Cracking the Chicken-and-Egg Problem: How to Kickstart and Scale a Marketplace Business

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Hatched by Glasp

Aug 21, 2023

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Cracking the Chicken-and-Egg Problem: How to Kickstart and Scale a Marketplace Business

Introduction:

Starting and scaling a marketplace business can be a challenging endeavor. One of the most common hurdles faced by marketplace startups is the chicken-and-egg problem, where the demand for the platform outpaces the available supply. In this article, we will explore strategies to overcome this obstacle and drive initial supply growth. By understanding the experiences of successful marketplace companies, we can learn valuable lessons and actionable advice to help us navigate this crucial phase.

The Power of Direct Sales:

One of the most surprising findings from research on successful marketplace companies is the importance of direct sales in the early stages. Approximately 60% of the companies surveyed emphasized the significance of one-on-one direct sales. By personally reaching out to potential suppliers, these companies were able to build the initial listings on their platforms. This approach was particularly effective in immature markets without critical mass, allowing them to pick and choose the right mix of supply types.

Harnessing the Power of Referrals:

Referrals proved to be another powerful lever for driving initial supply growth. For around one-third of the companies surveyed, referrals accounted for the majority of their first transactions. Furthermore, these referrals were often the most valuable drivers of growth. By incentivizing existing suppliers to refer new participants to the platform, companies were able to tap into their networks and rapidly expand their supply base.

Piggy-Backing and Word of Mouth:

Another effective strategy employed by marketplace startups was piggy-backing off existing networks, particularly Craigslist. By leveraging the established user base and reputation of platforms like Craigslist, companies were able to quickly attract suppliers to their own marketplaces. Additionally, organic word of mouth played a significant role in the growth of early supply for approximately one-fourth of the surveyed companies. While not a growth lever in itself, word of mouth recommendations spread awareness and credibility, fueling the initial supply growth.

Subsidizing and Employee Involvement:

In some cases, marketplace startups resorted to subsidizing to solve the supply-demand imbalance. By offering financial incentives or guarantees, companies were able to attract suppliers and ensure their commitment to the platform. For example, offering a guaranteed hourly wage for drivers or providing subsidies for supplies and equipment. Additionally, involving employees in the supply side of the marketplace proved to be a successful approach. By actively participating and experiencing the challenges faced by suppliers, employees gained valuable insights and empathy.

Single-Player Mode and Performance Marketing:

The concept of offering a tool or service that benefits one side of the marketplace, also known as "single-player mode," was found to be a powerful tactic for bootstrapping the initial supply. Companies like OpenTable and Eventbrite successfully employed this strategy, providing value to suppliers before scaling the full marketplace experience. Furthermore, performance marketing played a role in driving initial supply growth for some companies. By strategically targeting and acquiring suppliers through paid advertising channels, these companies were able to jumpstart their supply base.

Unleashing the Power of Events and SEO/Content Marketing:

A few marketplace startups found success by organizing events or meetups to build their initial supply. Companies like Airbnb and Lyft harnessed the power of face-to-face interactions to attract suppliers and foster a strong sense of community. Additionally, while search engine optimization (SEO) and content marketing were not key levers for most companies in driving initial supply growth, there were exceptions. Eventbrite, for instance, found SEO to be impactful in attracting suppliers to their platform.

Leveraging the Value of New Ideas:

Beyond the strategies mentioned above, there are deeper qualities and attributes that contribute to marketplace success. Albert Einstein's example teaches us that being smart is not enough; what truly counts are the important new ideas one brings to the table. Having an obsessive interest in a particular topic and independent-mindedness are key qualities that enable individuals to discover new ideas. Additionally, surprisingly, writing ability plays a significant role in generating new ideas. Writing essays and books can uncover new perspectives and insights that contribute to innovation.

Conclusion:

Cracking the chicken-and-egg problem is a critical step in kickstarting and scaling a marketplace business. By learning from successful companies, we can identify common strategies and actionable advice to overcome this challenge. To drive initial supply growth, focus on one-on-one direct sales, referrals, piggy-backing off existing networks, and leveraging word of mouth. Subsidizing, involving employees, and employing single-player mode can also be effective tactics. Additionally, consider performance marketing, organizing events, and SEO/content marketing to further accelerate the growth of your supply base. Finally, don't underestimate the power of new ideas and the qualities that foster innovation. With these insights and strategies in mind, marketplace entrepreneurs can navigate the chicken-and-egg problem and lay a strong foundation for long-term success.

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