Chicken and Egg Problem of Marketplaces: Attracting Initial Supply

Gayane Tamrazyan
How to attract Initial Supply When Only Starting a Marketplace

When the marketplace functions smoothly, the supply (like restaurant, travel agencies, or transport company) successfully serves the demand (customers, tourists, or passengers). But when you first launch a marketplace, you have neither demand nor supply. The nontrivial chicken-and-egg problem arises early on. You must convince one of the parties to the marketplace to come to your platform even before the representatives of the other side come.

For example, a customer who wants to order food has no reason to check your app if you haven’t attracted restaurants yet. Likewise, without customers using your app, restaurants have no incentive to spend time integrating with your platform. Solving the chicken-and-egg problem is one of the toughest obstacles to launching a marketplace.

Step One: Limit Your Starter Market to Launch a Marketplace

The best way to get big is to start small.

The common practice is to identify ways to limit the market. These ways can be: (1) limitation by geography and (2) limitation by category. If a marketplace requires supply and demand to be in the same physical location, then the constraint will always be geographic (for example, a limited set of cities or countries). Otherwise, the limitation is likely to be category-based (e.g. focus on handmade product categories).

Step Two: Focus on supply or demand

Once you have made a decision on how to limit the start-up market, you need to choose which side of the marketplace to focus on to attract users (supply or demand). You will have to decide where to spend most of your effort and resources on. If you are a dog walking agency, to generate initial supply, focus on dog walkers (your target audience) or generate initial demand making a wager on dog owners who need to walk their dog.

The vast majority of successful marketplaces focused almost all of their resources on shaping and developing the supply in the early stages. These companies found that their supply either stimulated demand on its own, or word of mouth provided enough demand to utilize the existing supply.

Attracting initial supply

Attracting users from the supply side is a major problem for many marketplaces. Most early stage marketplaces limit their efforts on the supply generation in the first place. Interestingly, the marketplaces continue to experience a supply shortage throughout their existence. Some of the marketplace giants are under supply because their product solves a problem that is in incredible demand. Their product-market fit is so strong that demand significantly exceeds supply. 

If you are at an early stage of launching your marketplace, you most probably have the most outcome from one or two channels. All you need to do is to understand what these channels are and focus your efforts on them.

Now let’s discuss each of the growth channels (growth channels below are sorted by frequency of use).

1. Direct sales

Direct sale is critical to getting the first quotes to your platform. This fact is proven by the experience of marketplace leaders. Take the Etsy example. The main thing that worked for them was the face-to-face communication with vendors at fairs and other places where they spend most of their time.

2&3.Referral program and word of mouth

The second most popular way to attract offers at an early stage is the referral program. It stimulates an existing supply to attract a new one. For example, Uber applied the referral program to attract drivers. Drivers who came through the referral program provided about 1/3 of the first rides. Another third came through word of mouth, and another third through paid ads.

4. Using an existing platform

One third of marketplace leaders relied heavily on using existing platforms to generate early supply. That was the case of the Uber and Lyft platforms. The first thing they did to form initial supply was placing an ad on Craigslist.

5. Subsidization

To get something, try to give first. This rule is also valid for generating initial supply. For example, Lyft promised a minimum income per hour for their drivers. This investment helped them launch fast the marketplace from scratch. 

6. First employees ensured the early supply

At an initial stage, you don’t have enough staff (actually, enough funds) to do all the work. That’s Ok. Most marketplaces started the same. In the majority of cases, their core team including the executives did the most of the job. In DoorDash, there was a special rule prescribing all employees of the company to commit themselves to delivering orders once a month. 

7. Creating value

Think about value for your customers. Give them a useful feature they would need and finally love. If your freely-distributed value product has traction, it will attract buyers to your site. At Eventbrite, they made a product that event organizers could use on their own and benefit. 

8. Performance marketing

It may seem surprising, but performance marketing is not the first thing to focus on when trying to generate initial supply. However, in some cases this supply generation channel may help. It played an important role in the early days for Lyft and Uber. At Lyft, they applied such a strategy: Search Ads + Display Ads + Facebook Ads. All three components worked well for both supply and demand capture. These channels made it possible to understand what the cost of attracting a new user is. 

9. Virality

Examples of some marketplace giants like Eventbrite and Airbnb show that a powerful viral cycle can drive early supply growth. At Eventbrite, company managers worked a lot on the viral loop, where visitors (demand) became event creators (supply).

10. Events

Some companies like Airbnb and Lyft organized events to attract supply early on. At Airbnb, before launching their service in a new city, they first went there and had a meetup. This aroused keen interest in the local community and drove supply in that specific locality.

11. SEO and content marketing

SEO doesn’t have much impact on early supply growth. However, this tactic was among the key ones for Eventbrite. They relied on blog posts, white papers, articles on ‘How to Advertise Your Event’ to attract the relevant SEO traffic. In addition to the content, they also drove user generated content (UGC): 1) event organizers created their event pages, 2) then they put a link to the event in Eventbrite from their own sites, 3) event pages had good SEO scores. 4) It stimulated both demand and a significant part of the supply. 

12. Community

One of the most effective ways to get supply for Etsy was to build an offline community. After years of going to fairs every weekend to attract sellers and promote the brand, they finally launched a program called Etsy Street Teams, which brought together active community members across the country and around the world. They became their local evangelists and promoted the Etsy brand at the vintage fairs.

Closing

In our next post, we’ll tell you more about attracting initial demand to skyrocket your marketplace launch. But you can already start building your marketplace foundation. Our eCommerce consultants give all the necessary pieces of advice so that you could launch your business online smoothly!

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