15 Ways to Solve the "Chicken or the Egg” Problem
Part two of four in our month long series on Network Effects
Getting a marketplace off the ground is akin to jumping out of a plane and building the parachute on the way down. It requires you to get two sides to show up at once, in the right ratios, and then to transact (and repeat).
This precarious situation is also commonly called the Chicken or the Egg problem.
Today’s post uncovers tactics that real companies used to solve the Chicken or the Egg problem. We provide 15 tactical tips below, using examples from real companies.
But before we dive in, here are three (somewhat counterintuitive) guiding principles for starting a marketplace that you should first consider to smooth the runway for takeoff:
Go after the harder side first
Start small, within a niche
Gravitate towards things that don’t scale
This post relies heavily on an excellent convo I had with James Currier, Founding Partner at NFX, on network effects and marketplace businesses.
Apple / Spotify / Youtube
Go after the harder side first
Figure out if you are a demand side or supply side marketplace. Every marketplace has an inherent tilt to it.
At the end of the day, you are whatever the harder side is, which is the direction you’ll have to lean towards in order to keep the sea-saw you’re building off the ground.
For most marketplaces, if you aggregate the harder side, the other side will eventually show up because the option you are providing is just that much better than existing options.
For Airbnb this was the supply side - getting home owners to allow random people to stay in their houses.
For Rover this was the demand side - allowing strangers to walk their dogs.
The majority of the time the harder side is the supply side, but that’s not always the case.
Start small, within a niche
"I know you want the whole market, and you've pitched your VCs and employees that you're going for this giant market, and you'll be a billionaire someday...
But that's the convertible...
And you actually have to build a skateboard to begin with...
You have to love the skateboard..."
-James Currier, NFX
When you're building a marketplace, starting small is not only the right thing to do - it's necessary.
Instead of going after the entire tours and activities market, you may start with Scuba diving for people over 65.
This specific “SKU” becomes your “white hot center” which everything else will bleed out from.
From there, you may move into other activities for people over 65, or attract younger people who also like to scuba dive. It’s a natural progression into other tangential areas once you get movement from your white hot center.
Here are some examples of starting small:
eBay started with Pez Dispensers and expanded into Beanie Babies
Uber started with black cars and expanded into normal cars, helicopters, SUVs
GOAT started with shoes and expanded into clothing, baseball cards, watches
Amazon started with books and expanded into… everything
Do things that don’t scale
There’s a term for this - Flintstoning: To people on the outside, it looks like you are driving a fully operational car. But under the surface, your feet are quickly moving to make it go.
DoorDash manually uploaded menus from restaurants (without their permission) and when an order was placed, they would then call it in themselves, go get the food, and deliver it without the restaurant knowing it was going on
The founder of Zappos, an online shoe and clothing retailer, started by posting pictures of shoes from local stores on his website without actually having the inventory. When an order was placed, he would buy the shoes from the store and ship them to the customer. This allowed Zappos to test the market without a significant initial investment in inventory.
Groupon initially functioned without an automated system for handling deals and vouchers. The company's employees would manually generate PDF vouchers and email them to customers after a deal was purchased. This labor-intensive process was crucial for proving the concept before investing in a more scalable solution.
Here are 15 tactics to crack the Chicken or the Egg problem.
Tactic #1: Subsidize the most valuable side of the market
Other than for building the underlying technology, VC money is most useful in propping up one side of the market - essentially paying participants to stay engaged until the other side arrives.
Uber used VC money to pay the drivers to wait near busy areas, and offered first time riders free rides
ClassPasss incentivized studios to join their platform by initially paying them upfront for a bulk number of spots in various classes.
PayPal offered a Referral program where you’d get $20 for anyone you brought to the platform
Tactic #2: Use convenience as an onboarding ramp
Make your marketplace so freakishly easy for one side to participate that it would make less sense to not do it.
ThredUp made the selling process extremely convenient by providing free Clean Out Kits—prepaid bags that sellers could fill with clothes and send back to ThredUp for assessment. This hassle-free process encouraged more people to sell their clothes on ThredUp, boosting the supply side.
AirBnB made it easier to list your home by sending a professional photographer to take photos for the profile, which both completed a required action for the supply side and increased the odds of a booking.
Poshmark streamlined the shipping process by providing prepaid, pre-addressed shipping labels to sellers. This ease of use significantly lowered the barrier for new users to start selling, rapidly growing the supply side of their marketplace.
Tactic #3: Make supply look bigger with automation (or by faking it)
You can fake it until you make it. The supply can temporarily be someone else’s supply that you are accessing via APIs, or scraping.
Airbnb scraped Craigslist to fake the supply side
Reddit founders wrote the initial threads on most discussion boards
Ashley Madison created fake profiles (not recommended)
(Tactics 4 through 15 below for paid readers)