Chicken and Egg Problem: How To Make a Two-Sided Market One-SidedHow Etsy got traction.

 

So here’s the challenge with a two-sided network. You want to get both the consumers and the producers onto the network and the producers won’t come there until the consumers do and vice versa.

And here’s the ridiculously trivial solution that seems to work very well in some cases. Target a specific group which has both the consumers and producers of your service and where the lines between them blur. Even if they are two distinct types of users, the members of this group fulfill both requirements, or at least some of them do. This is important because the WOM required to spread the word among the producers simultaneously spreads the word among the consumers  as well since they’re part of the same group. You don’t have to go around targeting two different groups which has a 2X impact on the difficulty and a 4X impact on the risk (you succeed if and only if you get both sides)

This is what worked for Etsy. Etsy is a niche marketplace for creators of arts and crafts. As the founders of Etsy discovered, people who make crafts typically like to buy from other craftspeople. This really helped them target exactly one group and spark transactions within that successfully. The buyers and sellers happen1ed to be in the same community which helped Etsy focus its efforts.

Another example is the case of Intuit’sTxtWeb, an SMS-publishing platform where online publishers can instantly create SMS-based services from their content. TxtWeb needed to get traction among developers (who would create the SMS-based services) as well as consumers. And TxtWeb did this by targeting engineering college students in India, a group which typically had the consumers as well as developers required for the network to kickstart into action. WOM among developers became WOM among consumers since the two had such a high overlap.

Typically, this works best when:

1. The producers themselves are early adopters as consumers: This worked very well for Etsy as craftsmen buy from other craftsmen not just to help support fellow-designers but because they often have a shared view of what they find aesthetically appeaking.

2. There is a clear incentive for producers to bring in consumers: While producers would like to spread the word around to have people know about their product, structured incentives (contests etc.) may accelerate seeding as well.

When creating a community, this is one of those questions worth a thought. If there IS a group that can satisfy both sides of your network, you might save enormous time and energy by seeding your service within that group.

Chicken and Egg Problem: How To Use Your Producers To Seed The PlatformHow do Skillshare and Kickstarter get to network effects?

 Getting both producers and consumers on the platform is incredibly difficult especially on platforms where both sides are quite often clearly distinct groups. Designing your platform so that your producers can bring along consumers is a great strategy for seeding a platform while concentrating on only one side of the market.

This works well under two scenarios.

A. There is a clear incentive for producers to bring consumers on the platform. This typically happens when the platform helps the producers manage or interact with consumers more efficiently.1

B. The ‘off-platform’ reputation of the producers attracts the consumers to the platform. Exploiting off-platform dynamics always helps while seeding and growing a platform.

PROVIDE AN IMPROVED MECHANISM FOR PRODUCERS TO INTERACT WITH EXISTING CONSUMERSThis model works really well for all those loyalty startups out there. Perx, Shopkick,Tagtile are all classic cases of this scenario where the merchants are signed up and the platform essentially helps merchants cater to their existing set of consumers to make them more sticky. The retailers encourage their customers to use the platform. Hence, creation of one side of the network leads to

creation of the other side. Over time, the merchants benefit from some data-driven cross-pollination here as other consumers on the network (brought on by other merchants) who are interested in their products and services are directed across to them.

When I first shared this thought on Quora, one of the readers responded with how this strategy had worked very well for his startup, Willstream Labs.

Willstream Labs is a cross-border remittance play with a twist: It allows its users (global migrants) to send funds to their home country but also gives them control on how these funds get spent back home at certain specific organizations. The migrant is typically interested in ensuring the funds get deployed at the right organization and are not handled by some intermediary beneficiary. As a result, Willstream Labs allows users to refer/invite the specific organizations (similar to importing one’s friends on a social network).  This has helped them build out a two-sided network by focusing exclusively on only one side and helping them transact with the other side.

PROVIDE A PRODUCTION INFRASTRUCTURE. WHEN PRODUCERS PRODUCE, THEY BRING IN THE CONSUMERSGoogle doesn’t spend much by way of getting consumers to buy an Android phone. The handset manufacturers do that. The handset manufacturers, in this case, are the producers using the Android OS to create new phones.

