Feb 27, 2024

What is the chicken and egg problem in marketplaces?

The definition of the chicken and egg problem in the context of online marketplaces and two-sided platforms. With 30+ examples from successful founders who’ve solved it.

Definition of the chicken and egg problem

The chicken and egg problem (or “the chicken or the egg problem”) is a well-known metaphor to describe a situation where cause and effect are unclear.

(A common, painfully accurate example: to land a job, you need experience, and to get experience, you need a job.)

In online marketplaces (and other two-sided platforms), the chicken and egg problem describes a specific challenge of building your initial user base. How do you bring in customers when you don’t yet have sellers, or sellers when you don’t have customers?

Marketplaces connect two sides: sellers and buyers. For the sellers, visibility and access to a pool of potential customers is a key reason for using a marketplace.

For the customers, the value of a marketplace is in the supply. A curated, high-quality supply makes it easy to compare the offering and find what you’re looking for – often at reduced rates because there’s competition.

In short: to get users, your marketplace needs to offer value, and to offer value, your marketplace needs users.

This is a key reason why building a successful marketplace is a lot harder than launching a one-sided business. The chicken and egg problem isn’t the kind of user acquisition problem that can be solved through added visibility only.

Luckily, there are several battle-tested strategies marketplace founders have used to solve the chicken and egg problem.

How to solve the chicken and egg problem

A short answer to how to solve the chicken and egg problem for a marketplace is to seed it by bringing in one side first.

  1. Identify which side of your audience has a bigger incentive to join (usually, that’s supply).
  2. Give them a reason to join your marketplace before the other side.
  3. Launch to customers when your initial supply is in place.

Resist the temptation to try to grow both sides at once. If you divide your efforts, there’s a great risk you offer a sub-par experience for all of your early users.

Instead, look to understand which side has more to gain by joining your marketplace. Usually, that’s the supply: they have a financial incentive since they believe your marketplace will (eventually) bring business their way.

Then, find a way to provide additional value to your first sellers before any customers are present.

What value can marketplaces offer, besides customers?

This is where benchmarking successful small- and medium-sized marketplaces is really valuable. They can’t throw money at the problem, so instead, they’ve found creative ways to engage and build bonds with early suppliers.

At Sharetribe, we have the chance to talk to tons of successful marketplace founders, and we always ask them how they went about solving the chicken and egg problem.

Over the years, we’ve compiled a great list of examples. Next, I’ll share the best ones (along with examples from well-known marketplace businesses) with you.

Examples of solving the chicken and egg problem

  1. Start small: GrubHub, Kickstarter + others

Almost every founder we've talked to says starting small was critical in their early stages.

There are essentially two ways you can constrain your marketplace: by geography, or by category. For most, the optimal is to constrain by both, to really narrow down a key group of users.

In our interview with Casey Winters (Eventbrite Chief Product Officer, formerly at Apartments.com and Grubhub), he shared that GrubHub started food deliveries in a single neighborhood in Chicago. Kickstarter co-founder Charels Adler told us the co-founders focused exclusively on the art community as their first market.

Both of these marketplaces, as you know, are massive operators today.

And the examples don't end there. Curtsy, a dress rental marketplace, reached $25M in GMV by first focusing on a single sorority. Freightos, the world's biggest marketplace for freight, started with worldwide coverage and then narrowed down to small importers and exporters from China to the U.S. Greenpal, a lawn care marketplace, found out it's easier for them to make smaller cities work than bigger markets. The list goes on.

Why is starting small such an effective strategy to solve the chicken and egg problem?

First of all, you get to focus on a small group of the most enthusiastic sellers. They'll be easier to convince to join, even without customers present yet.

And, with a limited number of suppliers, you can onboard them with the promise of future customers -- and actually deliver on that promise. Making a hundred users happy is by far the better strategy than disappointing a thousand.

And, importantly, with a small group of users, you'll be able to do things that don't scale, which is another great way to combat the chicken or egg problem. More on that next.

  1. Do things that don't scale: Zappos, PaulCamper + others

This is another strategy where examples are endless.

First of all, you can start by doing many things manually that you'll eventually automate on the product side.

A famous example is the online retailer Zappos. For months, the platform would take an order for a pair of shoes, have a team member drive to the nearest store, buy the shoes, and ship them manually.

Another example, is PaulCamper, the RV marketplace that was recently acquired by over $30M.

PaulCamper founder Dirk Fehse started out by renting out his own camper. (Which in itself is a great, unscalable way to solve the chicken or egg problem: be the early supply yourself!)

He managed the rentals with a simple website, a calendar, and an Excel sheet, and continued with this approach with the early suppliers when he decided to extend his one-van business idea into a marketplace.

