Chicken and Egg Problem: How To Make a Two-Sided Market One-Sided

How Etsy got traction.

So heres the challenge with a two-sided network. You
want to get both the consumers and the producers onto
the network and the producers wont come there until
the consumers do and vice versa.
And heres the ridiculously trivial solution that seems to
work very well in some cases. Target a specific group
which has both the consumers and producers of
your service and where the lines between them
blur. Even if they are two distinct types of users, the
members of this group fulfill both requirements, or at
least some of them do. This is important because the
WOM required to spread the word among the producers
simultaneously
spreads
the
word
among
the
consumers as well since theyre part of the same
group. You dont have to go around targeting two
different groups which has a 2X impact on the difficulty
and a 4X impact on the risk (you succeed if and only if
you get both sides)
This is what worked for Etsy. Etsy is a niche
marketplace for creators of arts and crafts. As the
founders of Etsy discovered, people who make crafts
typically like to buy from other craftspeople. This really
helped them target exactly one group and spark
transactions within that successfully. The buyers and

sellers happen1ed to be in the same community which

helped Etsy focus its efforts.
Another example is the case of IntuitsTxtWeb, an SMSpublishing platform where online publishers can
instantly create SMS-based services from their content.
TxtWeb needed to get traction among developers (who
would create the SMS-based services) as well as
consumers. And TxtWeb did this by targeting
engineering college students in India, a group which
typically had the consumers as well as developers
required for the network to kickstart into action. WOM
among developers became WOM among consumers
since the two had such a high overlap.
Typically, this works best when:
1. The producers themselves are early adopters
as consumers: This worked very well for Etsy as
craftsmen buy from other craftsmen not just to help
support fellow-designers but because they often
have a shared view of what they find aesthetically
appeaking.
2. There is a clear incentive for producers to
bring in consumers: While producers would like to
spread the word around to have people know about
their product, structured incentives (contests etc.)
may accelerate seeding as well.
When creating a community, this is one of those
questions worth a thought. If there IS a group that can

satisfy both sides of your network, you might save

enormous time and energy by seeding your service
within that group.

Chicken and Egg Problem: How To Use Your Producers To Seed The Platform

How do Skillshare and Kickstarter get to network

effects?
Getting both producers and consumers on the platform
is incredibly difficult especially on platforms where both
sides are quite often clearly distinct groups. Designing
your platform so that your producers can bring along
consumers is a great strategy for seeding a platform
while concentrating on only one side of the market.
This works well under two scenarios.
A. There is a clear incentive for producers to
bring consumers on the platform. This typically
happens when the platform helps the producers
manage or interact with consumers more efficiently.1
B. The off-platform reputation of the producers
attracts the consumers to the platform. Exploiting
off-platform dynamics always helps while seeding and
growing a platform.

PROVIDE AN IMPROVED MECHANISM FOR

PRODUCERS TO INTERACT WITH EXISTING
CONSUMERS
This model works really well for all those loyalty
startups out there. Perx, Shopkick,Tagtile are all
classic cases of this scenario where the merchants are
signed up and the platform essentially helps merchants
cater to their existing set of consumers to make them

more sticky. The retailers encourage their customers to

use the platform. Hence, creation of one side of the
network leads to creation of the other side. Over time,
the merchants benefit from some data-driven crosspollination here as other consumers on the network
(brought on by other merchants) who are interested in
their products and services are directed across to them.
When I first shared this thought on Quora, one of the
readers responded with how this strategy had worked
very well for his startup, Willstream Labs.
Willstream Labs is a cross-border remittance play with a
twist: It allows its users (global migrants) to send funds
to their home country but also gives them control on
how these funds get spent back home at certain
specific organizations. The migrant is typically
interested in ensuring the funds get deployed at the
right organization and are not handled by some
intermediary beneficiary. As a result, Willstream Labs
allows users to refer/invite the specific organizations
(similar to importing ones friends on a social network).
This has helped them build out a two-sided network by
focusing exclusively on only one side and helping them
transact with the other side.

PROVIDE A PRODUCTION INFRASTRUCTURE.

