How to overcome the "chicken-and-egg" problem and use it to get things off the ground

March 16, 2020

While the "chicken-and-egg" problem is often cited as the biggest hurdle of a marketplace, it can also help you to get things started.

The chicken-and-egg problem is something that founders should be aware of, before starting a marketplace. To bring things into an offline context, for a farmer’s market to work, you need suppliers (the farmers) and demand (customers). This is something that needs to be in balance, and there needs to be plenty of the both sides for it all to work.

If there is no demand, no customers, it doesn’t make sense for farmers to participate. If there are no farmers, customers won’t visit that market. As the founder of an online marketplace, you will face those same issues, and it is usually the first thing you will have to overcome.

Treat the start one-sided

It is tempting to start with a two-sided marketplace and lay out the whole marketing to attract both sides. But that’s exactly the reason why the chicken-and-egg problem is so dreaded: You will have a hard time attracting either of the two.

I’m letting you in on a little secret: Those popular marketplaces that are IPOing left and right rarely started out two-sided. Uber was a texting service that went to a small pool of drivers who then picked them up. Airbnb was a way for the founders and their friends to rent out their air mattresses during big conferences.

You will have a much easier time if you forget the two-sided dream for the first few months. Instead of marketing a freelancing marketplace, build a freelance platform and recruit the freelancers yourself. Before you build the next delivery marketplace, maybe just start building an app and deliver the food yourself.

Suppliers can be your ambassadors

If you are starting out today with a two-sided markwetplace, it usually – and this is generalizing a lot – makes sense to look for suppliers first. These are often businesses or business consumers (like freelancers, drivers, landlords, …) who will have understanding for your current position. Not only that, but if you are entering the right markets, they could also be parties that are deeply involved in communities or might have an audience, providing you with access to new audiences.

As mentioned above, your first suppliers might be you and your friends. They may be people you found on the internet or other marketplaces. In the best case, they would be people with a certain influence and knowledge of the space.

For MentorCruise, it was clear to me that I needed to have mentors on board who would have the power to attract students. That meant getting people in the boat with a large following or working for a well-known company. After a lot of cold emailing, I ended up with around 90 emails of people who were interested, including Engineers at Google and Twitter, and some folks with north of 100,000 followers on Twitter. In the end exactly 12 of them joined, but it was enough to provide that first kick.

Positioning as two-sided service

Starting out one-sided makes it easy for you to validate a certain service. It makes it easier to figure out pricing, value propositions, make use of promotions in an early stage, and generally allows for more flexibility.

At some point, you will want to make use of all the benefits of a two-sided service and open the floodgates for the other side. I am in this process with MentorCruise right now, so I might not have the best advice for this just yet, but before you get to this point, think about the drawbacks and make sure that the benefits outweigh them.

  • You will have to re-think your positioning and let visitors of your site decide in which category they belong (example Uber, do I want to use Uber, drive for them, or both)
  • Think of your pricing and commission basis as frozen as soon as the first outsider gets onboarded. As you onboard suppliers, you establish a contract with them, and changing that contract requires agreement. That can be tricky if you want to test out things like trial periods or different pricing schemes. You can still change that all, it just requires more effort.
  • You will have to step up your support to support both sides
  • You will likely have to add training for your suppliers
  • As a platform, you will be responsible for the errors of your suppliers, so make sure you have a good refunding and moderation coverage.

There’s a lot more to turning a one-sided service into something two-sided, of course, but for now – let’s keep it there and save that for another post.