Florence, the marketplace for healthcare staffing, was also first a Google sheet where nursing homes could add their shifts.

A second realm for unscalable early tactics is marketing. If you don't aim for millions of users, a bunch of effective (and charmingly old-school) user acquisition strategies open up.

Drive Lah founders found the first users for their peer-to-peer car-sharing marketplace by putting flyers on car windows wherever they went. For Greenpal, it was hangers on house doors. Nomandy founders went door to door to build relationships with landowners so they'd list on his platform for private campsites. Jason Bergman sent thousands of Instagram DMs to athletes for his athlete sponsorship marketplace.

A great additional benefit of all these manual, painstaking tactics is that they force you to engage and talk to potential users. The intel you gather and the relationships you build will pay you back several times over.

  1. Steal supply from a competitor: Airbnb, Etsy + others

If there already is a big marketplace player in your niche, you're in luck.

That means there are likely thousands of sellers who want to list on a marketplace and know the drill. They may even have an existing customer base they could bring to you.

Convincing them to change from a familiar solution to something new is definitely a challenge. Your job, then, is to communicate to them why your solution is better than any alternatives.
Curtsy, for example, competes in the extremely crowded niche of second-hand and rental clothing. However, they identified a clear gap: existing players like Poshmark favor active sellers with a big following, and the platforms are difficult to use for casual sellers.

So, for many sellers who aren't interested in growing a social media following, Curtsy is a better choice.

You could offer increased trust and quality. For Airbnb, trust mechanisms between users were a key competitive advantage over Cragislist. Freeup competes in the crowded niche of online job marketplaces by focusing on a curated supply of eCommerce professionals -- an interesting value proposition for a pro who struggles to stand out in more generic job platforms.

Or, if your competitor has hiked up the commission rates for sellers, offering a lower fee could win them over. That's how Etsy was able to compete with eBay in the early days. You could even consider offering an early-bird discount to create a sense of urgency for early sellers.

  1. Offer value through SaaS: CREXi, Freightos + others

SaaS-enabled marketplaces can offer sellers significant additional value. This is often called the "single-player mode" in marketplaces.

For example, Freightos first only advertised to the supply (freight forwarders) as a platform to automate their pricing. CREXi offers real estate agents great productivity tools that they are able to use whether they are interested in CREXi's marketplace element or not.

For both Freightos and CREXi, building the initial SaaS offering was a significant undertaking. In our interview, Ruthie Amaru from Freightos shared it took three years to build the tool before opening up the marketplace.

This is a common challenge in B2B, where markets are fragmented and transactions are complicated and high in value.
For P2P and B2C, however, the tech requirements aren't as high.

Many Sharetribe customers have told us their sellers get lots of value in the booking, availability, and stock management features and online payments that come out of the box with Sharetribe. (And building additional tools, or support for complex B2B transactions, is also a lot faster and cheaper with Sharetribe than from scratch.)

Encore, a marketplace for booking musicians, first pitched as a "LinkedIn for musicians" and brought supply in with the value of social networking.

The benefit of the SaaS-enabled model is also that it'll increase the switching cost for your supply. If they rely on your tools to manage their business, they're likelier to stick around even if a competitor woos them with slightly lower pricing.

  1. Subsidize supply: Uber, Stocksy

A tactic VC-funded marketplaces often use is to pay for their supply themselves before customers start picking up the tab.

For example, Uber (in)famously offered cash rewards to drivers to build initial supply and undercut competitors.

This tactic takes deep pockets, but there are other ways to boost the financial incentive to join your platform. For example, Stocksy offered early suppliers a stake in the company to compete against dominant stock photo platforms.

  1. Fake supply: GrubHub, Thumbtack + others

There are many ways to create marketplace supply through tactics other than the marketplace model.

The simplest way to go about it is to aggregate information you can find online for your marketplace.

Casey Winters told us GrubHub faked its early supply by building a list of delivery restaurants (without working with any of them yet) and showcasing them to customers. When they had customers showing interest, they reached out to the restaurants and "said we have people looking for your food, you should sign up for online ordering."

In the same interview, Casey shares a similar tactic from Thumbtack: in the early days, the team would take any lead they got and then email local suppliers in the area.

Queenly, a marketplace for formal dresses, used automated and manual approaches to both fake and "steal" supply. The founders wrote a script to scrape listings from Poshmark and Facebook Marketplace, but they would also comment on the listings, complimenting the dress and asking the seller to also list it in Queenly.

