How to solve the Chicken and Egg Problem? 22+ tactics

Hi Startupper. Previously, we presented a list of tools that you can use to achieve your main aim. Today, we want to share a list of tactics big players use to solve the chicken-and-egg problem in startups. Dig through each of them to solve your chicken and egg problem in your business.

What is the Chicken & Egg Problem for Startups?

The Chicken and Egg problem is similar to “Wikipedia Chicken & Egg” where you don’t know what was the first. It mainly relates to marketplaces.

Once you are developing such a platform you need to have sellers and buyers.  It is not so easy to attract a single type of user into the app, but in the marketplace, it makes x2 harder. Each side (user type) finds the platform useful only if there is another side on the platform.

A good sample here is PS or X-Box, no one would buy them if there were no games. So, let’s say you are launching a third-type console. You would need to show some games – to attract developers to sell the console. But which of them would agree to have extra platform support with no users?

So, how to solve the chicken and egg problem in your own startup? Let’s check others’ experiences. But before that, let’s check what is capital efficiency?

Capital Efficiency

Despite the tactic you would choose or a mix of tactics, we believe there are three capital efficiency options:

Small Competition – If you focus on delivering value and solving problems, like OpenTable did, you’ll face very little competition. Postponing the classical supply part is also a key strategy. These strategies aim to give suppliers a low-risk opportunity to try out a service.

Low Churn Rate – Such services are higher friction to adopt. If the tool provides a critical operation of a business, it would be harder to leave a marketplace. If you are not sure what is the Churn, check the details here.

Cash Flow Growth – As rule marketplaces need liquidity on both sides to generate revenue. So, they need to spend more on marketing. The great solution made OpenTable and MindBody.

They generate revenue from software tools even before they become a marketplace. What is more, OpenTable generates +50% of its own revenue from subscriptions. 

Amazon is a great sample. It started as a book retailer and you know where they are. So, they used the cash turnover to grow later on. Compared to other big startups, Lyft and Uber needed hundreds of users. They also required thousands of passengers to establish value in the market.

Answering the question: How to solve the Chicken and egg problem in the marketplace? There are many strategies, and it doesn’t mean that what worked for OpenTable will work for Uber or Lyft. These startups had their own great solutions to solve the chicken and egg problem in their own startup.

Tactics to Learn

You might think that the safest choice is to get sellers first. The main purpose is to use advertisements. The goal is to establish the customer database and promise a substantial increase in demand. What is more, there is no need to pay sellers before there is any order.

In case you have enough efforts you can provide them with a deposit to attract some good merchants and ask them for cross-promotion. So, you would be able to cover both merchants and promotions to attract more customers for your initial launch. – that’s our Tactic #0 for you to solve the chicken and egg problem in a startup.

Solving the chicken and egg problem is the top priority for marketplaces. This is super important for any technical partner to know, as they need to guide startups.

So, we examined a list of well-known marketplaces’ history and are pleased to share tactics that they did in their own way. So, how did Airbnb and Uber overcome this problem? Here are the tactics used by them and some other big startups:

Tactic #1: Complicated feature first

Once a single side reaches its top activity point, the other side (supply or demand) starts to grow organically. Sure, it depends on the market, it is always hard to attract a single side, either supply or demand.

The easiest way to sort this out is just to gather analytics from your sales & onboarding. Certainly, attracting more users on the challenging side brings greater value. Once you have enough of these users, getting the others on board becomes 2 to 10 times easier.

Outdoorsy is the RV rental marketplace. Getting RV owners was the hardest side for them. Since they could convince suppliers to join the platform their demand came x5 cheaper & faster. That was a key point for Outdoorsy to become the online Mecca for mobile lodging.

Tactic #2: White Hot Center

Find a small group in your community that cares the most about your idea – your marketplace. Find it, then go after such users. You would need to stay tight to such a niche and repeat it till it scales.

