I tutor on the side for a few extra bucks. I enjoy the work and an hour or two on an otherwise boring evening can earn me enough for my weekend activities.
This past week, I was working with a regular student. They proposed going off of Wyzant and paying me via an alternative service like Venmo. I refused, which surprised them. They asked “But Wyzant takes a cut of your hourly rate. This seems like a win-win to me: I pay the same rate and you get to keep more of it. Isn’t Wyzant exploiting you?” Me being me saw an opportunity for a discussion on transaction costs.
It is true that Wyzant takes a cut, and a substantial cut at that. They take 25% of my hourly pay. I charge $40/hr, They get $10/hr and I keep $30/hr. Why wouldn’t I want a 25% pay raise and take the student up on their offer?
The reason: Wyzant provides valuable services to me. Services I value much higher than $10/hr:
-Wyzant provides online meeting capabilities. Without them, I would have to buy a Zoom account (or something similar)
-Wyzant verifies, handles, and guarantees all payments. No matter what, I get paid. They absorb risk and track down delinquent accounts. Without them, I would have to handle my own accounts payable.
-Wyzant helps match me with students. They do all the searching and advertising for me. Without them, I would have to conduct heavy search and advertising costs.
-Wyzant provides calendar software. Without them, I would have to manage my own appointments.
-Wyzant provides legal security. They have an entire arbitration process in place in case of complaints or abuse. Without them, I would have to invest in legal help.
In short, Wyzant dramatically reduces the transaction costs I would face if I were to tutor privately. They take $10/hr of my wage, yes. That is the “seen” aspect. But they save me many more dollars in transaction costs. That is the “unseen.” I am wealthier because of Wyzant. If their goal was to exploit, they are doing a poor job.
I also pointed out that Wyzant reduces the student’s costs as well:
-Wyzant thoroughly vets the tutors who use their platform. The student doesn’t need to conduct a search to verify tutors or their competency.
-Wyzant prevents payment fraud. I cannot demand extra money or anything as Wyzant has a whole process for getting paid.
Wyzant makes both the student and the tutor better off by providing a platform to reduce transaction costs of tutoring.
This post may sound like an ad for Wyzant, but it is not. Wyzant is simply a stand-in for the countless firms and institutions that exist in a market economy. They exist not because they are exploitative, but because they reduce transaction costs. If firms do not reduce transaction costs, then they would disappear in the market.
Jon Murphy received his PhD in economics from George Mason University and is an Instructor at Western Carolina University.
READER COMMENTS
Alexander Otero
Jul 2 2022 at 11:45am
Yeah, it’s like the people who says middleman serve no purpose.
Dylan
Jul 2 2022 at 1:47pm
I’m not familiar with Wyzant, but am familiar with a number of similar platform startups. One common challenge that your post doesn’t directly address is that the majority of the value they provide is in the initial matchmaking part of the process, they help you find students and the students to find vetted tutors. After you make a connection with the student and both sides trust each other, it is often beneficial to both parties to transact off of the platform.
The other benefits you mention strike me as primarily conveniences. It is certainly easy enough to get software these days for free video calling, especially if you only need two people on the call (I believe Zoom is still free for this), and scheduling software like Calendly can integrate with your calendars and let people book time based on your availability (free or low cost depending on your need). Payments can also be automated pretty easily and integrated into free bookkeeping tools like Wave (and you need the bookkeeping part even if you do all your work through Wyzant)
Of course, how much a person values the convenience Wyzant provides is up to the individual and I would imagine depends heavily on how many hours in a given month you’re tutoring, if it is only a couple hours, probably not worth the headache. If you’re doing 15+ hours a week and charging $100 an hour like some friends of mine, it would make a lot more sense to consider it.
The other aspect would be Wyzant’s TOS. I know many platforms specifically prohibit going off platform for exactly the reasons I mention. Their ability to enforce this is pretty limited, but they could potentially throw you off the platform if you’re caught, the risk of which could negate the benefits of going off platform for just a couple of clients (if you expect to still get the majority of your business through the app)
Phil H
Jul 2 2022 at 2:31pm
Yeah, cash-in-hand has a lot of costs. I was a freelance translator, and usually the agencies would be paying us, the translator, approximately half of what they were getting from the clients. That seemed to be about the fair market rate when I was doing the job. A good agency would provide excellent client matching and editor services, and be very much worth their cut.
(That said, I used to get very irritated by “process charts” that show the translator as one bubble in a long string of other bubbles. The translator – or the tutor in the OP’s case – is the lynchpin of the whole thing, and should be shown as such!)
Monte
Jul 2 2022 at 9:06pm
Transaction costs are something of a Catch 22. They’ve become an inherent part of what Kathryn Judge, finance professor at Columbia law school, calls the Middleman economy.
Is this a valuable service or exploitation? Yes.
Jon Murphy
Jul 2 2022 at 10:33pm
And yet, despite all that power, it amounts to nothing. There is always new competition coming in and destroying that “infrastructure…relationships…expertise.”
All those advantages are only advantages to the extent they reduce transaction costs for consumers. As soon as they cease to be valuable, the advantages disappear.
Those stores cannot “shape the evolution of the market structure,” except insofar as they participate in regulatory capture.
Jim Glass
Jul 3 2022 at 8:54pm
Acting in my self-interested, self-serving manner is now ‘exploiting’ others?