  1. Engage with a community: Kickstarter, Makerist + others

Founders with a strong community behind them have a cheat code to solve the chicken and egg problem. Sellers and buyers are often both present in these communities -- or, if the sellers aren't there, you could use the community to showcase buyer potential to early sellers.

Again, inspiring examples abound.

Sharetribe customer Gritty In Pink saw 16 months of continuous month-over-month growth right after launching in 2019. But the Gritty In Pink community, fighting for more representation in the music industry, had been active since 2003.

Shortboxed, a marketplace for comic books -- a multi-billion dollar secondary market, by the way -- evolved from a blog into a community, then a platform. Kickstarter founders were strongly embedded in the arts community and built a platform for its needs.

Founders of all these three marketplaces were active members, or even initiators, of their communities from the get-go. But it's not impossible to tap into existing communities to leverage their potential.

The idea for Makerist, a marketplace for crafts patterns, was first validated through Facebook groups. The founders had an idea for a marketplace business, but before building the platform, they set up a few Facebook groups. They created some inspiring content and spent a small amount of money advertising the groups -- and found out they worked amazingly well.

PaulCamper founder Dirk was active in the camper van community from the get-go, but he and his team also made a strategic decision to lean into community-building as a growth strategy.

Their first event for camper owners, hosted in their first year, had a grand total of 20 participants. But some of them had driven across Germany to participate in this one-night event. So again -- find a few dozen users who absolutely love you, and your marketplace is off to a great start.

  1. Communicate well: Toptal, FreeUp + others

The chicken and egg problem is not a marketing problem -- it's a strategic challenge that's inherent to the marketplace business model.

That being said, some marketing and comms tactics can be quite helpful in cracking the challenge.

Highlighting exclusivity can work especially if you're in a market with lots of existing players. Communicate that you're building a new quality-focused marketplace that only accepts the highest-quality sellers.

Examples of this strategy seem to be tied to the verticalization trend in marketplaces, especially in services and jobs. FreeUp advertises access to the top 1% of online talent. Toptal positions as an exclusive network for the top 3% of freelance talent. Hired interviews applicants and gives the top performers access to the platform where companies can send them interview requests.

A tempting strategy (although very difficult to pull off) is creating exclusive access, like invite-only, to boost hype. This worked quite well for the social media platform Clubhouse -- at least in the beginning.

Early partnerships with key influencers in your niche could also work. If you don't have a community of your own, a partner can give you access to one. And again -- think small, at first. Curtsy's co-founder started with her own sorority and then went to other sorority meetings and asked everyone to download the app on the spot -- a strategy Curtsy later replicated with their campus ambassador program.

  1. Choose an idea where the chicken can get you the egg: Poshmark, Eventbrite + others

A final strategy to solve the chicken or egg problem is to not have it in the first place.

This happens if you target a market where buyers and sellers are the same people.

For example, The Octopus Club has grown mostly organically in its niche of pre-loved kid items -- a market with tremendous buyer-seller overlap because children constantly outgrow clothing and gear and need new ones.

Many extremely successful second-hand clothing marketplaces -- think Poshmark, Vinted, and ThreadUp -- also fall into this category.

This buyer-seller overlap, by the way, is a powerful growth lever beyond the early days. Eventbrite, for example, has seen great results in encouraging ticket buyers to become ticket sellers.

And speaking of Eventbrite, its market has another powerful benefit: ticket sellers actively promote their events to their audience through their own channels.

So even if there isn't complete buyer-seller overlap, the sellers bring you buyers simply by promoting their offering.

The same is true for Kickstarter: to get funded, a project owner would need to actively promote it outside of the platform and bring in supporters -- many of whom would eventually set up a page for their creative projects.

CREXi's tools for real estate brokers incentivize sellers to market to and bring in their own demand -- without investment in customer acquisition from CREXi.

Key takeaways

The chicken and egg problem is a fundamental challenge of the marketplace model.

The value marketplaces offer is connecting demand with supply. Sellers are there for the customers, customers are there for the sellers.

There are many successful strategies to combat the chicken or egg problem. In this article, I've namedropped 30+ successful marketplaces of different scales to give you a selection of practical tactics you can consider.

However, if there's a single formula that works for most marketplaces, it would be a variation of the following:

  1. Start in a really, really small niche.

  2. Bring in the supply side first by offering them additional value or showing them the buyer potential.

  3. Bring in just enough customers to match with the first small group of sellers.
    By far the most successful marketplaces out there have started out by focusing on a really, really small niche. Instead of aiming for volume, they built a small but faithful audience who loved using the platform.

And, when you manage to solve the chicken and egg problem once -- and find liquidity -- you have a playbook on which you can start building your expansion strategy.

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