Samples: The first traction eBay got with selling Beanie Babies. Craigslist had just email lists to its friends who were searching for a job and apartments for rent. Uber started its own campaign in San Francisco with luxury cars to rent. Poshmark targeted urban female professionals in California.

Tactic #3: Capitalise on the most valuable side

Pay cash to one of the sides which is most valuable to join your marketplace.

 A list of companies did it. Uber gets to key cities and paid drivers (suppliers) to be in the app, so their riders (buyers) always had a car to book. ClassPass paid gyms upfront to join their platform. Helix covered a portion of the cost of genetic tests to solve the chicken and egg problem in your business.

Tactic #4: Fake your supply size with the automatization

Get as much data as possible from the web regarding your supply side. All this will give a vision of quite a big marketplace that has a lot of activity.

This is quite a popular tactic, and here are some well-known companies who did that already. GoodReads, Indeed, and Yelp collected data about local businesses, books, and job postings. All the data they put into their own platform.

This approach made people notice that many good companies posted jobs there, making them want to try the platform. That’s how they solved their own problem.

Tactic #5: Fake your value

You can try to create bots that will use other resources and grab users to your platform. PayPal used such tactics. They created a bot that was purchasing stuff on eBay and asked to pay with PayPal.

Sure, such a bot should behave like a human. Nevertheless, it worked. Reddit also used fake users to “plant” interesting questions and attract users to the platform.

Tactic #6: Target & launch only 1 side as an email list.

One of the easiest ways to launch a marketplace is if your buyers would be sellers too. That’s how several well-known companies started their own way.

Threadless started with a light version – an email list. Craigslist used the same tactics. Craig had emails from friends and was selling them instruments. Later he proposed all subscribers sell their own stuff within his list.

Tactic #7: Host Events

Yes, scale events are a tough task. But they are quite effective at the very beginning. You can generate community, demonstrate activity, and provide your customers with real-time feedback. This works even better when powered up with social loudness.

That’s what Poshmark did. They hosted “Posh Parties” where guests could exchange fashion goods. It was a place where the app was presented, and users could solidify their own new connections.

Yelp used the same tactics in 2004. It was “Yelp Elite parties”. All Attendees received such a “badge” and went home as heavy reviewer members of the Yelp community. Nice tactic to solve the chicken and egg problem in your own startup, isn’t it?

Tactic #8: Build a SaaS tool for a single marketplace side.

Such tactics provide you with time to attract another side. What is more, it locks the first one inside if you have real-time support and feedback gathering.

That’s exactly what OpenTable did. They added a reservation service and had managers call restaurants to book tables for users.

Once OopenTable got the booking, users received notifications. Honeybook launched software for event planners and professionals to deal with billings, workflow, and proposals. StyleSeat, which allows reserving hairdressers, employed similar tactics.

OpenTable was selling software to restaurants. They created a tool named the “Electronic Reservation Book” to handle tables and used a subscription model for it. So, the software was the main value for them. And that’s another option to solve the issue.

Sangeet Paul Choudary called their seeding strategy – Standalone Mode. Chris Dixon called the same strategy – Single Player Mode.

Tactic #9: Provide a software 3d party that can cover a second side

Android builds software for cell phone manufacturers that provide them with customers. Such a move pushed Android to cover half of mobile OS coverage and revenue. MySpace provided bands with free pre-setup profiles. In return, bands attracted their fans in.

Tactic #10: Target a single giant user for a supply or demand.

One of the best samples we could find is Candex. They targeted Siemens and became a big anchor for their demand side. Once they partnered, Siemens began requiring its vendors to use the Candex marketplace for payments.

Tactic #11: Make a single side change behavior.

There were around 10 startups that were trying to get to mobile payments before Square. With such a competition, you need to be as fast as possible. So, Square made one single side – the merchant side and later supply-side changed their behavior. Meanwhile, the buyers were using their credit cards as usual, so there was no barrier to entry for them.

Tactic #12: Make something free at once

Quite a simple and popular tactic, something that costs money on your platform, at one time becomes free within a limited time.

