Hi Startupper. Previously, we presented a list of tools that you can use for achieving your main aim. Today, we would like to share a list of tactics that were used by big players to solve the chicken-and-egg problem in startups. Dig through each of them to solve your chicken and egg problem in your business.
Table of contents
- What is the Chicken & Egg Problem for startups?
- Tactics to Learn
- Tactic #1: Complicated feature first
- Tactic #2: White Hot Center
- Tactic #3: Capitalise on the most valuable side
- Tactic #4: Fake your supply size with the automatization
- Tactic #5: Fake your value
- Tactic #6: Target & launch only 1 side as an email list.
- Tactic #7: Host Events
- Tactic #8: Build a SaaS tool for a single marketplace side.
- Tactic #9: Provide a software 3d party that can cover a second side
- Tactic #10: Target a single giant user for a supply or demand.
- Tactic #11: Make a single side change behavior.
- Tactic #12: Make something free at once
- Tactic #13: Product first. Marketplace after
- Tactics #14: Manually connect the two sides.
- Tactics #15: Target a niche where sellers are buyers too.
- Tactics #16: Exclusive access
- Tactic #17: Geo-location targeting
- Tactic #18: Time constraint
- Tactic #19: Demand Constraint
- Tactic #20: Targeted Events (evaluation of Tactic #7 – first 15k users)
- Tactic #21: Parasitism + Tactic #4
- Tactic #22: Start as E-commerce with Drop-shipping
- Tactic #23: Acting as a producer
- Tactic #24: Motivation tokens (Extra tactic)
What is the Chicken & Egg Problem for startups?
The core of business-related Chicken and Egg problems lies in a classical “Wikipedia Chicken & Egg” where you don’t know what was the first. It 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 in 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 console. You would need to show some games – to attract developers to sell the console. But which 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 in your own startup? Let’s check others’ experiences. But before that, let’s check what is capital efficiency?
Despite the tactic you would choose or a mix of tactics, we believe there are 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 its own revenue from subscriptions.
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.
Answering the question: How to solve the Chicken and egg problem in the marketplace? We would say, that 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 to solve the chicken and egg problem in their own startup.
Tactics to Learn
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 promotions to attract more customers for your initial launch. – that’s our Tactic #0 for you to solve the chicken and egg problem in a startup.
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 in their own way. So, how did Airbnb and Uber overcome this 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 the market, it is always hard to attract a single side, either supply or demand. The easiest way to sort this 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 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 its 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 on 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 to solve the chicken and egg problem in your business.
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 postings. 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. That’s how they solved their own problem.
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 like a human. Nevertheless, it worked. Reddit also used fake users to “plant” interesting questions and attract users to the platform.
Tactic #6: Target & launch only 1 side as an email list.
One of the easiest ways to launch a marketplace is 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 from friends and was selling them instruments. Later he proposed all subscribers sell their 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. Nice tactic to solve the chicken and egg problem in your own startup, isn’t it?
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 OpenTable did. Once they launched a reservation side for customers, they had several managers on the backend side who were calling restaurants and 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 which allows 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. And that’s another option to solve the issue.
Tactic #9: Provide a software 3d party that 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 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 a single giant user for a supply or demand.
One of the best samples we could find is Candex. They targeted Siemens and 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 that 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 tactic, something that costs money on your platform, at one time becomes free within a limited time.
A good sample here is Robinhood which is a stock trading and investing platform. Initially, they launched with a commission. One day, they removed commission completely and made 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. And do you know another sample who used such a tactic to solve the chicken and egg problem in their own startup?
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 and SmartRecruiters was a SaaS tool with a job posting.
Tactics #14: Manually connect the two sides.
A great Chicken and Egg Problem marketplace sample here would be Zappos & Zenefits. Initially, the Zappos team was dealing with orders manually: fulfilled the order, drove to shoe stores, bot them, and shipped them. Such a flow allowed them to polish out excellent initial transactions. The same did eToys and Zenefits – health insurance services.
Tactics #15: Target a niche where sellers are buyers too.
Avoiding 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 is that nearly every attracted customer doubles its own value as a “seller”, so as a “buyer”.
A similar strategy used OLX and Letgo. But they made a huge leap by using TV advertising to reach the first users:
We began with aggressive marketing on Oct. 17, 2015… and back then very few people were aware of Letgo,” he said. “Today, we 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 on 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 word of mouth and participation will in your marketplace once the viral interest is 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, and Craigslist. Please, share with us more samples that solved the problem in such a manner.
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 with a new update and be powered up with some media buzz.
That’s what Tophatter did. They allowed bidding for only 1 hour in the evening – from 8-9 pm Pacific Time. The same was done by Intermedia Labs with the HQ Trivia app to manufacture excitement.
Tactic #19: Demand Constraint
A good chicken and egg problem marketplace 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 well as possible. It would give the target audience a reason to join your marketplace.
Tactic #20: Targeted Events (evaluation of Tactic #7 – first 15k users)
Everyone has heard of Tinder. Today (2019), thanks to Tinder, there are 1 million dates per week. But what about the first few days of service? How did they overcome each market’s nightmare? There is an interesting story behind this.
