on their own preferences and circumstances, and set a price that can be higher or lower than the platform’s standard prices. The European Union has a proposed platform work directive that considers the right to set one’s own rate a distinguishing factor between freelancers and employees; if adopted, it may push ride-hailing and food delivery platforms, which currently determine prices, to share this control with providers.

Platforms that control pricing can mitigate the power imbalance by being transparent with service providers about how prices are determined and whether they can do anything to increase earnings. They should also provide a mechanism for hearing providers’ concerns and enable them to appeal algorithmically determined decisions that affect their earnings on the platform.

While allowing service providers to set prices makes sense in some cases, it does not always lead to optimal pricing for them or the platform. For example, providers who have established high ratings and show a high number of completed tasks may have more pricing power compared with new providers. This is not beneficial for platforms, because new service providers quickly disengage if it takes too long to acquire work, limiting platform growth. Malt handles this discrepancy by boosting new providers’ visibility in search results.

Platforms can also assist providers with price setting, especially for offerings that are prone to demand fluctuations. A study of Airbnb found that only professional hosts (those with multiple properties) set prices skillfully; most others set suboptimal prices.4 Airbnb introduced price recommendations, alerting hosts to events and time periods when demand is high and prompting them to increase prices.5 Moreover, it lets hosts opt for automatic price adjustments, which essentially brings the price-setting power back to the platform, even in this service provider-controlled model.

When customers set prices, as we have seen, they may make lowball offers to service providers, especially during unfavorable market conditions. Platforms can prevent exploitation of service providers by setting minimum price thresholds that, for example, correspond to minimum or living wages. For instance, Temper sets a minimum price threshold for each service category that is in line with minimum wages, although it is not required to do so under Dutch law. In addition, it allows providers to negotiate. In 2022, 10% of all transactions on Temper were negotiated upward compared with initial prices set by customers, one of the company’s cofounders told us. Such proactive initiatives from platforms may anticipate increasing regulations aimed at curtailing their power. New York City already has imposed a minimum wage for Uber and Lyft drivers and recently announced the same for workers on food delivery apps. The European Union is going a step further: Its proposed directive will presume gig workers are employees of platforms if certain criteria do not apply, such as a worker’s right to adjust platform-determined rates as they see fit. In other words, if a platform sets upper limits for pay, it may be viewed as an employer.

As we have noted, customers may not always be fully informed, or they may have very specific preferences, in which case platforms can assist them with making provider selections. For example, on freelance marketplace Upwork, customers post desired tasks they need accomplished such as “logo design” or “report writing,” with detailed descriptions of what they are looking for and the price they are willing to pay. This price-setting model works well when customers have specific preferences and need a specific kind of provider for the job. However, Upwork eventually realized that not all customers have clear preferences; some just want the service done and would rather select it from a menu of offerings. This led to the launch of Upwork’s Project Catalog, a website offering predefined projects that customers can browse and select, such as “A 500-word SEO-optimized blog article in under 24 hours” for $50. Instead of customers detailing the job, providers post what they can offer for a set price. This makes it easier for customers to find the right provider for their needs and gives providers more opportunities to win work.

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A platform’s need to control its marketplace to maximize returns isn’t going away, but the approach it takes will determine its long-term sustainability. Platform leaders must realize that a platform is not a unilateral, hierarchically managed entity but rather a web of economic and social relationships. To manage it successfully and ensure satisfaction for all parties, they must share some aspects of control with other stakeholders, allow for compromise, and step in to support their workforce when needed. When control is shared more equitably among all parties in the platform relationship, the platform model can cater more beneficially to all.