WHEN PRODUCERS PRODUCE, THEY BRING IN
THE CONSUMERS
Google doesnt spend much by way of getting
consumers to buy an Android phone. The handset

manufacturers do that. The handset manufacturers, in

this case, are the producers using the Android OS to
create new phones.
Platforms that provide production tools (and not just
distribution or transaction tools) especially to producers
who have few other options benefit immensely from this
strategy.
Youtube, WordPress and most content hosting
platforms, for that matter, grow in a similar way by
providing users with creative tools (video hosting and
content blogging respectively). Once users produce,
they become marketing agents for the platform to get
other consumers in.

FOCUS ON HIGH QUALITY PRODUCERS

High
quality
producers
attract
consumers. Tutorspree does this quite effectively. The
online education platform focuses on getting high
quality tutors on board. As of mid 2012, there were
6000 tutors on the service with approximately one in
every three applicants being expected as tutors. These
tutors evangelize the platform to their students who in
turn spread the word about it.

GET A FLY-ATTRACTING BEACON

We know that one. Malls have been doing this for the
last 50 years. Get a big name retailer, give them good
floor space and use that to attract consumers to the
mall, who incidentally will get exposed to the smaller

merchants too. Turns out, this strategy works equally

well for digital platforms, especially content platforms,
that need to take off and find adoption among
producers. Ad networks use this strategy quite often by
getting exclusive access to premium eyeballs and using
that to lure in the advertisers.
Ultimately, it boils down to understanding the
motivations of the producer side on the platform. What
about the platform will make them draw other users
onto the platform. Loyalty platforms help retailers
manage their customers. Youtube helps budding
musicians promote themselves. What does your
platform do?
Why Payments Startups Fail: A Lesson In User Behavior

Why most payment startups fail to get traction.

Users hate having to learn entirely new behavior.

Products that find rapid adoption typically try to fit into
existing user contexts.1 Introducing entirely new
behavior may lead to barriers in adoption and this
problem is compounded in a two-sided network where
having to learn new behaviors on both sides can
make the mutual baiting problem of seeding the
network even more complicated.
Mobile Payments is a particular case of two-sided
network activity where users prefer trying the most
accepted behavior and new behavior takes time to find

adoption. Thats largely the reason why NFC-enabled

Payments still hasnt gone away. Consumers wont go
out of their way to get NFC-enabled phones unless there
are enough merchants accepting them and merchants
dont want to invest in terminal hardware unless
enough consumers start using the network. Both sides
need to change behavior, consumers need to adopt a
new payment instrument and merchants need to enable
new store infrastructure, both of which are new
enforced behaviors.
Seed a new model by changing user behavior on
one side
Thats exactly why Square has done so well, targeting
one side exclusively. Square started by not changing
anything at the consumer end. The consumer uses his
credit card as he always did. The merchant had to
change his behavior but given the superior and simpler
pricing and the convenience of receiving payments
anytime anywhere, the merchant side was seeded well.
Now, that the merchant side is seeded, new behavior is
being introduced on the consumer side with the
consumer card case.
Reintermediate an existing model
changing user behavior on one side

without

MPESA established itself as a revolutionary payment

mechanism in Kenya for a similar reason. North and
East African nations already had a system of money
transfer inherently linked to the religion of Islam, known
as Hawala. In the Hawala system, a user asks a

Hawala agent to transfer money to an acquaintance in

another location, who then contacts another Hawala
agent in the new location to pay the users
acquaintance. The user then pays the sum to the first
agent along with a small fee. The debt between the
agents is logged and settled at a later date. MPESA
simply rode on this behavior , without trying to
introduce new ones and simply made it more efficient
by leveraging the mobile network to track the
movement of money. The user-agent relationship
remained the same while the agent-agent relationship
was improved drastically. Instead of logging in
transactions on a book and settling them at a later
date, the ma-payments system allows the agents to
settle money transfer instantly. As with all platforms,
when
a
tech-driven
payment
business
is
reintermediating an existing payments business, it
should try to bring in added efficiency to the transaction
without changing the current user behavior drastically.
What is critical (and common to both the above models)
is the fact that for even one side of the network to
adopt new behavior, the platform should offer
significant advantages over existing mechanisms.
Square offers better and simpler pricing and the
convenience of payments on the go. MPESA offers more
efficient transaction settlement between agents.
Joel Spolsky refers to this phenomenon in the
technology space where he refers to it asbackward
compatibility. Essentially, backward compatibility is
simply a conscious platform decision to ease a desired

