Chicken and Egg Problem: 11 Growth Channels for Attracting Initial Demand

Gayane Tamrazyan
How to attract initial demand when launching a marketplace

In our previous post, we dealt with a nontrivial chicken-and-egg problem that arises when you launch a marketplace from scratch.

The chicken-and-egg problem consist in a difficulty to attract vendors as you don’t have customers. Without customers buying at your marketplace, merchants won’t join your site.

Solving the chicken-and-egg problem is one of the toughest obstacles to launching a marketplace. You should first decide whether to start with generating demand or supply. As we already suggested some practices to attract initial supply, in this article, we will focus on the best practices to draw initial demand.

Limit to grow!

Limiting your initial market will help you to get the intended traffic. These first buyers can be your repeated customers spreading the word of mouth about your brand and trailing other people to your site. You can limit your initial demand by (1) geography and (2) category. If your marketplace needs demand to be in the same physical location (like a city or a region), then the constraint will always be geographic. Otherwise, focus your demand on categories (like handmade products).

Supply or Demand?

After narrowing down your market by geography or category, opt for supply or demand to focus at the initial state. Based on your decision, you will have to spend most of your effort and resources on either option.  

When focusing on driving demand, you should consider some signs telling about your readiness:

  • The demand is easy to attract – users on the supply side sign up without long persuasion.
  • Supply significantly exceeds demand.
  • You haven’t proven the value of your product yet.

Let’s discuss some growth channels to raise demand for your product. The list below enumerates the demand generation channels based on their frequency of use by market leaders.

1 & 2. Word of mouth and marketplace model

50 percent of the eCommerce world leaders talk about the importance of word of mouth in the early stages of demand growth. The second half shared the common growth channel – the marketplace model itself, where supply attracts demand without extra efforts.

For DoorDash, restaurants did most of the marketing for them. They printed posters and stickers and hung them up in the restaurant without any assistance from the marketplace. The window stickers worked especially well. The Etsy sellers have been marketing their stores and contributed a lot to the growth of the platform itself.

3. SEO

SEO won’t help you to generate initial demand in most cases. However, you should not ignore it as it was an important demand growth channel for over 40% of marketplaces. For GrubHub, SEO brought up to 30% of new users from searches like ‘Thai food near me’, and 10-15% from search engine marketing. They made landing pages for all of their restaurants, sometimes creating websites for them and integrated their platform with Google Local to drive demand.

4. Performance marketing

The next most common growth channel for initial demand is performance marketing. This activity may include advertising on Google, Facebook or Twitter. At Grubhub, they started using AdWords for their four restaurants with a specific kind of cuisine. SEO and the performance marketing helped them to draw initial demand. 

5. PR

PR has proven to be effective for about a third of the companies. For companies like TaskRabbit and Zillow, this was a major growth channel. At Airbnb, they adapted the product for a variety of major events: Democratic National Convention, Presidential Inauguration, Music Festivals, World Cup, and Olympics. High-profile linking accompanying PR is the primary way to build user networks early on. 

6. Product cycles

You should not underestimate the powerful demand growth cycles that have become important growth channels for some of the big marketplace players. At GrubHub, they have built a content cycle. This cycle was: to get content from restaurants (menus) → aggregate and present information → get traffic → convert traffic → generate more demand for restaurants → get more restaurants. Etsy’s early growth was driven by a cycle that sellers created themselves: they made handcrafted goods buying materials from other Etsy vendors.

7. Referral program

The referral program is an important early-stage demand growth channel. It was massively used by Instacart, Airbnb, and Uber. For Uber, about 30% of the trips were provided by the referral program. At Instacart, the referral program provided about a third of the demand in the early stages of development.

8&9. Direct sales and Events

Direct sales and events work well both for attracting initial supply and demand. Face-to-face communication with potential buyers at local events and other places where your target audience gathers, draw the most of demand to your site.

10. Creating value 

Some companies like GrubHub have been able to create value for users on the demand side even before attracting supply. The GrubHub employees crawled restaurant menus, put them online and generated SEO traffic. Then they went to restaurants and asked if they wanted this traffic. As a result, they signed in agreements with restaurants on the spot.

11. Partnerships 

The OpenTable marketplace used partnerships to drive demand. They partnered with Citysearch, AOL Digital Cities, Yahoo, Metromix. Every time one of the restaurants appeared in some white list on the web a link to OpenTable immediately appeared there.

Closing

Drawing initial demand can be intimidating. However, using the best practices and joining experts can make this task easier. Simtech Development can be your technical partner in customization of your eCommerce project, its hosting and further scaling. While attracting the initial demand, rely on experts!

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