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 14 tactical tips below, using examples from real companies.
Founder, chasing chickens
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.
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)
Tactic #4: Create exclusivity
As Groucho Marx once said “I don’t want to be a part of a club that will have me as a member.” People want to feel like they are a part of something exclusive. Create an artificial velvet rope.
Robinhood created a wait list which prominently displayed where you were in the line to get free trades.
Etsy positioned itself as a marketplace exclusively for unique, handcrafted goods, differentiating it from other e-commerce sites like eBay or Amazon. This exclusivity appealed to sellers who wanted a dedicated platform for their niche products and to buyers seeking unique items.
The League, a dating app known for its exclusivity, made it so you had to get “accepted” based on your accomplishments, job, and looks.
Tactic #5: Impose artificial time constraints
Force the demand and supply to show up at the same time.
Clubhouse made their content live listening only, with only a fixed number of seats available.
Gilt made clothing sales available during only certain hours.
Tophatter only allowed people to bid between 8 and 9 PST.
Sidenote - my college roommate did something similar when he was selling his (kind of wrecked) motorcycle - he “scheduled” all three potential buyers to show up and see it at the same time. It started a bidding war in his driveway.
Tactic #6: Build a single player tool for one side
Marketplaces inherently need a minimum of two players to work. You can attract one side by offering tools that are useful in and of themselves to just one side. And when you’re ready to make it a network, you’ve already built pent up supply (or demand).
OpenTable started as a reservation tool for restaurants to plan seat capacity and scheduling internally, transitioning from closed end to open end.
LinkedIn got users on the platform by allowing them to create a professional resume and profile.
Zomato started by providing restaurant reviews and information, then gradually moved into the food delivery marketplace.
Tactic #7: Act as a provider (at first)
You can be the supply side for a temporary (or forever) amount of time.
Apple and Google built the first apps themselves for their app stores
Home Joy required some employees to actually clean homes (yikes)
OpenDoor still buys the actual houses and then sells them
Maybe the best example: this guy literally went out and bought the stuff people purchased, then sold them on eBay.
“When people rented the items, I went out and bought them, first hunting for the lowest price on line. Then I rented it to the new Rentoid member in good faith and gave them an exceptional user experience.
After the rental I sold the item on eBay for around about 80% of the retail price.
I pretty much re-couped my costs doing this.”
Tactic #8: Build a community first
Start by creating a community around the interest or need your marketplace serves. This builds a dedicated user base before the marketplace aspect is introduced.
Allrecipes began as a site for sharing recipes. The vast collection of user-generated recipes attracted a large audience of home cooks. The platform then leveraged this user base to attract advertisers and partners in the food and cooking space.
TripAdvisor: While known for its reviews and booking services, TripAdvisor also offers a vast array of travel-related content, including travel guides, tips, and forums. This content attracts travelers, who then use the platform to book hotels, flights, and experiences.
Goodreads combines a book review and recommendation platform with a social network for book lovers. Its vast content in book reviews and recommendations attracts readers, which in turn makes it an attractive platform for authors and publishers to promote their books.
Tactic #9: Make something free that usually costs money
Credit Karma offered free credit score checks, a service that typically required payment. This free offering attracted a large user base, which they later leveraged to promote credit card and loan offers from financial institutions.
Mint.com offered free, user-friendly personal finance tools, like budgeting.
Robinhood attracted users to its stock trading platform by offering commission-free trades, a significant differentiator from traditional brokerage firms.
Tactic #10: Partner with niche influencers
Turo, a car-sharing marketplace, used YouTube influencers to showcase the range of unique and luxury vehicles available on their platform.
Poshmark partnered with well-known fashion influencers who would showcase their Poshmark closets. These influencers promoted their Poshmark activities on their own social media channels, attracting their followers to the platform.
Glossier leveraged beauty influencers and makeup artists to showcase their products, creating a community of users who not only buy but also actively participate in brand discussions.
Tactic #11: Recruit supply from physical / virtual events
Etsy representatives attended craft shows and art fairs to recruit sellers. They set up booths to demonstrate the platform and helped artisans and crafters understand how Etsy could expand their reach. This face-to-face interaction was crucial in building trust with potential sellers.
Poshmark created a unique feature called "Posh Parties," virtual buying and selling events where users could gather in the app to browse, buy, and list items. This feature encouraged both buying and selling activities, simultaneously boosting supply and demand.
Yelp’s initial strategy was to host parties and events for their 'Elite' reviewers in various cities. This helped create a core community of active users who generated a large volume of reviews, attracting more users to the platform.
Tactic #12: Remove Downside Risk
It’s natural that a new way of monetizing a good or service will need to overcome inherent frictions compared to the old way of doing things.
Turo provided insurance coverage, making it a low-risk option for car owners to earn money from their vehicles.
LendingClub offered a buyback guarantee to investors on some loans. This reduced the perceived risk for investors, encouraging them to use the platform, which in turn attracted borrowers.
StockX implemented a rigorous authentication process, ensuring that only genuine products were bought and sold. This built trust in the platform and attracted sneaker enthusiasts.
Tactic #13: Use content as a hook
Houzz combined a marketplace for home furnishings with a wealth of home improvement content, like articles and photos for inspiration. This content attracted homeowners, who then also used the platform for shopping.
Discogs started as a database for music enthusiasts to catalog and showcase their record collections. This rich database attracted collectors and music lovers, which naturally transitioned into a marketplace for buying and selling records.
Lynda.com (now LinkedIn Learning) created high-quality, professional educational videos and courses. This content attracted learners to the platform, which later expanded to include courses from other professionals, creating a comprehensive learning marketplace.
Tactic #14: Run Contests
99designs, a platform for freelance designers, used design contests as their core business model. Clients would submit a design brief and a budget, and designers would compete by submitting their designs. The client would then pick a winner, who received the payment.
Kaggle is a platform for data science competitions. Companies and researchers post their data and statistical problems, and data scientists compete to produce the best models. Winners receive cash prizes or recognition. This method attracted a large community of data scientists, which in turn made the platform attractive for companies needing data analysis.
Devpost organizes online hackathons and coding competitions where developers can showcase their skills and win prizes. This attracts a large community of developers, making the platform appealing for companies looking to host hackathons or find talented developers
Stuff I read at 3AM:
NFX: 19 marketplace tactics for overcoming the chicken or the egg problem (excellent read)
