Art by Lyndal Whiting
The chicken and egg problem is a challenge for all new businesses as the best way to get new customers is usually through referrals from existing customers. However, the chicken and egg problem is especially hard for marketplaces or platform businesses. For marketplaces, bringing two audiences together at the same time, in enough quantity to kickstart a growing customer base is extremely hard. For platforms, building traffic and the ability to monetize content involves a lot of work before any revenue is even possible.
I experienced this first hand when I started Offload, an app for hiring local freelancers back in 2017. Among other mistakes, we failed to get simultaneous traction with buyers and sellers and ended up having to close it down. It was the single most painful failure of my life and I’ve spent a long time reflecting on this problem and the best ways around it. I am now navigating this challenge again with Zeltta, and we are solving it using a combination of the strategies below.
For a platform or marketplace to grow you can’t afford to manually help each customer get onboard. You should manually assist every customer you can, but you will not grow if they cannot do it themselves. Also, if you don’t deliver enough value to retain customers from the beginning, you will fade.
At the legendary startup incubator, YCombinator, they coined the phrase “Do things that don’t scale”. Their advice is that innovative unknown ventures must be prepared to do things far above and beyond the expectations of early customers in order to gain their trust and confidence. Multiple cognitive biases are working against you, and the only way to counteract these is to blow their expectations out of the water.
For a platform or marketplace business, the overall number of people you reach is meaningless. What is extremely important is how deeply committed your customers are. The smaller and more tight-knit your target market is, the better the chances of starting a sustainable referral process. It is better to cultivate five champion customers who absolutely love your product than to have thousands who think it's okay.
This strategy involves either directly paying users to start using your product, partnering with an existing supplier, or leveraging existing marketplaces and platforms to direct traffic to yours. This strategy works if you have big piles of cash lying around that you don’t mind using to get customers onboard. But this strategy can potentially be damaging. If your product doesn’t meet the three requirements listed above, it will still not stick and it would be a wasted effort.
A company that succeeded following this strategy was PayPal. PayPal was fortunate enough to get started at a time when insane amounts of money were pouring into internet ventures. They were able to create a referral model where they spent
$60 million paying people to start using it. If you joined PayPal, they would give you
$20 and if you got a friend to join they would give you another
$20. But it wasn’t straightforward, they still worked extremely hard to make it catch on, focusing on the eBay power-seller community and doing everything in their power to reduce friction and inspire confidence.
Unfortunately, most of us don’t have piles of cash lying around so the next two options are more realistic.
In this strategy, you make yourself the first customer and develop a product that solves your own problem before selling it to others. This means becoming the first supplier on a marketplace or content-producer on a platform and making it work well for you before inviting other suppliers or creators to start using it.
An example of a company that has successfully followed this strategy is Amazon. Amazon started as an online bookstore, and they expanded their range of products until they had built a site with enormous sales volume. Later on, they began allowing other businesses to sell their products directly through Amazon using the online selling software Amazon developed.
This strategy is the most powerful and elegant in my opinion, and here's why: The biggest advantage of platforms and marketplace businesses is that they create something called network effects. Network effects happen when products get better as more people use them, and this creates a natural barrier to competitors. For marketplaces and social networks, the more people use them, the better they get. Unfortunately, network effects are exactly the source of the biggest obstacle for platforms and marketplaces, they are useless if nobody else is using them.
The way to overcome network effects is to create a product that is useful even if nobody else is using it - and creates network effects as a byproduct. Simply put, you make people come to you for the tool and then stay for the community.
The best example of this is Instagram. When Kevin Systrom started Instagram, it was a tool for adding filters on photos to enhance the photos and easily share them onto facebook or twitter. After a while, as more people used it, users realised they could explore and engage with other users and their photos without leaving the app. Instagram exploded because people came for the easy-to-use photo filter tool and they stayed for the social network.
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