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On Demand Startups: 5 Ways to Solve the Chicken and Egg Problem

By jwork 4th September 2015

Following in the footsteps of success stories like Uber and Instacart, it is natural if you want to enter the on demand economy by starting an online business that instantaneously matches producers and consumers. To give your On demand startup a successful start, you need to first figure out a way to overcome the main problem posed by building a platform in the on demand economy.

The core challenge that any business faces in the on demand economy is customer acquisition – both on the consumer and producer side (We have created an infographic that helps you understand the On Demand Economy better).

Consumers won’t come on a platform until they see value provided by producers, and producers would not create that value until they see consumers on a platform. It is a case of the classic chicken-and-egg problem where one cannot happen without the other. Users on one side of the business model find the platform useful only if the other side also exists. For example, why would you go on TaskRabbit if there are very few or no good quality local experts to help you with your errands, and why would people sign up to provide household services if there wasn’t a clear demand of it on the platform?

This problem could mean make-or-break when you start an online business in the on demand economy, but there are ways to work your way through it and emerge successful, as has been exemplified by companies like Uber, Lyft, Instacart, TaskRabbit, Munchery etc.  

Strategies To Solve The Chicken and Egg Problem for On Demand Startups 

There are broadly five ways in which you can overcome this problem –

1. Start Small

[Tweet] When you start small, it is easier to get both sides of customers to accept your offering. Focusing on a single city, area or even a neighborhood first can help you prove the model to both suppliers and consumers. Once that happens, you can expand gradually, building the two sides in tandem, one area at a time. When Uber started its operations, it was restricted to San Francisco and once it met with success there, they decided to expand to other cities.

Starting small could also mean starting in a small segment like Flipkart, which sold books for a long time before it branched out to other areas of e-commerce.

2. Bring High Value Users on Board first

Users whose participation brings in extra value on the platform will attract other users to interact with them. Giving monetary subsidies to encourage participation of high value producers is an important tactic to bring in more customers. When OpenTable started its business, it focussed on getting the top 20 restaurants in the San Francisco Bay Area on board. When consumers and other restaurants saw the best restaurants listed there, they readily embraced the idea of online reservations.

When Uber launched in Seattle, it subsidized town car participation by paying drivers even when they weren’t transporting customers. This subsidy brought high-value producers into the ecosystem, which in turn attracted paying customers. Dating websites are another classic example. Their populations tend to skew heavily male, so they often let women join for free.

3. Act as a Producer

This strategy helps you focus on one user group at a time as the platform acts as a producer to attract an initial group of consumers. It then uses its existing consumer base to attract additional producers. The basis of it is that you start out as a traditional linear business and then open up your business model as you begin to scale. For example, Yelp started off as an information portal by preparing a directory of local services and businesses that customers could access, and then they contacted the owners of listings with maximum hits so they could claim their business and advertise for related search terms.

A similar approach is to try and fill both sides with the same user group, the reason behind the success of Etsy, a platform for selling and shopping handmade goods. Their research showed that people who were likely to produce handmade goods were also the ones more likely to purchase them.

4. Tap into an existing network

Rather than creating a platform from scratch, it can prove useful to partner with an existing network to attract a subset of their users. Compared to the existing solution, your platform must provide additional value to potential users. In a way, you’ve realized that you’re developing an evolved version of an existing network, and you’re appealing to a section of its existing network to help seed yours.

This could be used a bit unfairly, as happened in the case of Airbnb allowing its users to publish their vacation rentals on Craigslist, a bigger network, and directing them to its own website to complete the booking process while offering an improved experience for finding short-term rentals. A more cooperative strategy was adopted by Google when it formed the OHA (Open Handset Alliance) with leading handset manufacturers to use Android in order to fight off competition from Apple’s iOS.

5. Impart Standalone value to your Product

A product that has standalone value irrespective of the network is more likely to get traction among at least one set of users. In such a case, the end consumer is sold purely on the value of the standalone product and not on the promise of the added benefit when the network kicks in.

For example, Square’s credit card swiping device has enough value proposition for merchants even without consumers coming on board. OpenTable, the restaurant reservation service, distributes booking management systems that can be used as standalone software. Once they had enough restaurants on board, and hence access to their seating inventory as well, they opened out the consumer side to allow them to start making booking and collecting a lead generation fee from the restaurants.

These are the 5 main approaches that companies have used to get out of the chicken and egg conundrum of starting an online business in the on demand economy. While early customer acquisition is especially tough for platforms that are modeled on an on demand or Uber for X business model, creative use of these strategies should help you overcome this problem. Once you are through, you are all set to give your on demand platform a great start!

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