How to Kickstart and Scale a Marketplace Business – Part 3: Cracking the Chicken-and-Egg Problem 🐣 - Growing Initial Supply

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Aug 01, 2023

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How to Kickstart and Scale a Marketplace Business – Part 3: Cracking the Chicken-and-Egg Problem 🐣 - Growing Initial Supply

"The Buffett Formula: Going to Bed Smarter Than When You Woke Up - Farnam Street"

In the world of marketplace businesses, one of the biggest challenges is the chicken-and-egg problem, where supply and demand need to be balanced for the marketplace to thrive. Many successful consumer marketplaces, despite having a strong product/market fit and a high demand, often find themselves supply-constrained. This pressure on supply can hinder the growth of the marketplace. So, how can marketplace businesses overcome this challenge and grow their initial supply? Let's explore some strategies and insights.

  • 1. Direct Sales: An Unexpected Growth Lever

Surprisingly, one of the most significant learnings from research on marketplace businesses is the importance of one-on-one direct sales in the early stages. Sales played a crucial role in kickstarting supply growth for around 60% of the companies studied. By directly approaching potential suppliers and addressing their concerns and obstacles, these marketplaces were able to convince them to join the platform. Removing any downsides and making it easy for suppliers to sign up and try the platform was key to gaining initial supply.

  • 2. Referrals: Harnessing the Power of Recommendations

Referrals proved to be another effective lever for growing initial supply. Around one-third of the first trips on marketplaces came from referrals, and they were often the best drivers of growth. By incentivizing existing suppliers or users to refer others, marketplaces were able to tap into their network and expand their supply base.

  • 3. Piggy-Backing and Word of Mouth: Leveraging Existing Networks

For some marketplaces, piggy-backing off an existing network, such as Craigslist, proved to be a successful strategy. By integrating their platform with an established network, they were able to attract suppliers and users more easily. Additionally, organic word of mouth played a significant role in the growth of early supply for about a quarter of today's biggest marketplaces. Satisfied suppliers and users naturally spread the word, bringing in more participants.

  • 4. Subsidizing and Employee Engagement: Removing Barriers to Entry

In some cases, marketplaces used subsidies to solve the chicken-and-egg problem. By offering financial incentives or benefits to suppliers or users, they were able to attract and retain them. For example, ride-hailing services guaranteed a minimum hourly rate for drivers who maintained a certain acceptance rate. Additionally, engaging employees in the supply side of the marketplace, such as having them participate as suppliers themselves, helped overcome initial supply constraints.

  • 5. Single-Player Mode: Bootstrapping Supply

A tactic that wasn't as common but proved to be highly effective for some marketplaces was the concept of "single-player mode." This strategy involved offering a tool or service to one side of the marketplace that they found valuable on its own. For example, platforms like OpenTable and Eventbrite provided benefits to restaurants and event organizers, respectively, without initially focusing on the demand side. This approach allowed them to build a strong supply base before expanding to the other side of the marketplace.

  • 6. Performance Marketing, Loops, SEO, and Community Leverage

Other strategies that marketplaces employed to grow initial supply included performance marketing, creating supply-oriented loops or virality, leveraging SEO and content marketing, and organizing events or meetups. These tactics varied in effectiveness depending on the marketplace and its specific dynamics.

The Buffett Formula: Going to Bed Smarter Than When You Woke Up

While marketplace businesses focus on cracking the chicken-and-egg problem to grow their initial supply, it's essential for entrepreneurs and business leaders to continually improve themselves and their knowledge. Warren Buffett, one of the most successful investors of all time, attributes his success to his habit of reading and learning.

Buffett and his partner, Charlie Munger, prioritize reading and spend hours each day accumulating knowledge. They believe that going to bed smarter than when you woke up is the best approach to personal development. Reading productive material and critically analyzing it helps them form opinions and make informed decisions.

Buffett and Munger emphasize the importance of thinking for yourself and relying on facts rather than other people's opinions. They believe that thinking critically and having partners to bounce ideas off of are crucial for making sound decisions.

Actionable Advice for Marketplace Businesses and Individuals:

  • 1. Focus on a few key growth levers: Instead of trying to tackle multiple strategies, identify and prioritize the most effective levers for growing your initial supply. Direct sales, referrals, and leveraging existing networks are often successful starting points.
  • 2. Invest in continuous learning: Cultivate a habit of voracious reading and strive to become a little wiser every day. Develop a curiosity that drives you to seek out new knowledge and perspectives. This investment in self-improvement will pay off in the long run.
  • 3. Be critical and think for yourself: Don't just accept other people's opinions or go with the crowd. Take the time to analyze information and form your own opinions. Surround yourself with partners or colleagues who can challenge your thinking and help you make better decisions.

In conclusion, growing initial supply for marketplace businesses can be a challenging task. By focusing on key growth levers, such as direct sales and referrals, and leveraging existing networks, marketplaces can overcome the chicken-and-egg problem. Additionally, adopting the Buffett formula of continuous learning and critical thinking can benefit both marketplace businesses and individuals in their quest for success.

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