What is the Chicken & Egg Problem for startups?
The core of business-related Chicken & Egg problem lays in a classical “Chicken or Egg” where you don’t know what came first. The Chicken & Egg problem is related to marketplaces mainly. Once you are developing such a platform you need to have sellers and buyers.
As a business model it sounds really cool: gather commission - let just buyers buy and sellers sell. But it makes a big problem to launch. It is not so easy to attract a single type of user into the app, but with the marketplace, it makes x2 harder. Each side (user type) finds the platform useful only if there is another side on the platform. A good sample here is PS or X-Box, no-one would buy them if there are no games.
So, let’s say you are launching a third type of console. You would need to show some games - attract developers to sell the console. But who of them would agree to have extra platform support with no users? That’s an endless discussion…
So, how to solve the chicken and egg problem? Let’s check other company's experiences.
You might think that the safest choice is to get sellers first. The main reason is that you will use ads by promising a huge demand jump once the customer DB is established. What is more, there is no need to pay sellers before there is any order. In case you have enough efforts you can provide them with a deposit to attract some good merchants and ask them for cross-promotion. So, you would be able to cover both merchants and promotion to attract more customers for your initial launch. - that’s our Tactic #0 for you.
The chicken & Egg problem is the number one that is needed to be solved with marketplaces. This is super important for any technical partner to know, as they need to guide startups. So, we examined a list of well-known marketplaces' history and are pleased to share tactics that they did during their own way. So, how did Airbnb and Uber overcome the chicken or egg problem? Here are the tactics used by them and some other big startups:
Tactic #1: Complicated feature first
Once a single side reaches its top activity point, the other side (supply or demand) starts to grow organically. Sure, it depends on a market, it always hard to attract a single side, either supply or demand. The easiest way to sort out is just to gather analytics from your sales & onboarding. And sure, the hardest side provides much more value, once you get such users enough, the other would take x2-x10 easier to get on board.
The great sample here is Outdoorsy. Outdoorsy is the RV rental marketplace. Getting RV owners was the hardest side for them. Since they could convince suppliers to join the platform their demand came x5 cheaper & faster. That’s was a key point for Outdoorsy to become the online Mecca for mobile lodging.
Tactic #2: White Hot Center
Find a small group in your community that cares the most about your idea - your marketplace. Once it is found, go after such users. You would need to stay tight to such a niche and repeat it till it scales.
Samples: The first traction eBay got with selling Beanie Babies. Craigslist had just email lists to own’s friends who were searching for a job and apartments for rent. Uber started its own campaign in San Francisco with luxury cars to rent. Poshmark targeted urban female professionals in California.
Tactic #3: Capitalise the most valuable side
Pay cash to one of the sides which is most valuable to join your marketplace.
A list of companies did it. Uber gets to key cities and paid drivers (suppliers) to be in the app, so their riders (buyers) always had a car to book. ClassPass paid gyms upfront to join their platform. Helix covered a portion of the cost of genetic tests.
Tactic #4: Fake your supply size with the automatization
Get as much data as possible from the web regarding your supply side. All this will give a vision of quite a big marketplace that has a lot of activity.
This is quite a popular tactic, and here are some well-known companies who did that already. GoodReads, Indeed, and Yelp collected data about local businesses, books, and job posting. All the data they put into their own platform. This gave their targeted audience a vision that a lot of good companies are placing jobs there and they need to try such a platform out.
Tactic #5: Fake your value
You can try to create bots that will use other resources and grab users to your platform. Such tactics were used by Paypal. They created a bot that was purchasing stuff on eBay and asked to pay with Paypal. Sure, such a bot should behave as a human. Nevertheless, it worked. Reddit also used fake users to “plant” interesting questions and attract users into the platform.
Tactic #6: Target & launch only 1 side as an email list.
One of the easiest ways to launch a marketplace if your buyers would be sellers too. That’s how several well-known companies started their own way.
Threadless started with a light version - an email list. The same tactics were used by Craigslist, Craig had emails of friends and was selling them instruments. Later he proposed all subscribers to sell his own stuff within his list.
Tactic #7: Host Events
Yes, scale events are a tough task. But they are quite effective at the very beginning. You can generate community, demonstrate activity, and provide your customers with real-time feedback. This works even better if it is powered up with social loudness.