Man, I’m self-serving all day long and I wish I had somebody to exploit!
Matthias
Jul 3 2022 at 12:21am
To be fair to the student, after you’ve interacted with someone for a while, the transaction costs drop, and so the agency is relatively less useful.
(But might still be absolutely useful enough to stick with them.)
Dylan
Jul 3 2022 at 9:20am
My earlier comment got caught in moderation, but was a long winded way of saying the same thing.
There are a lot of “platform” startups that fall into a similar trap, the value they provide is in the initial connection but their business model relies on monetizing the connection over the lifetime of the relationship they facilitated. Many try to use their TOS to prevent people later transacting off of the platform after establishing the initial connection. That has limited effectiveness and is highly dependent on the nature of the relationships they bring about.
Jon Murphy
Jul 3 2022 at 6:03pm
Perhaps, though as I say below they still help mitigate other forms of transaction costs.
Monte
Jul 3 2022 at 12:47am
But isn’t it regulatory capture that primarily validates her point?
Jon Murphy
Jul 3 2022 at 6:05pm
Not really, no. For one, regulatory capture is expensive. It happens, but not every (or even a majority) of successful firms can engage in it. For another, there are all sorts of ways around regulatory capture and new entrants destroy the power of the old all the time (for example, how Uber destroyed taxi cartels or Netflix the communication monopolies).
Thomas Lee Hutcheson
Jul 3 2022 at 2:19pm
Zoom may be a good point (although I have found the found level of service so good, I do not see how they make money :)) but the rest work only prospectively. Come on and admit that you don’t stop using the service with existing clients is that it would feel like cheating and you are just not that kind of guy?
vince
Jul 3 2022 at 4:35pm
And if everyone had the attitude of your student, the Wyzants would disappear. It’s like the prisoner’s dilemma.
Jon Murphy
Jul 3 2022 at 6:02pm
The attitude is insufficient. There are the other transaction costs I mentioned as well: search costs, information costs, payment handling, etc. My student’s attitude could reduce some costs (eg, fraud costs), but not all. Wyzant and other platforms would take on a different role.
I am not sure what you mean by this. Can you be more specific?
Dylan
Jul 3 2022 at 6:30pm
In my other comment, which will probably show up eventually, I give a couple of examples to show that the other costs you mention are not really that costly. There are free or inexpensive solutions out there that can handle almost all of that in a pretty seamless way and wouldn’t take long to setup. I’m not going to mention the names again, in case that is what got me put in moderation. But there are services I use to handle calendar, automatic invoicing and payment processing, I even have a friend who works at a company that aims to automate arbitration for freelancers.
Obviously, you’re ultimately the one to decide what is worth it to you and what is not. However, given the $30/hr price tag that you’ve assigned to your marginal hour, I would think it wouldn’t take long for you to come out ahead monetarily by moving a student off of Wyzant after you had reached some level of trust.
Jon Murphy
Jul 3 2022 at 7:05pm
That’s all well and good, but doesn’t change the point. I am well aware of the various other apps. But the fact Wyzant is one-stop shopping for all of that is what lowers the costs even more for me.
There are many middlemen. Competition among them is what drives down the costs.
Dylan
Jul 4 2022 at 10:11am
It wasn’t meant to change your point, transaction costs are subjective and you get to be the one that decides what is worth it to you. I think for most people the calculus changes the more they use the system. If you’re only tutoring a few hours a month for $40 an hour, it probably doesn’t make sense to go to the trouble of pasting together alternatives to give you similar functionality. As you teach more or as your hourly fee goes up then looking for ways to recoup that 25% cut become more attractive.
Disclosure: I advised a tutoring platform startup on their initial fund raise and one of the big questions investors had was how sticky the customers were. Would they continue to transact on the platform after building the initial relationship or would they move off, which greatly impacts the lifetime value of the customer. The company I was advising hadn’t been around long enough to have those numbers, but adding in features to keep the tutors sticky was a major focus and challenge.
And on your competition piece, platform businesses are different than your typical middleman in that they tend to be winner take all. The goal is rapid expansion (subsidized by investors) to build up network effects so that anyone who wants to transact in that space must come to you. Obviously not that simple and there is still competition, it just looks different than say an import/export type of middleman.
Jon Murphy
Jul 4 2022 at 2:27pm
Yup. Absolutely. That’s the point of my final paragraph.
But it’s still not a prisoner’s dilemma. I am still unclear as to what Vince means.
Dylan
Jul 4 2022 at 3:10pm
I don’t think it is a prisoner’s dilemma, maybe closer to the categorical imperative, or the free rider problem (although neither is quite right either). Simply the idea that if everyone used the platform in the way your student suggested…using it to connect with students/tutors and then once the connection was validated and trust was established moving off the platform in a way that was mutually beneficial (your student could have suggested splitting the difference so he pays less and you make more). If this was the norm, the platform would likely need to charge more upfront to make the connection, possibly more than the tutor would even make during the first sessions in order to keep the lifetime value of the customer higher than the cost of acquiring the customer. But at those terms, the deal likely makes sense to fewer people, which means they need to raise prices even further…
Not saying this is the case with Wyzant, maybe they really do add enough value in addition to the initial connection that the majority want to stay on the platform. But, the dynamic has played out with other startups that haven’t been able to figure out the retention puzzle.
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