7 Strategies for Solving the Chicken

and Egg Problem as a Startup

By Alex Moazed on April 26, 2016

This post 7 Strategies for Solving the Chicken and Egg Problem as a
Startup originally appeared in the Huffington Post.
Customer acquisition is a core challenge for any startup. But for platforms this is doubly
true, thanks to the chicken-and-egg problem.

Unlike a traditional, linear startup, a platform doesnt need to acquire just one group of
customers. At a minimum it needs two, its consumers and its producers.

But a new platform doesnt initially create enough value to attract new users. Its not
economical for consumers to join the platform when there are no producers, and vice
versa. This is called the chicken-and-egg problem.

This problem is common to all platforms, and the key to overcoming it is to subsidize
value to your early users. As we explained in a previous post, there arethree main
ways for platforms to subsidize value. These are
Monetary Subsidies,
Product Features
User Sequencing.

Monetary subsidies include decisions about pricing as well as things like loyalty
programs and referral fees. For product features, many platforms create special
functionality for key users in order to increase loyalty and usage among particularly
valuable user groups. Both of these types of subsidies are guided by decisions on user
sequencing, which involves deliberate prioritizing the acquisition of certain users groups
that others will want to interact with.

Combining these ways of subsidizing value allow a platform to offer enough value to
early users to overcome the chicken-and-egg problem and reach the point where
positive network effects to kick in and drive future growth.

But what do these methods look like in action? Based on our experience working with
countless platform startups and our extensive research into successful platforms, weve
uncovered seven essential strategies that combine these ways to subsidize value to
overcome the chicken-and-egg problem and help your platform reach scale.

These strategies are not all mutually exclusive, so you use any one of them on its own
or you can use several at the same time, depending on your platforms resources and
goals. All of these strategies involve user-sequencing decisions, so weve sorted them
by whether they primarily involve using monetary subsidies, product features or both.

Monetary Subsidies
1. Enter with Significant Pre-Investment
Significant upfront investment in your platform can signal to your producers that its safe
for them to join your ecosystem.

This strategy is especially common for development platforms, where developers

incur considerable upfront costs to join a platform and high switching costs if they
decide to leave. For the platform, making a big up front investment signals that you
arent going anywhere and makes these producers more comfortable making a long-
term investment.
A great example of this strategy is Microsofts launch of the original Xbox. Microsoft
made a big deal about its commitment to spend $500M promoting the platform, thereby
signaling that the company was fully committed to its platform for the long haul. This
was one way Microsoft attracted third-party game developers, who would then feel more
comfortable developing games for the Xbox early on.
2. Build a Cooperative Strategy
Back in 2007, Google was in a precarious position. The company owned desktop
search, but the mobile Internet was starting to take off. With the iPhones runaway early
success, Google was worried that mobile would become Apples walled garden. Luckily,
it wasnt alone. Handset manufacturers and telecoms not named AT&T shared the same
fear. So Google created the Open Handset Alliance (OHA), a group dedicated to
advancing Googles Android operating system.

In essence, Google used a cooperative strategy. Rather than trying to build a network
all on its own, Google tapped into the existing sales channels of the companies in the
OHA to spread Android to consumers. With Android enjoying more than 80 percent
worldwide market share for mobile OSs and having more than 1.3M apps on its Play
Store, the strategy worked out pretty well.
Product Features
3. Act as a Producer
Why bother getting two users groups at the same time when you can only focus on
one? Thats the idea at the heart of this strategy, where the platform acts as the
producer to attract an initial group of consumers. It then uses its existing consumer base
to attract its producers.

In essence, this strategy means you start out as a traditional linear business and then
open up your ecosystem as you start to scale.

The iPhone is a classic example. When it first came out, Apple didnt allow third-party
apps. Once Apple had attracted a large group of consumers, it opened the App Store to
enormous success.

Another example is Amazon, which started out fulfilling all customer orders on its own.
However, as Amazon grew, the company opened up the Amazon Marketplace platform.
Third parties on the marketplace sold over 2 billion items on Amazon last year, a
new record. They now make up 40 percent of the sites annual sales.
4. Use an Evolution Strategy
Rather than trying to create a network from scratch, why not use one thats already
there? An Evolution Strategy taps into an existing large network in order to attract a
subset of its users. In order to attract these users away from the existing network, your
platform needs to provide incremental value compared to the existing solution. In
essence, youve recognized that youre creating the next evolution of an existing
network, and youre appealing to a portion of its existing network to help seed yours.