That’s what Poshmark did. They hosted “Posh Parties” where guests could exchange fashion goods. It was a place where the app was presented and users could solidify their own new connections. The same tactics were used by Yelp in 2004. It was “Yelp Elite parties”. All Attendees received such a “badge” and went home as heavy reviewer members of the Yelp community.
Tactic #8: Build a SaaS tool for a single marketplace side.
Such tactics provide you with time to attract another side. What is more, it locks the first one inside if you have real-time support and feedback gathering.
That’s exactly what did OpenTable. Once they launched a reservation side for customers, they had several managers on the backend side who were calling restaurants and were booking tables for users. Once it was booked, users received notifications. Honeybook launched software for event planners and professionals to deal with billings, workflow, and proposals. And similar tactics were used by StyleSeat that allow reserving hairdressers.
OpenTable was selling software to restaurants. They created a unique CRM and table management - the “Electronic Reservation Book” and used a subscription business model with them. So, the software was the main value for them.
Tactic #9: Provide with a software 3d party who can cover a second side
The great sample here is Android. They build software for cell phone manufacturers that provided them with customers. Such a move pushed Android to cover a half (if not more) of mobile OS coverage and revenue. MySpace provided bands with free pre-setup profiles. In return, bands attracted their own fans to the platform.
Tactic #10: Target on a single giant user for a supply or demand.
One of the best samples we could find is Candex. They targeted Siemens who becomes a big anchor for their demand-side. Once they partnered, Siemens starts to require its own vendors to use the Candex marketplace to be paid.
Tactic #11: Make a single side change behavior.
One of the best samples here is Square. There were around 10 startups were trying to get to mobile payments. With such a competition, you need to be as fast as possible. So, Square made one single side - the merchant side and later supply-side changed their behavior. Meanwhile, the buyers were using their credit cards as usual, so there was no barrier to entry for them.
Tactic #12: Make something free at once
Quite a simple and popular tactics, something that cost money on your platform, at one time becomes free within a limited time period.
A good sample here is Robinhood that is a stock trading and investing platform. Initially, they launched with a commission. One day, they removed commission completely and made with such a move a great buzz. Now, the valuation is over $11.2b. The same move Napster did with free music. Skype made a free video and phone calls.
Tactic #13: Product first. Marketplace after
The CRM tool was created by SalesForce before launching the Force marketplace a year later. Initially, Amazon launched as a retailer before opening a well known marketplace. And more than 50% of transactions are coming from suppliers instead of warehouses. Apple created 32 apps before launching the AppStore. Before opening a marketplace to sell software to HRs, SmartRecruiters were a SaaS tool with job posting.
Tactics #14: Manually connect the two sides.
Initially, Zappos team was dealing with orders manually: fulfilled the order, drove to shoe stored, bot them, and shipped them. Such a flow allowed them to polish out excellent initial transactions. Same did eToys and Zenefits - health insurance service.
Tactics #15: Target on a niche where sellers are buyers too.
Avoiding all together by building a one-side could be one more easy way to resolve The Chicken & Egg Problem. In this case, you can simply target all your resources in terms of both launch and promotion.
That’s what Poshmark did. The majority of their buyers were selling fashion too. The same start was for Match. The value here that nearly every attracted customer doubles its own value as a “seller”, so as a “buyer".
We began with aggressive marketing on Oct. 17, 2015… and back then very few people were aware of Letgo,” he said. “Today, we have surpassed the 45 million downloads milestone a couple weeks ago and a third of all listings are sold. — Letgo founder Alec Oxenford to Forbes
Tactics #16: Exclusive access
Create a fear of missing out among the one side with a simple restriction and limited access. But it works only if you detected your niche and you have enough resources to create a buzz. Such a tactic would create a word of mouth and a participation will in your marketplace once the viral interest caught. But without strong background resources, such a tactic won’t work. Such tactics were used by Gilt, Gmail, and Mailbox.
Tactic #17: Geo-location targeting
Despite the fact of what marketplace your idea is related to, you always need to start local. Once you are launching it is much easier to target users in a particular city/state rather than the whole country or worldwide - you just won’t have enough resources to sort out the best approach to work with them. That’s what the majority of the profitable marketplace actually doing, here are our favorite samples: Lyft, Yelp, Craigslist.
