Owning It: Small Business

Amazon’s next big bet: Blue-collar workers

By Elaine Pofeldt, special to CNBC.com

Blue-collar professional service providers are scrambling to plug into the array on online marketplaces like Angie's List geared to help them connect with potential customers. Amazon's recent foray into the on-demand professional services market with the recent launch of its Amazon Home Services platform, illustrates how mainstream it's become to buy products and find service providers for repair and installation at the same time.

This niche may be a potential goldmine, and it's attracting an array of new players. Nielsen Scarborough, which studies consumer trends, says that 53 percent of U.S. adults made some kind of home improvement in the past 12 months, and 56 percent of them spent $1,000 or more.

Amazon breaks into the home services sector.
Pual Bradbury | Getty Images

Amazon Home Services, like other platforms in this field, takes a cut in a contractor's revenues from each job that a consumer books through the site. The sites' share can be substantial for a large home improvement project. For instance, Amazon requires providers to pay fees ranging from 10 percent to 20 percent, depending on the service profession; in January it will also start charging a $50 monthly subscription fee and $40 background check fee for each employee doing in-home services.

Amazon screens professionals through a combination of media searches, online interviews and reference checks and that they are required to maintain any mandatory trade licenses and insurance on file, a company spokesman said. The goal: to have pros with a strong track record of service quality.

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"I think you're going to see a lot of companies jumping up and trying to identify themselves as a source of this kind of worker," says Mitch Ratcliffe, a senior analyst and digital strategy analyst at BIA/Kelsey who is based in the Seattle area. "The challenge will be the competition between marketplaces for the best consumer experience."

It could be a tough battle, with an ever-expanding list of players now fighting for market share. Amazon Home Services debuted in March. Then, in April, the giant global marketplace Freelancer.com, based in Sydney, Australia, introduced Freelancer Local Jobs, offering on-demand, location-specific services ranging from plumbing to catering, which are available in the U.S.

These giant sites are taking on established players such as The Home Depot's Redbeacon and venture-capital-backed sites such as TaskRabbit and Thumbtack, which has funding from Google.

To dominate the market, a platform will need a steady stream of reliable contractors—lots of them. That may seem to be a tall order, if you live in a densely populated area where it's hard to get a plumber or washing machine repair person to show up when you need them. But Nik Badminton, regional director, North America, for Freelancer.com, says there are actually many contractors looking to fill their schedules with extra work they can find online. "You'd be surprised at how many people who are out there who aren't at 100 percent of their capacity."

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And the number of Americans turning to these platforms to find work is likely to grow. The U.S. General Accounting office just estimated that contingent workers—those who earn a living outside of traditional, full-time W-2 jobs everywhere from service businesses to temporary jobs—made up a whopping 40.4 percent of the workforce in 2010. That number rose from 35.3 percent in 2006.

Within that group, the population made up of independent contractors, such as service providers, and self-employed workers, such as restaurant and shop owners, also increased. They made up 16.2 percent of the workforce in 2010, up from 14.7 percent in 2006.

The rise of these online marketplaces has really changed the rules of the game for small independent providers of home improvement and repair services.

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Currently, many blue-collar workers find employment through staffing services, but many would likely be willing to try another type of middleman, such as platforms, to find work. But they now need to become savvy Internet marketers in order to attract clients through online Zip code search.

Jim Allen, owner of the Seattle-based residential cleaning service Simply Clean, has experimented with several of the marketplaces. The former financial planner tried promoting his five-year-old business through Groupon and Amazon Local, a branch of the giant retail site that offers local deals, but ultimately pulled the plug even though it generated about 40 deals. "It was getting too expensive," said Allen, who employs about 25 cleaners, generating revenues in the "mid-six figures" at the profitable business. Now he primarily focuses on advertising through Yelp and Angie's List, where his firm has built many positive reviews, and a new Seattle-based marketplace that launched in January called Trusted Few. "It's become a very interesting landscape out there," he said.

You're thrust into this world where your online reputation matters enormously....It raises the competitive bar for these small businesses to another level.
Steve King
Partner, Emergent Research

It’s not clear how much the growth of the marketplaces will affect the rates small service providers can charge. On online marketplaces aimed at white-collar freelancers such as writers and web designers, U.S. based professionals often complain about a “race to the bottom,” where they are vying for jobs against overseas competitors who can charge far less because of a lower cost of living.

Providers of home repair and maintenance services may fare differently on digital marketplaces, say experts. Given the hands-on nature of the home repair and improvement work, it is usually performed by local providers who operate in the same market—and therefore face similar overhead.

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“Tradespeople like electricians and plumbers are pretty good at holding their prices at a union level,” says Steve King, a partner at Emergent Research, a firm in Lafayette, Calif., that studies the independent economy. “The people that get hurt are the ones that aren’t. They’re more exposed to the price competition that comes into play with these places.”

What's next for blue-collar workers?

The marketplace Trusted Few, which opened in January, has been limiting the number of providers who can advertise in each category. When platforms accept too many competitors in each category, says founder and owner Michael Gasparenas, it drives these providers' prices down. "You have to discount your services just to stand up and catch attention," he says.

If small businesses' prices do hold steady, that could benefit the growth of the marketplaces. "Their profits would be higher if wages were supported," says Andrew Karpie, a principal analyst at the Research Platform in San Francisco who studies online platforms used in the labor area.

Still, there are other challenges that face home services pros on the platforms, especially if they are not technologically sophisticated, says King. "You're thrust into this world where your online reputation matters enormously," he says. "You've got to be in multiple places if you want to be found. It raises the competitive bar for these small businesses to another level."

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Such competition isn't deterring businesses like 911 Restoration, headquartered in Van Nuys, California, from participating in the platforms. Shayna Hardesty, a marketing assistant at the roughly 30-employee water-damage-restoration firm, is trying to get its more than 50 franchises listed in Amazon Home Services. An Amazon employee she reached initially did not seem familiar with the program, but Hardesty persisted until she reached a supervisor who was—and learned her company had to apply to be invited to send an application for the program.

"When we had tested with one branch we got approved pretty quickly," she said. "It's been quiet since I submitted the remaining listings." She was told it could take several weeks before there is any news. "Hopefully, we'll get approved to be invited," she added.

By Elaine Pofeldt, special to CNBC.com