change in user behavior by supporting the existing user

behavior through the transition phase.
Any form of payments has to combat a behavioral
problem. Hence, building in some form of Backward
compatibility helps spur adoption because users have
the choice to continue with the existing method or
transition to the new one. Visa and Mastercard know a
thing or two about disrupting the payments space.
When wave and pay was introduced, the new cards that
were issued supported both swipe (existing) and wave
(new) modes of payment. Consumers could continue
using swipe until merchants set up wave terminals. Of
course, a string of incentives to users of wave helped
execute the transition.
In a similar vein, companies like CheckFree provide a
comprehensive payment mechanism to consumers
while allowing merchants to either migrate to a new
system (online payments) or receive checks in the mail
like they already have. CheckFree changes behavior on
the consumer side successfully because the consumer
has the advantage of making one-stop one-click
payments. Merchants are allowed the options to
continue with the old behavior or adopt a new more
efficient one. If CheckFree had insisted that all
merchants accept epayments from Day One, it would
not have been able to build a comprehensive portfolio
of merchants which would have prevented it from
gaining traction among consumers.

Payments is a unique space where a change in payment

instrument tends to impact both buyers and sellers and
very often, new payments mechanisms fail because
they try to change behaviors at both ends.

This makes the payment industry, in general, very

difficult to disrupt. In fact, apart from Paypal, no other
business has succeeded in finding widespread global
adoption in the payments industry in the last 2 3
decades. The key is to ease in one side at a time and
not try to create new user behavior on both sides
simultaneously.

How Online Dating Services Bring In The Ladies!

How dating communities are built and why the ladies

night strategy isnt enough.

9 out of 10 dating sites fail not because they cannot get

traction, but because they cannot spark interactions. It
doesnt take a genius to get young hormonal men
signing up onto a dating site, especially in regions
where the gender ratio is already skewed in their favor.
Its much more difficult getting women to sign up at a
dating site.
Dating sites are a great example of two-sided markets
which, often, rapidly build out traction on one side but
fail to get any uptake on the other. Typically, such
markets are asymmetrical with one side that is harder
to attract (the hard side) and the other which is
relatively easier to get traction on (the easy side).
Members of the hard side are more likely to not
show up
Given the lack of quality interactions on most dating
sites and the general stalker tendencies that seems to
take over some members there, women are a lot more
careful about joining.
Getting the hard side in almost guarantees the
easy side following in, while getting the easy
side in wont guarantee the other side

One might say that since it is so easy to get the easy

side in, why dont we get them in and then attract the
hard side purely on the basis of numbers. Heres the
dating: Since it is easy to get the easy side in, a lot of
other people are already doing that and creating noisy
destinations.
You wont find women signing up just because there is
an army of raging men all stacked up on the site. A
dating site with real women, on the other hand, almost
always attracts men.
The easy side desires quality and it is often
difficult to get that quality
A great way of solving The Mutual Baiting Problem in
such a scenario is to incentivize the hard side to join
in. Some common incentives could be:
Monetary/Standalone: Chris Dixon outlines this in his
article on the Ladies Night strategy. Bars and pubs
often hold a weekly Ladies Night where women get
free drinks, tapas, something to gather a critical mass
of women which would then get men coming in all the
more. What works for a singles bar works for a dating
site!
Better Experience: The hard side would literally pay for
a better experience. Since its so easy to get men to
sign up on a dating site, most dating sites end up
getting chock-full of stalkers with poor grammar and (if
theres a video chat component) inappropriately angled
video cameras run by inappropriately clad men. The

bulk of online dating networks are just so irrelevant that

women value relevance a lot more than they would a
monetary [Link] is trying to solve for
this by letting real women curate the membership and
determine who does or doesnt get access to the site.
This has helped seed the hard side well despite the
fact that the initial launch was in a highly single-maledominated geography (the Bay Area).
While the dating market is a classic example of an
asymmetrical market, this strategy works equally well
for other markets with a hard side. E.g. Luxury
Commerce. Targeting high end consumers, especially
with niche interests, is difficult. Magazines on luxury
travel etc. assemble a market of high-end consumers
and use that to attract advertisers. Advertising, of
course, suffers from negative network effects but the
principle of incentivizing the hard side works equally
well.

