Online marketplace require two sets of users – sellers and buyers or producers and consumers – for them to function. But when you’re a new platform, you have no sellers; therefore, potential customers see no benefit in signing up. On the other hand, without buyers, sellers are going to be reluctant to join your platform. This vicious cycle is called the chicken-and-egg problem.
How can we solve this dilemma? Here are some proven strategies you can use
Launch with significant pre-investment in the platform
This approach carries a strong message – you’re committed to growing your platform. This kind of messaging is important especially if you’re trying to attract developers.
For example, when Microsoft launched the Xbox, it did so while highlighting its $500 million marketing budget. That was the most money Microsoft had ever spent launching a product, ever. This move was instrumental in attracting new developers and publishers to the platform. They even secured some exclusives, which attracted more consumers. Chicken and egg problem solved.
Today, the Xbox is a multi-billion dollar division under Microsoft.
Start off the platform as a producer
Depending on how many resources you have, attempting to attract both producers and consumers simultaneously may spread you too thin. So, taking on the mantle of producer solves your chicken and egg dilemma.
As a producer, your focus now is creating products that will attract consumers. When you’ve grown your user base well enough, then you can open up the ecosystem to other producers/sellers. Nintendo and Amazon did this successfully with their hardware and marketplace respectively.
Nintendo usually creates first party software on their consoles to spur interest and garner sales. This then leads to game developers and publishers rushing to release a “Nintendo” version of their best games on the console. Amazon initially fulfilled all orders by itself. It was years later that the Amazon Marketplace became a thing (an extraordinary thing).
Acquire high-value users first
High-value users have an intrinsic quality – they attract other users. By concentrating on securing them, perhaps by offering them incentives to join your platform, their presence will inadvertently attract other users.
Take Facebook as an example. The social network started out as an exclusive Ivy League social network. As human beings are naturally aspirational, this exclusivity made every other college out there clamour to be on the network. So when the walls opened up (pun unintended), there was a mad dash to sign up.
For Facebook, the Ivy League schools were the high-value users.
Sign up a celebrity chicken
Preferably, in an exclusive deal.
Getting endorsements and partnerships from someone with an existing large fanbase could be a good coup. You can gain significant credibility, PR value and brand awareness for your product in doing so. You also automatically gain their fan base on your platform. As they would follow the celebrities to your platform. You get the point. Just make sure your platform isn’t buggy or this could backfire big time.
Leverage the power of an existing network
Picture your startup hitching a ride on the back of an already established platform. The key to picking the right network is to ensure your platform complements the existing platform. Or solves a problem in that network.
For example, Paypal was able to gain traction by “invading” eBay and offering a more convenient payment method. I mean, an account that needs just your email address to function? It was a genius move by Paypal.
Focus on a single utility
This is one of the bootstrapping techniques that can be employed to build a product that required network effects to scale. The idea is to get to significant traction by offering users a single utility tool. By focusing on one feature, the product can have the advantage of delivering value to its users in a way that is 10x better than products that offer a broad range of usage.
The primary objective is to gather a critical mass of audience around the product, thereby creating a community and good network effect. A good example is Instagram. Initially, Instagram was just a free and cool app that does photo filter better than Facebook. The platform gathered an audience and an active community around a single tool.
These strategies are proven strategies to kickstart your platform. And the good news is, you can mix and match each of them, to find any that suits your startup.