Solving The Chicken-And-Egg Problem
Solving the chicken-and-egg problem starts with understanding the general pattern of the problem. In terms of the producer-consumer parlance that we used to explain network effects in Section 1, the problem can be reduced to the following pattern:
Problem. How do I get producers and consumers, given that Condition 1. I need producers to get consumers, and Condition 2. I need consumers to get producers?
If the two roles are not too distinct (e.g. Skype), the pattern may simply be stated as:
Problem: How do I get users, given that:
Condition 1: Users will not come unless there is value in the platform, and Condition 2: There is no value in the platform without having users on it?
The chicken-and-egg problem continues to persist till a certain point at which there is enough overlap between supply and demand to sustainably enable interactions. The size of the user base at this point is referred to as the critical mass.
4.1
solving chicken-and-egg problems
Solutions to chicken and egg problems have a few defining characteristics:
1. Breaking The Vicious Cycle. Like most vicious cycles, the chicken-and-egg problem is a conceptual loop with no predefined place to start. The platform needs to figure out a way to break into that loop.
2. Positive Feedback. Once a starting point to the loop is created, it is set in motion through a positive feedback loop. As one side grows, it attracts more of the other side, which in turn, attracts more of the first side, and so on.
3. Maximizing Overlap. The chicken-and-egg problem exists before a network reaches critical mass. Hence, the longer a network takes to reach critical mass, the longer it has to grapple with this problem. As mentioned, critical mass is a measure of the overlap between produc- tion and consumption. Hence, conditions that help maximize this overlap are likely to yield simpler solutions to the chicken-and-egg problem.
4. Getting The Harder Side In First. Some markets are asymmetrical, and it is usually more difficult to get one side than the other. For example, dating websites find it harder to attract women, than they do men.
Content platforms find it harder to attract content creators, compared to consumers. Hence, the platform needs to figure out a model that incentivizes the harder side to join in.
5. On-Boarding Of Two Distinct Markets. On many platforms, producers and consumers may be two distinct markets. The same user may upload and view videos on YouTube but the traveler and driver markets, on Uber, are largely distinct. The typical user, on these platforms, plays only one of the two roles. Serving two-sided markets requires reaching minimum traction on both sides. Hence, two-sided markets require building two companies, often with completely different challenges, not just building two forms of behaviors among users.
five design principles for solving chicken-and-egg problems
With the above characteristics in mind, a solution to any chicken-and-egg problem relies on five key design principles:
1. Finding A Compelling Bait To Start The Loop.
The first step in breaking a vicious cycle is to find an inorganic bait that attracts and hooks one of the two roles without the need for the other role being present. In many of the strategies that follow through the rest of the section, we look at different types of baits that are used by platforms when starting off.
2. Ensuring There Is No Friction In The Feedback Loop. Once one role comes on board, it is important to ensure that there are no barriers to getting the other roles on board. If producers come in first, the platform should make it easier for the consumers to follow suit, and vice versa. This works best when the first role is organically incentivized to bring the second role on board. As an example, project creators host their projects on Kickstarter and subsequently spread the word about their project among their followers and friends. A virtuous cycle of producers bringing in consumers – some of whom then become producers – is set into motion.
3. Minimizing The Time It Takes For The Startup To Reach Critical Mass.
As we note subsequently with the case studies of Facebook, Tinder, and others, a platform reaches critical mass faster when it is launched in a hotbed of existing activity. In such cases, the platform enters a market that already has a high overlap of supply and demand, and is well-positioned to exploit it to gain traction.
Facebook’s launch at Harvard University, and subsequently in similar closed markets, ensured that critical mass was reached a lot faster than the many Myspace copycats that were launching globally around that time.
4. Incentivizing The Role That Is More Difficult To Attract.Some user types may require more incentive to be pulled in. Acknowledging this is important, and is counterintuitive to the principles of traditional marketing.
And finally,
5. Staging The Creation Of Two-Sided Markets.In general, the nature of two-sidedness only allows us to capture such markets one side at a
time. However, we do observe exceptions in the strategies that follow. Finding the bait or incentive that brings in one role and enables them to remain while we get in the other role holds the key to succeeding with this model. OpenTable used this strategy to get restaurants on board by providing restaurant management software (the bait) before any consumers signed up. Conversely, Megaupload seeded content (the bait) on its site to attract consumers on board, and subsequently, converted some consumers to producers of content.
Through this section, we look at several strategies that apply the above design principles to solve the chicken-and-egg problem.