Solving The Chicken And Egg Problem In Marketplaces

Marketplaces are appealing for entrepreneurs and investors because – at scale – they are very hard to disrupt. But before your marketplace can get to scale, you need to solve the chicken and egg problem – figuring out who to bring first – buyers or sellers; producers or consumers; supply or demand. That’s why building a marketplace feels like building two separate companies, at the same time, with the growth in each being dependent on the other.

A marketplace cannot acquire buyers if there are few or no few sellers on it, and would not be able to convince sellers to join the if there are no buyers. This cold start problem can make marketplaces extremely difficult and expensive to build. Here are some approaches that has worked for marketplaces in solving this chicken-egg problem.

Launch a Saas enabled marketplace

Create a compelling value proposition and persuade seller to sign up by building a product your sellers can use independently. By onboarding sellers this way, it attracts buyers to your platform, thereby creating the makings of a marketplace. If you can leverage this buyer-seller dynamic to get to critical mass, you have put yourself in a great position to scale a marketplace. OpenTable is a good example of a marketplace that started by selling a single product (table and guest management software for restaurants). That product brought restaurants to OpenTable, which then allowed OpenTable to offer online reservations to diners, thereby getting the flywheel for network effects spinning. For the early part of its existence, OpenTable was merely a product company, and not a marketplace. But once OpenTable reached critical mass of restaurants and diners, they evolved into a marketplace, and a really successful one going by their 2.6Bn acquisition by the Priceline Group.

Chris Dixon call this “Come for the tool, stay for the network.”

Act as a seller

A variation of the SaaS enabled marketplace is to take on ownership of bringing the initial liquidity by producing it yourself.  Your primary objective at first is selling your own products or services and using that to drive growth with buyer. If you reach sufficient scale, then attract other sellers with the promise of buyer engagement. The success of this depends on being successful in selling your own product or service, which is expensive and can be time consuming. But if your manage to attract a critical mass of buyers, it becomes easier to acquire more sellers and you then have a viable marketplace. Walmart used this approach by first launching their own marketplace, and then introducing 3rd party marketplace.

Buy supply

If you can’t pursue the SaaS route to create an incentive for sellers to join your platform, you can offer financial incentives instead. If the long term economics of the marketplace support such an expensive user acquisition and if there’s a significant market opportunity this is an option. Uber and all other ride sharing companies pushed this approach to the limit. Uber’s launch playbook in every market involved seeking out a large pool of drivers and promising to pay them a fixed hourly wage even if they didn’t pick up/drop any passengers. Drivers could sign up, and sit around all day and still receive a  paycheck every week. Uber’s intention was to onboard enough liquidity so that when passengers opened the app, they found a driver quickly. While these economics aren’t sustainable in the long run, it has proven to be an effective way for Uber to launch and win new markets.

Leverage existing user network

This is an approach that can work if you are launching a marketplace as an extension to your existing user network. Facebook built a massive user base over several years, and then introduced vertical marketplaces to that user group. Facebook Marketplace allows sellers to list furniture, clothing, cars, bikes, toys, etc.. for the rest of the community to discover and buy. Facebook Jobs allows companies to post job openings.

Attract a single user group that is buyer and seller

Targeting a specific group which behaves as both the seller and the buyer of a product or service gives you an opportunity to launch a marketplace on a very small scale. Etsy is a great example of where their early audience was people interested in unique handmade crafts. These users often take turns being the producer/seller and the buyer of these unique goods. And given the close knit nature of such communities, these early adopters tend to bring other like-minded users on to the platform. 

What is the best approach for your marketplace?

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