Tactic #18: Time constraint
Make limited access to marketplace features. This would provide you with excitement and usage pikes in your analytics. We would suggest using such tactics once you have validated your idea already and have at least 1k users from each side. Such a feature can come within a new update and powered up with some media buzz.
Tactic #19: Demand Constraint
A good sample here would be Groupon. They contained the supply down to a single coupon per day. Also, Fiverr made all pricing within 5$ (Sure, later Fiverr used Tactic #16 with sellers and called it Fiverr Pro). The main idea is to focus on a single proposition as good as possible. It would give targeting audience a reason to join your marketplace.
Tactic #20: Targeted Events (evaluation of Tactic #7)
That’s what Tinder did. Whitney Wolfe made app presentations in different cities to women’s communities and motivated them. After, she made another app presentation to male communities and showed a number of ladies that are already there.
Tactic #21: Parasitism + Tactic #4
Any approach is good if it works. Airbnb created a script that scanned landlords on Craigslist and collected emails. The same automatized tool wrote an email about how cool the apartment is. Later, asked them to join Airbnb as it is easier to manage and pay there. Sure, Craigslist closed this backdoor later but the job was done all that time.
Tactic #22: Start as E-commerce with Drop-shipping
It works the best if you have own goods to sell/rent. So you can polish out behaviour with users and later attract more merchants into the platform, just like Etsy did. They launched Ecommerce at first to sell own handcraft stuff, and later on were reaching other merchants to work on drop shipping model. Once they start getting profit they moved to a fully-featured Marketplace with a demand.
Tactic #23: Acting as a producer
You can act as a producer of your items. Shauna Mei's father was traveling around the world and was bringing different stuff from other countries. Each item had its backstory and this point Mei liked the most. Such a childhood story provided a great impetus to launched AHAlife. The idea behind a luxury e-commerce marketplace is to share a story of how each item was created. What is more, Mei added a biography of the designers who worked on it. Such an approach attracted a list of creators that are offering unique items.
Tactic #24: Motivation tokens (Extra tactic)
As a rule, the majority won’t join your platform till everyone is there. But you need to show an activity there. You can pay tokens to join your platform, you can pay with tokens for user activity, and much more.
Despite the tactic you would choose or a mix of tactics, we believe there is three capital efficiency options:
Small Competition – If your targeting is providing value and solving pain points as OpenTable did and postponing the classical supply part there will be nearly no competition. Such strategies are designed for providing a low risk for suppliers to try out a service.
Low Churn Rate - Such services are higher friction to adopt. If the tool provides a critical operation of a business, it would be harder to leave a marketplace. If you are not sure what is the Churn, check the details here.
Cash Flow Growth - As rule marketplaces need liquidity on both sides to generate revenue. So, they need to spend more on marketing. The great solution made OpenTable and MindBody. They generate revenue from software tools even before they become a marketplace. What is more, OpenTable generates +50% of own revenue from subscription.
Amazon is another great sample. It started as a book retailer and you know where they are. So, they used the cash turnover to grow later on. In comparison with other big startups, Lyft & Uber needed hundreds of users and thousands of passengers to have value on the market.
As you see, there are plenty of different strategies and it doesn't mean that the OpenTable strategy can work with Uber or Lyft. These startups had their own great solutions.
Despite the fact of how many tactics you would like to use in your strategy. We would suggest staying Lean and be concentrated on having a limited supply, features, etc. It is much more reasonable to invest in buzz and perfect single feature/sell process/etc.
Having a lot of features and products can provide you with rare but different orders, and it would be difficult to keep both suppliers and buyers happy and, as a result, in it.
In addition to all these tactics, feel free to check our Case Study of another kind-a “marketplace” that could get from a simple WhatsApp group up to fully custom system with $2m on sales.
Nevertheless, the tactics above are just some points we found. Remember, you are limited just with your imagination. If you have any addition to the mentioned tactics, feel free to drop a line.
p.s. We would highly appreciate your sharing 🤓
Previously published at https://www.urlaunched.com/blog/the-chicken-and-egg-problem