6 Ways to Solve the Chicken and Egg Problem for a Marketplace Startup

Are you ready for some shocking numbers? Ninety percent of e-commerce startups fail during their first year. The reasons vary, from poor planning and lack of budget, to low-quality products and troubles with customer support.

In the e-commerce industry, there is one common obstacle every newborn business strives to overcome. This obstacle is highlighted in lots of interviews; it is discussed at conferences and covered in TED Talks. However, only a small percentage of businesses find the strength to overcome it. This is the chicken-and-egg problem.

Although it sounds more funny than serious, this issue may become the factor that shatters your business. And curiously, you are, in fact, the one who controls it.

In order to solve this problem, a deep understanding and a striking idea are needed. Fortunately, we have analyzed the most successful use cases and investigated the stories of numerous marketplaces to bring you this report on how to make your business survive in the cruel startup world.

Let’s collect all the pieces of the chicken-and-egg puzzle together.

What’s the problem?

For those who aren’t acquainted with one of the greatest problems marketplace startups face, we have prepared a quick introduction.

In essence, an online marketplace is a virtual place where buyers and sellers meet each other to easily sell and buy products. The model looks quite beneficial: you, as a marketplace owner, just provide an ecosystem for successful trading without producing goods or taking care of deals.

Wait, but we're talking about a startup. So have you already thought about how to attract buyers if you have nothing to offer? Or do you have a vision of how to engage sellers if your customer base is empty? If you do, you already know how the chicken-egg scenario looks: it's the issue of attracting sellers and buyers before you have anything to offer them.

As they say on Reddit,

"No one in B2B wants to be the first customer, and no one wants to be the second or third either"

Even if you have two or three sellers and buyers already, potential partners will still look at you suspiciously. Thus, the chicken/egg issue won’t disappear by itself in the early stages of your growth. Fortunately, we know how to help it along.

6 tried-and-tested methods to solve the chicken-and-egg problem

Luckily, there is a solution. Actually, there are a few of them. In this section, we are going to demonstrate the six best ways to solve the chicken-and-the-egg problem and save your business from disaster:

1. Low start, high achievements

By starting slowly, you avoid critical mistakes and have enough time and energy to deal with any potential trouble along the way.

To employ this method successfully, use the following tips:

Focus on a single community

Let’s say your goal is to build a bookselling marketplace. The idea is good, but if you want to cater to all needs immediately, the possibility of failure is higher. Focus on a particular group of users (for example, young adults — they use the internet actively and may find your marketplace attractive) and offer books for this target audience first.

Target one location

Study the local market and start with promoting your solution in this geographical area. This is your chance to find out as much as you can about local users’ preferences, create value for them and successfully enter the industry.

Motivate manufacturers and customers to invite new users

People you’d like to work with may already know each other. In order to grow your community, allow them to send invitations and offer special benefits for each friend (or business) invited.

Inspiring example: A transportation hero of our time, Uber, started its path in San Francisco. The company engaged drivers, attracted passengers, solved the troubles that emerged and conquered multiple cities all over the planet.

Inspiring example: Flipkart, a huge online marketplace where you can find everything from jewelry to sports goods, started out selling books only.

As you can see, market leaders have focused on specific locations and a particular sort of product before they’ve conquered the entire industry. Once you are a leader in a chosen niche, you can grow enormously.

2. Focus on one side of cooperation first

Even if you have decided on a specific location and type of products to work with, you still have neither caught a chicken nor found the eggs. That's where the second method comes in.

What to start with? Who to attract first? Sellers or buyers, chicken or egg? Depending on your marketplace’s specifics, you can:

• Target product or service providers; or
• Target consumers.

Brainstorm and find out who would be easier for you to start with. Then, find out who has already done that and start acting, too.

Inspiring example: If there were no drivers employed, Uber would make no sense. Thus, the company started by attracting drivers; it was much safer for business than attracting passengers with no one to take them to the desired destination.

Inspiring example: These days, Instagram is not only a platform for sharing visual content. It's now a huge online sales channel for both small entrepreneurs and famous brands. But several years ago, the app started offering unique features and creating an ordinary user base.

Inspiring example: Do you know how OpenTable (a huge online restaurant reservation marketplace) started its battle for success? A company built a convenient customer relationship management (CRM) product for restaurants, attracted a bunch of them and started inviting the first customers only afterward.

Inspiring example: Belly, a major service that provides loyalty programs for merchants worldwide, implemented the same method: The company launched an extremely profitable low-risk program for initial users, attracted investments and grew organically.

3. Grant benefits to the target group of users

Another method to avoid the chicken-and-egg headache is to offer special opportunities to privileged users. Devote particular attention and grant benefits to people and businesses who are:

• Among the first ones on your platform

At this stage, your relationships aren’t balanced: these people are still more important for your app than your app is of value for them. To increase the appeal of your platform, offer bonuses, free products, or even money to the ones who join the marketplace.

• The most important for your business

As Thales Teixeira said,

“It’s not just the chicken and the egg, you also want to select the right eggs.”

“The right eggs” are the famous brands, huge companies, influencers in the local market, well-known bloggers, representatives of big communities, etc. Get to know your customers to find these “right eggs” and make them warmer in your nest.

Inspiring example: In Seattle, to engage more drivers, Uber paid drivers even when they weren’t transporting passengers.