Platform Seeding
Strategies
An overview of solving the chicken and egg problem

Acquiring new users for an unknown business is

difficult1. Startups face this challenge all the time.
This problem gets compounded further when the
business is a platform. A platform or network business
is a great business to be in once it has been seeded and
has achieved critical mass. However, seeding a platform
from zero is very complicated and this is the stage at
which most user-driven businesses fail. There are three
problems that platforms commonly encounter.
The mutual baiting problem (No producer equals
no consumer equals)
Two-sided businesses typically have a producer side and
a consumer side which are typically distinct roles. For a
two-sided business to work, both producers and
consumers need to be on the platform. However,
producers wont come to the platform without
consumers and vice versa. Consumers act as a bait to
get the producers to come in and vice versa. This is the
mutual baiting problem that such networks suffer from
which needs to be overcome to seed the platform with

users on both sides and spark interactions. This is often

referred to as a chicken and egg problem, which isnt
really accurate as the problem is less about seeded one
side first and more about bringing on the two together
so that they attract each other.
Strategies
SInce consumers are a bait to producers and vice versa,
this problem is typically solved by providing an
alternate bait to one of the sides. Seeding can be
accomplished by:
Providing a bait to consumers
Providing a bait to producers OR
Simply providing a bait to whichever side is most
difficult to seed
Once one side is seeded, it acts as a bait for the other
side to come on board.
The ghost town problem (No complementary
products)
Platforms, often, dont have any standalone value. E.g.
Wikipedia without the contributors has no meaning,
AirBnB without rental listings is useless. A section of
users on the platform (in producer roles) create the
content and products for consumption. Hence,
platforms are initially ghost towns. Users visiting the
platform find no activity, and hence no value, in the
platform. Producers, in turn, dont contribute unless

they see some consumer interest. As a result of this

vicious cycle, a ghost town continues to remain a ghost
town. The challenge is to get complementary
products/content on the platform from Day One to
break the vicious circle.
Strategies
Successful platforms overcome the ghost town problem
by either creating the complementary products
themselves or incentivizing producers to create the
complementary products initially.
Provide a service for producers that enables them to
interact with their consumers
Provide access to new production infrastructure that the
user would use even if the network was a ghost town:
Signal relevant activity
Get a marquee player
Convert consumers to producers

The double company problem

Building a new business requires acquiring and serving
a user base. WIth two-sided networks, this problem gets
complicated further as two distinct sets of users need to
be acquired and served. Doing this during the initial

stages of seeding the platform is twice as difficult as

building any other business.
Strategies
Successful platforms solve the double company
problem by not trying to go down the double company
path. They try to focus only on one set of users at a
time. The strategy may be:
Producer-first
Seed the producers on standalone mode
Act as a producer on your own platform
Consumer-First
Heavily incentivize the consumers
Both Sides Together
Provide single-user utility and move to multi-user mode
(App to network)
Focus on a niche and serve it really well
Make a two-sided platform one-sided
Dont try to change behavior on both sides
simultaneously
The Critical Mass Problem
Platforms and networks are not one-sided services
provided by a startup. The service is provided by the

producers on the platform and the platform creates

value by helping both sides get together and interact.
On eBay, a person looking for Angry Birds inflatable
balloons needs to be matched to a person selling them
for a transaction to be initiated. On Quora, a question
needs to be shown to the closest matches in terms of
users who can answer it for the right answers to be
sourced.
For a network business to succeed, the right producers
need to be matched with the right consumers. The
likelihood of having both the right producers and the
right consumers for all possible transactions increases
as the size of the user base increases. This makes it
particularly difficult for a new startup to take off
because there might not be enough members of both
sides (or in both roles) to spark interactions. Critical
mass is the minimum size of the user base at which
enough number of producers and consumers exist to .
Strategies
This problem is solved by targeting a niche.
Groupon solved this problem making a transaction the
focus of the marketplace sparking transactions from
Day 1
Exploit underlying network structures