A good sample here is Robinhood which is a stock trading and investing platform. Initially, they launched with a commission. One day, they removed commission completely and made such a move a great buzz.

Now, the valuation is over $11.2b. The same move Napster did with free music. Skype made a free video and phone calls. And do you know another sample who used such a tactic to solve the chicken and egg problem in their own startup?

Tactic #13: Product first. Marketplace after

SalesForce created the CRM tool before launching the Force marketplace a year later. Initially, Amazon launched as a retailer before opening a well-known marketplace. And more than 50% of transactions are coming from suppliers instead of warehouses.

Apple created 32 apps before launching the AppStore. Before opening a marketplace to sell software to HRs and SmartRecruiters was a SaaS tool with a job posting. 

Tactics #14: Manually connect the two sides.

A great Chicken and Egg Problem marketplace sample here would be Zappos & Zenefits. Initially, the Zappos team was dealing with orders manually: fulfilled the order, drove to shoe stores, bot them, and shipped them. Such a flow allowed them to polish out excellent initial transactions. The same did eToys and Zenefits – health insurance services.

Tactics #15: Target a niche where sellers are buyers too.

Avoiding together by building a one-side could be one more easy way to resolve The Chicken & Egg Problem. In this case, you can simply target all your resources in terms of both launch and promotion.

That’s what Poshmark did. The majority of their buyers were selling fashion too. The same start was for Match. Every customer you attract here becomes both a “seller” and a “buyer,” essentially doubling their value.

A similar strategy used OLX and Letgo. But they made a huge leap by using TV advertising to reach the first users:

We began with aggressive marketing on Oct. 17, 2015… and back then very few people were aware of Letgo,” he said. “Today, we surpassed the 45 million downloads milestone a couple weeks ago and a third of all listings are sold.

Letgo founder Alec Oxenford to Forbes

Tactics #16: Exclusive access

Create a fear of missing out on one side with a simple restriction and limited access. But it works only if you detected your niche and you have enough resources to create a buzz.

Catching viral interest with such a tactic will lead to word of mouth and increased participation in your marketplace. But without strong background resources, such a tactic won’t work. Gilt, Gmail, and Mailbox employed such tactics.

Tactic #17: Geo-location targeting

Regardless of your marketplace’s focus, always start locally with your idea. Once you are launching, it is much easier to target users in a particular city/state. It’s tough to reach everyone everywhere because we don’t have enough resources to figure out the best way to work with them.

This is what most successful marketplaces are doing. Our favorites include Lyft, Yelp, and Craigslist.

Tactic #18: Time constraint

Make limited access to marketplace features. This would provide you with excitement and usage pikes in your analytics. We would suggest using such tactics once you have validated your idea already and have at least 1k users from each side. A new update can introduce such a feature, enhanced with media buzz.

That’s what Tophatter did. They allowed bidding for only 1 hour in the evening – from 8-9 pm Pacific Time. Intermedia Labs did the same with the HQ Trivia app to generate excitement.

Tactic #19: Demand Constraint

A good chicken and egg problem marketplace sample here would be Groupon. They contained the supply down to a single coupon per day.

Also, Fiverr made all pricing within 5$ (Sure, later Fiverr used Tactic #16 with sellers and called it Fiverr Pro). The main idea is to focus on a single proposition as well as possible. It would give the target audience a reason to join your marketplace.

Tactic #20: Targeted Events (evaluation of Tactic #7 – first 15k users)

Everyone has heard of Tinder. Today (2019), thanks to Tinder, there are 1 million dates per week. How did they overcome each market’s nightmare? There is an interesting story behind this.

1. Tinder co-founder Whitney Wolfe packed her suitcases and set off on a trip across the country. 
2. She started women’s communities in each city, encouraged them to join the app, and explained how cool and useful it was.
3. She then gave a demo for the male community and showed the app filled with local girls who had already signed up.
4. When Whitney returned from a business trip, 15,000 first-time users had used the app.