Inspiring example: Creative Market, a marketplace with more than 3 million design assets, offered $5 to each new user (now, they still offer a 10 percent discount to newcomers).

4. Produce and sell your own goods

What do you do if you have nothing to sell yet? Is there a chance it's easier to market your own products than involve external producers at this point? Yes, there is. And this fact is well-demonstrated by famous brands.

Another tried-and-tested method of how to get rid of the trouble is to become a producer. You shouldn’t invest much or consider it a long-term plan; the point is to acquire the very first users.

Inspiring example: Do you remember how Pierre Omidyar, the American billionaire that founded eBay, took his first step toward a bank account with billions of dollars in it? He offered for sale his own stuff he didn’t need.

Inspiring example: Now, Salesforce owns a huge AppExchange cloud marketplace. But long before the founders launched this solution, they built a CRM product that attracted enough customers to grow an empire.

5. Cross the threshold of an existing network

High competition is one of the top reasons why so many startups fail nowadays. It’s a hard pill to swallow but your e-commerce platform already has competitors even before it launches. Try to look at this fact not only as an obstacle but also as an opportunity. You can consider the other platforms’ users as potential buyers and sellers to work with.

Each competitor may already have a ready-made base of active users. And many multibillion-dollar brands have already gained their perks from the competition. So why not use their experience and build your own startup unicorn?

Inspiring example: Airbnb scraped the Craigslist user base, and it turned out to be an extremely profitable method of customer acquisition.

Inspiring example: The service that connects subscribers with local merchants called Groupon actively targeted Facebook and Google profile owners to involve its first users. Although it wasn’t the direct usage of someone else’s database, it helped the company to start cooperation and climb to greater e-commerce heights.

6. Host events to solve the chicken-or-egg problem

On your road to success, talk about your idea, your business, and even your plans both offline and in the digital space. Extend your business borders so that potential users hear about your solution. Participate in meetings as well as organize events yourself. The more people who find out about your platform, the more of them who will sign up soon.

Inspiring example: Poshmark, a great marketplace where people sell and buy used apparel, hosts four virtual parties every day, and Manish Chandra, the marketplace’s founder, says it was profitable from the very beginning:

“That's where through the process of discovery, we came upon this notion of Posh Party, which is our virtual live parties, which have been a whole engine of growth for us.”

Inspiring example: World-renowned e-commerce marketplaces don't only operate online. Yelp (an online service where you can leave a review about any company) combines business and pleasure by organizing great parties. The Yelp Elite Squad is the community of “users with status.” The Elite status is defined by a person’s influence and activity. And it turns out, users love parties with free drinks!

3 extra tips to deal with the chicken-and-egg problem effectively

This section is our sweet bonus for those who have had enough patience to follow our guide and thoroughly employ the best practices for seamless marketplace growth. Let’s see what we have here:

Real value matters the most

Why would someone install your app if it’s useless? No obvious reasons, huh? Thus, first and foremost, you need to make sure you provide your potential users with real, exclusive value and high-quality service.

Users want to feel safe

Internet fraud is a terrible thing. Brands avoid suspicious platforms; users refuse to provide personal data or even abandon the website if they feel like there is something fishy going on behind an attractive interface. So don’t hesitate to demonstrate to your platform’s visitors how much you care about their security: emphasize it in your marketing campaigns, talk about how much money you invest in software security, and reveal what latest technologies and methods you employ to protect your users from fraud.

The P2P model strengthens your position

What if sellers are able to turn into buyers with a few clicks? What if this scenario would work vice versa, too? A peer-to-peer model is another way to avoid the chicken-and-egg problem as in this situation, chickens and eggs are interchangeable.

Is the “fake it till you make it” method worth your attention?

Due to enormous hype around this topic on Twitter, we decided to add it to our research as well.

If you act like you already have a huge customer base, you get a precious opportunity to attract sellers. But is it fair to build business relations in such a way? Is it legal? These questions require active and time-consuming discussions to be answered. But facts remain facts: “Fake it till you make it” is a method many modern brands have employed and … won!

• In the beginning, there was only one coach on the Relationship Hero website: its co-founder. However, the website listed multiple fake coach accounts to assure real users there were enough experts on the platform.
• Reddit created thousands of fake accounts to simulate the appearance of popularity and attract real users.
• Rumor has it, Flipkart didn’t even store products at the beginning: When a customer ordered a book, Flipkart’s representative bought it in a local store and shipped it to the buyer.

There are many similar examples that push us to one more question: If this method works well for so many brands, would it be profitable for e-commerce startups, too? Maybe, yes. But it also may be a reputation-killer.

Final thoughts

The e-commerce industry is full of pitfalls, both hidden and obvious, and today, we have saved your startup from at least one of them. Let’s summarize how.

To resolve the chicken-and-egg problem, employ the following practices:

• Start slowly;
• Initially, focus on one side of cooperation;
• Sell your own goods first;
• Target an existing user base;
• Offer benefits; and
• Organize events, meetups, and parties.

Additionally, always keep in mind that real value, high quality and impeccable security are the must-have features of any e-commerce platform.

To reach success, you probably should act like you already occupy the leading position. Thus, the “fake till you make it” approach may be useful, too. But be careful: at the same time, it may be damaging to your reputation.