Airbnb used this strategy to help grow its ecosystem early on. The company tapped into
Craigslists large network by offering an improved experience for finding short-term
rentals. It then used features like its infamous (and now defunct)Publish on
Craigslist button to make it easy for its hosts to publish their Airbnb listings on
Craigslist. But anyone responding to the listings would still reach the host through
Airbnb. Airbnb apparently also simply spammed Craigslist posters to get more
hosts.
Dont think you can get away with repeating this same Craigslist trick now, though.
Craigslist was quick to ban Airbnbs tactic once it discovered what was going on, and it
has since banned any similar activity on its site, including a potential fine of up to
$25,000 a day. Unlike with a Cooperative Strategy, the existing network youre
siphoning users from isnt likely to take kindly to your activities.
Monetary Subsidies & Product Features
5. Create a Single- or Double-Sided Marquee Strategy

High-value users will help you attract other users who want to interact with them. Their
participation on your platform brings extra value to your ecosystem, so many platforms
will make specific efforts to subsidize the participation of these high-value users.

When Uber launched in Seattle, it subsidized town car participation by paying drivers
even when they werent transporting customers. This subsidy brought high-value
producers into the ecosystem, which in turn attracted paying customers.

Dating websites are another classic example. Their populations tend to skew heavily
male, so they often let women join for free. Other dating platforms, like Coffee Meets
Bagel, go even further, deliberately designing the experience to appeal to women with
the knowledge that if women join, men will too.
Facebook also used this strategy to great effect by gating access to its network and
opening up to Ivy League schools first. It then used the prestige of the Ivy League to
help market to other schools. Other college students wanted to join the social network
that all the Ivy League kids were talking about.

6. Target a User Group to Fill Both Sides

The idea behind this strategy is similar to #3: try to make a two-sided market one sided.
The goal here is to find a user group that can fill both your consumer and your producer
roles. That way, you no longer need to worry about attracting and balancing two
separate user groups early on.

This was the recipe for success for handmade goods platform Etsy. Etsys early
research indicated that the people most likely to buy handmade goods were the people
that also sold them. So the company decided to focus on this user group to fill out both
sides of its marketplace before expanding to other audiences.

The strategy worked pretty well, as Etsy is set to IPO soon.

7. Provide Single-User Utility (1 & 2)
Last but certainty not least is providing single-user utility. This is a come for the tool,
stay for the network approach, where you attract one side of your multi-sided
platform by offering that user group value even if the other side never shows up.
Many platforms that went this route were initially apps that provide their users with
essential functionality even if the network never materializes. Early Instagram is a great
example, as it provided its users with a way to take photos and make them look good
long before it evolved into a full-fledged social networking platform.

Restaurant booking platform OpenTable used a similar strategy in order to get

restaurants on board. The company realized that even the top restaurants in San
Francisco didnt have back-end reservation systems. They were still using pen and
paper to track reservations. So OpenTable built a software application to handle
electronic booking and targeted the top 20 in San Francisco, offering to help these
restaurants set the system up.
After these restaurants were on board, other restaurants became interested. And with
this core group of restaurants on board, OpenTable was able to successfully open its
platform to allow for consumers to book restaurant reservations online.

Of course, a less subtle way to provide single-user utility is simply to find a way to pay
your users. Doing this can help remove any initial uncertainty a user might have about
your platforms value, because whether or not the other users show up, theyll still get
value from participating. But be careful, because these direct monetary subsidies can
be hard to sustain long term. And once they go away, your users might too.

Conclusion
So those are the seven key strategies for getting your platform off the ground. While
early customer acquisition is especially tough for platforms, creative use of these
strategies should help you overcome the chicken-and-egg problem and attract your first
users. After that, its time to start building your network effects to rev your long-
term growth engine.
At Applico we help CEOs build disruptive tech companies. For more information on
startup traction and other platform-related topics please visit our platform innovation
page.