Platforms that provide production tools (and not just distribution or transaction tools) especially to producers who have few other options benefit immensely from this strategy.

Youtube, WordPress and most content hosting platforms, for that matter, grow in a similar way by providing users with creative tools (video hosting and content blogging respectively). Once users produce, they become marketing agents for the platform to get other consumers in.

FOCUS ON HIGH QUALITY PRODUCERSHigh quality producers attract consumers. Tutorspree does this quite effectively. The online education platform focuses on getting high quality tutors on board. As of mid 2012, there were 6000 tutors on the service with approximately one in every three applicants being expected as tutors. These tutors evangelize the platform to their students who in turn spread the word about it.

GET A FLY-ATTRACTING BEACONWe know that one. Malls have been doing this for the last 50 years. Get a big name retailer, give them good floor space and use that to attract consumers to the mall, who incidentally will get exposed to the smaller merchants too. Turns out, this strategy works equally well for digital platforms, especially content platforms, that need to take off and find adoption among producers. Ad networks use this strategy quite often by getting exclusive access to premium eyeballs and using that to lure in the advertisers.

Ultimately, it boils down to understanding the motivations of the producer side on the platform. What about the platform will make them draw other users onto the platform. Loyalty platforms help retailers manage their customers. Youtube helps budding musicians promote themselves. What does your platform do?

Why Payments Startups Fail: A Lesson In User BehaviorWhy most payment startups fail to get traction.

 

Users hate having to learn entirely new behavior. Products that find rapid adoption typically try to fit into existing user contexts.1 Introducing entirely new behavior may lead to barriers in adoption and this problem is compounded in a two-sided network where having to learn new behaviors on  both sides can make the mutual baiting problem of seeding the network even more complicated.

Mobile Payments is a particular case of two-sided network activity where users prefer trying the most accepted behavior and new behavior takes time to find adoption. That’s largely the reason why NFC-enabled Payments still hasn’t gone away. Consumers won’t go out of their way to get NFC-enabled phones unless there are enough merchants accepting them and merchants don’t want to invest in terminal hardware unless enough consumers start using the network. Both sides need to change behavior, consumers need to adopt a new payment instrument and merchants need to enable new store infrastructure, both of which are new enforced behaviors.

Seed a new model by changing user behavior on one side

That’s exactly why Square has done so well, targeting one side exclusively. Square started by not changing anything at the consumer end. The consumer uses his credit card as he always did. The merchant had to change his behavior but given the superior and simpler pricing and the convenience of receiving payments anytime anywhere, the merchant side was seeded well. Now, that the merchant side is seeded, new behavior is being introduced on the consumer side with the consumer card case.

Reintermediate an existing model without changing user behavior on one side

MPESA established itself as a revolutionary payment mechanism in Kenya for a similar reason. North and East African nations already had a system of money transfer inherently linked to the religion of Islam, known as Hawala.  In the Hawala system, a user asks a Hawala agent to transfer money to an acquaintance in another location, who then contacts another Hawala agent in the new location to pay the user’s acquaintance. The user then pays the sum to the first agent  along with a small fee.  The debt between the agents is logged and settled at a later date. MPESA simply rode on this behavior , without trying to introduce new ones and simply made it more efficient by leveraging the mobile network to track the movement of money. The user-agent relationship remained the same while the agent-agent relationship was improved drastically. Instead of logging in transactions on a book and settling them at a later date, the ma-payments system allows the agents to settle money transfer instantly. As with all platforms, when a tech-driven

payment business is reintermediating an existing payments business, it should try to bring in added efficiency to the transaction without changing the current user behavior drastically.

What is critical (and common to both the above models) is the fact that for even one side of the network to adopt new behavior, the platform should offer significant advantages over existing mechanisms. Square offers better and simpler pricing and the convenience of payments on the go. MPESA offers more efficient transaction settlement between agents.

Joel Spolsky refers to this phenomenon in the technology space where he refers to it as‘backward compatibility’. Essentially, backward compatibility is simply a conscious platform decision to ease a desired change in user behavior by supporting the existing user behavior through the transition phase.

