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The chicken and egg problem in platform business models

Do you have, or are you planning to start a platform-based business? Is it a two-sided platform? That is, does it have sellers and buyers? If yes, then you are probably facing a so-called chicken and egg problem. But what is the problem and what can you do about it?

What is the chicken and egg problem?

The chicken and egg problem refers to the willingness of participating groups to join the platform. If the platform is two-sided, meaning that it typically includes sellers (for example Uber drivers) and buyers (for example Uber passengers), the different sides may have a preference regarding the number of users on the other side of the platform.

Sellers will join the platform only if there are many buyers, because only then they can expect enough demand for their service. Similarly, buyers will join only if there are many sellers, because only then they can expect that a seller provides a solution that meets their needs.

The problem for the platform owner is that if none of the sides wants to join before there is a great number of users on the other side, then how to attract any of the sides to participate? Focus on both sides? Focus on one side? Which one first? How?

SOLUTIONS TO THE CHICKEN AND EGG PROBLEM

There are several solutions to the chicken and egg problem. Famous platform businesses such as Uber, Airbnb, and Amazon have shown that these solutions can be very effective. Here, I will elaborate on four different solutions:

  1. Subsidize the other side
  2. Increase the standalone value of the platform
  3. Become a seller, that is, supply the service yourself
  4. Invite big end users to join your platform on either side
  5. Connect users from an existing platform

Subsidize

First, you can subsidize one side at the cost of the other side. This means that you give the other side of the platform initial discounts or even free access (like users on Facebook) thus increasing their willingness to join the platform, which will then increase the willingness of the users on the other side to join. For example, ride sharing platforms such as Uber could attract passengers by offering free rides and discounts if they recommended the platform to their friends. This would not only lead a higher number of passengers but also more drivers joining the platform. You should always subsidize the side that is more price and quality sensitive.

Increase standalone value

Second, by providing standalone value, that is, how valuable the platform is to the users on one side regardless of how many users are on the other side, it is possible to attract users to join, which again, leads to a higher number of users joining the platform on the other side. For example, OpenTable, a famous booking platform, provides restaurants (sellers) with a software that helps them manage their reservations regardless of whether customers (buyers) book it directly via the platform or not. Hence, restaurants are thus willing to join, because the platform is valuable for them even when there are no users on the other side. However, the increasing number of restaurants on the platform has encouraged customers to join the platform too.

Become a seller yourself

Third, you can supply the service yourself and become a seller to encourage buyers to join too. This solution is also known as vertical integration as you go up in the supply chain and not only provide the platform itself but also the service that your sellers provide. For Uber this would mean that the company would have their own drivers and cars, after which more passengers would join as there would be enough sellers, which in turn would lead to more external sellers to join the platform.

Invite big end users

Fourth, by having big end users joining your platform on either side, you can attract users to join on the other side. Big end users, also known as marquee users, are well-known stars, and they can be either a person or a company. For example, consider Xbox, a gaming console by Microsoft, that was able to attract EA Sports to become a seller on their platform. This resulted in an increased number of Xbox gamers (buyers) as they could now buy and play high-quality sports games.

Connect users from an existing platform

In the so-called “piggyback strategy“, you connect the users of another already existing platform with yours. Many of the current biggest networks have used this strategy. PayPal got lots of new users as it became the main payment method on eBay and when it was acquired by the marketplace platform. Instagram grew largely on Facebook, Airbnb piggybacked on Craigslist, and WhatsApp used existing phone book networks. Successful piggybacking requires complementary networks that add mutual value to each other. It should also be acknowledged that piggybacking involves risks related to technological integration and ownership questions.

Visualizing a business model: Monetization of solutions

CONCLUSION

The chicken and egg problem is typically present in two-sided platform businesses. The problem arises if the two sides have a preference regarding the number of users on the other side. While the problem is very common, there are several solutions that can be used individually or in combinations.

In addition to the chicken and egg problem, platform businesses also face a so-called penguin problem (both of which depend on the platform’s network effects), which you can learn more about here.

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