- Tinder co-founder Whitney Wolfe packed her suitcases and set off on a trip across the country.
- In each city, she introduced the women’s community, encouraged them to sign up on the app, and explained how cool and useful it was.
- She then gave a demo for the male community and showed the app filled with local girls who had already signed up.
- When Whitney returned from a business trip, 15,000 first-time users had used the app.
“Your presentation was great. She would go to her sorority chapter, give her presentation, and ask all the girls in the session to install the app. Then she goes to the appropriate fraternity—they open the app and see To all these lovely girls they know…” – Angel Munoz, Coder.
In 2014, Whitney left Tinder to start Bumble (Tinder’s biggest competitor). Today, Bumble is valued at more than $1 billion, and there are rumors that they are preparing to go public. Dating? This girl knows how to make money with it. Wanna check out more stories about females in business? Check this article
Tactic #21: Parasitism + Tactic #4
Any approach is good if it works. Today, Airbnb is a massive company worth $35 billion with 11,000 employees worldwide. But in 2008, they were just starting to think about airbeds and breakfasts for strangers. Like all markets, they face a chicken-and-egg problem:
- Landlords don’t want to include their apartments in the service without a visit.
- Tenants have nothing to rent on the platform.
How did Airbnb get out of the woods? (Already a legendary example):
- They created a script that scans all listings from hosts on Craigslist and collects their emails.
- The same script then sent a letter on behalf of a pretty girl who “loves apartments a lot” asking the owner to add his apartment to Airbnb.
- Airbnb quickly acquired 60,000 of its first hosts, solving the chicken-and-egg problem.
Additionally, they make it easy for users to post listings on Craigslist with one click from Airbnb.
Craigslist later closed this backdoor for collecting emails, but the main idea is still in its infancy. If you need the first batch of users, you can copy them from somewhere. Furthermore, such vulnerabilities are frequently found in many services. You just have to look at opportunities like this.
For example, our friend started a music project in 2016 and managed to scan about a million(!) emails from musicians and music establishments from various sources. They also sent letters on behalf of a “young girl” with >50% open rates.
Tactic #22: Start as E-commerce with Drop-shipping
It works best if you have your own goods to sell/rent. So you can polish out the behavior with users and later attract more merchants into the platform, just like Etsy did. They launched Ecommerce at first to sell their own handcraft stuff, and later on, were reaching other merchants to work on a drop-shipping model. Once they start getting a 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 launch 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.
The “Chicken and Egg Problem” in startups, particularly in marketplaces, refers to the challenge of attracting both sellers and buyers to a platform simultaneously. Each side of the marketplace finds value in the presence of the other, making it difficult to get one side to join without the other.
Overcoming this problem is crucial for startups because the success of a marketplace business model depends on having a critical mass of both buyers and sellers. Without both sides active on the platform, the business cannot thrive.
There are various strategies that startups can employ, including:
– Complicated Feature First: Focus on building features that cater to one side of the marketplace and wait for the other side to naturally follow.
–White Hot Center: Target a niche group within your community that cares deeply about your idea and encourage them to join.
– Capitalize on the Most Valuable Side: Pay or incentivize the more valuable side of your marketplace to join first.
– Fake Your Supply or Demand: Collect data or automate listings to create the illusion of a thriving marketplace.
– Exclusive Access: Limit access to your marketplace initially to create a sense of scarcity and excitement.
Sure, one example is Airbnb, which initially faced the challenge of convincing hosts to list their properties on the platform when there were no guests and vice versa. They used a script to scan Craigslist listings and contact potential hosts, effectively solving the problem by quickly acquiring both sides.
It’s important for startups to remain lean and focused, concentrating on a limited supply or set of features to perfect before expanding. Additionally, investing in creating a buzz and concentrating on a single feature or selling process is often more effective than offering numerous features right away.
The choice of strategy depends on your unique circumstances, market, and resources. It’s essential to analyze your target audience, the value your platform provides, and the competitive landscape to determine which strategy aligns best with your goals.
If your startup’s situation is unique, don’t be limited by conventional strategies. Use your imagination and creativity to come up with innovative solutions that suit your specific challenges.
Despite the fact of how many tactics you would like to use in your strategy. We would suggest staying Lean and being concentrated on having a limited supply, features, etc. It is much more reasonable to invest in buzz and perfect a 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 a fully custom system with $2m in sales.
Nevertheless, the tactics above are just some points we found. Remember, you are limited just to your imagination. If you have any addition to the mentioned tactics, feel free to drop us a line.
p.s. We would highly appreciate it if you share how we suggest solving the Chicken and Egg problem for startups 🤓
p.p.s. Here is a list of other white spots regarding marketplaces that you would want to review:
- How to develop a SaaS marketplace?
- How to evolve from e-commerce to marketplace?
- How to build a marketplace startup?
- Top 10 marketplace ideas to move forward with
- Different types of marketplaces
Do you need to launch a product that solves the Chicken and Egg Problem in your startup?
If you have asked yourself these questions and still aren’t sure where you see your startup going, we can help provide a second opinion.