Your presentation was great. She would go to her sorority chapter, give her presentation, and ask all the girls in the session to install the app. Then she goes to the appropriate fraternity—they open the app and see To all these lovely girls they know…

Angel Munoz, Coder.

In 2014, Whitney left Tinder to start Bumble (Tinder’s biggest competitor). Bumble is now worth over $1 billion, and there are rumors they might go public. Interested in more stories about women in business?

Check this article

Tactic #21: Parasitism + Tactic #4

Any approach is good if it works. Today, Airbnb is a massive company worth $35 billion with 11,000 employees worldwide. But in 2008, they were just starting to think about airbeds and breakfasts for strangers. Like all markets, they face a chicken-and-egg problem:

• Landlords don’t want to include their apartments in the service without a visit.
• Tenants have nothing to rent on the platform.

How did Airbnb get out of the woods? (Already a legendary example):

1. They created a script that scans all listings from hosts on Craigslist and collects their emails.
2. The script also sent a letter from a girl who really likes apartments, asking the owner to list his apartment on Airbnb.
3. Airbnb quickly acquired 60,000 of its first hosts, solving the chicken-and-egg problem.

Additionally, they make it easy for users to post listings on Craigslist with one click from Airbnb.

Craigslist later closed this backdoor for collecting emails, but the main idea is still in its infancy. If you need the first batch of users, you can copy them from somewhere. Moreover, many services often have such weaknesses. You just have to look at opportunities like this.

For example, our friend started a music project in 2016 and managed to scan about a million(!) emails from musicians and music establishments from various sources. They also sent letters on behalf of a “young girl” with >50% open rates.

Tactic #22: Start as E-commerce with Drop-shipping

It works best if you have your own goods to sell/rent. So you can polish out the behavior with users and later attract more merchants into the platform, just like Etsy did.

They started by selling their own handmade items through Ecommerce. Later, they reached out to other merchants to collaborate on a drop-shipping model. Once they start getting a profit they moved to a fully-featured Marketplace with a demand.

Tactic #23: Acting as a producer

You can act as a producer of your items. Shauna Mei’s father was traveling around the world and was bringing different stuff from other countries. Each item had its backstory and this point Mei liked the most. Such a childhood story provided a great impetus to launch AHAlife.

The luxury e-commerce marketplace strives to narrate the story of how it created each item. What is more, Mei added a biography of the designers who worked on it. Such an approach attracted a list of creators that are offering unique items.

Tactic #24: Motivation tokens (Extra tactic)

As a rule, the majority won’t join your platform till everyone is there. But you need to show an activity there. You can pay tokens to join your platform, you can pay with tokens for user activity and much more.

Frequently Asked Questions (FAQ):

Conclusion

Despite the fact of how many tactics you would like to use in your strategy. We suggest staying lean and focusing on a limited supply, features, etc. It is much more reasonable to invest in buzz and perfect a single feature/sell process/etc.

Having too many features and products can make it tough to keep both suppliers and buyers happy.

In addition to all these tactics, feel free to check our Case Study of “marketplace” that rises to $2m in sales within a year.

Nevertheless, the tactics above are just some points we found. Remember, your imagination is the only limit. If you have any additions to the mentioned tactics, feel free to drop us a line.

p.s. We would highly appreciate it if you share how we suggest solving the Chicken and Egg problem for startups 🤓

p.p.s. Here is a list of other white spots regarding marketplaces that you would want to review:

• How to develop a SaaS marketplace?
• How to evolve from e-commerce to marketplace?
• How to build a marketplace startup?
• Top 10 marketplace ideas to move forward with
• Different types of marketplaces
• Startup Requirement Document: SRD, MRD, PRD

Do you need to launch a product that solves the Chicken and Egg Problem in your startup?

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Specializing in lean startup methodology, we have the experience and expertise you need to help get your startup up and running. 

If you have asked yourself these questions and still aren’t sure where you see your startup going, we can help provide a second opinion.