Any form of payments has to combat a behavioral problem. Hence, building in some form of ‘Backward compatibility’ helps spur adoption because users have the choice to continue with the existing method or transition to the new one. Visa and Mastercard know a thing or two about disrupting the payments space. When wave and pay was introduced, the new cards that were issued supported both swipe (existing) and wave (new) modes of payment. Consumers could continue using swipe until merchants set up wave terminals. Of course, a string of incentives to users of wave helped execute the transition.

In a similar vein, companies like CheckFree provide a comprehensive payment mechanism to consumers while allowing

merchants to either migrate to a new system (online payments) or receive checks in the mail like they already have. CheckFree changes behavior on the consumer side successfully because the consumer has the advantage of making one-stop one-click payments. Merchants are allowed the options to continue with the old behavior or adopt a new more efficient one. If CheckFree had insisted that all merchants accept epayments from Day One, it would not have been able to build a comprehensive portfolio of merchants which would have prevented it from gaining traction among consumers.

Payments is a unique space where a change in payment instrument tends to impact both buyers and sellers and very often, new payments mechanisms fail because they try to change behaviors at both ends.

 

This makes the payment industry, in general, very difficult to disrupt. In fact, apart from Paypal, no other business has succeeded in finding widespread global adoption in the payments industry in the last 2 – 3 decades. The key is to ease in one side at a time and not try to create new user behavior on both sides simultaneously.

How Online Dating Services Bring In The Ladies!How dating communities are built and why the ladies night strategy isn’t enough.

 

9 out of 10 dating sites fail not because they cannot get traction, but because they cannot spark interactions. It doesn’t take a genius to get young hormonal men signing up onto a dating site, especially in regions where the gender ratio is already skewed in their favor. It’s much more difficult getting women to sign up at a dating site.

Dating sites are a great example of two-sided markets which, often, rapidly build out traction on one side but fail to get any uptake on the other. Typically, such markets are asymmetrical with one side that is harder to attract (the ‘hard’ side) and the other which is relatively easier to get traction on (the ‘easy’ side).

Members of the ‘hard’ side are more likely to not show up

Given the lack of quality interactions on most dating sites and the general stalker tendencies that seems to take over some members there, women are a lot more careful about joining.

Getting the ‘hard’ side in almost guarantees the ‘easy’ side following in, while getting the ‘easy’ side in won’t guarantee the other side

One might say that since it is so easy to get the ‘easy’ side in, why don’t we get them in and then attract the hard side purely on the basis of numbers. Here’s the dating: Since it is easy to get the easy side in, a lot of other people are already doing that and creating noisy destinations.

You won’t find women signing up just because there is an army of raging men all stacked up on the site. A dating site with real women, on the other hand, almost always attracts men.

The ‘easy’ side desires quality and it is often difficult to get that quality

A great way of solving The Mutual Baiting Problem in such a scenario is to incentivize the ‘hard’ side to join in. Some common incentives could be:

Monetary/Standalone: Chris Dixon outlines this in his article on the “Ladies Night” strategy. Bars and pubs often hold a weekly ‘Ladies Night’ where women get free drinks, tapas, something… to gather a critical mass of women which would then get men coming in all the more. What works for a singles bar works for a dating site!

Better Experience: The ‘hard side’ would literally pay for a better experience. Since it’s so easy to get men to sign up on a dating site, most dating sites end up getting chock-full of stalkers with poor grammar and (if there’s a video chat component) inappropriately angled video cameras run by inappropriately clad men. The bulk of online dating networks are just so irrelevant that women value relevance a lot more than they would a monetary

incentive.CupidCurated is trying to solve for this by letting ‘real women’ curate the membership and determine who does or doesn’t get access to the site. This has helped seed the ‘hard’ side well despite the fact that the initial launch was in a highly single-male-dominated geography (the Bay Area).

While the dating market is a classic example of an asymmetrical market, this strategy works equally well for other markets with a ‘hard’ side. E.g. Luxury Commerce. Targeting high end consumers, especially with niche interests, is difficult. Magazines on luxury travel etc. assemble a market of high-end consumers and use that to attract advertisers. Advertising, of course, suffers from negative network effects but the principle of incentivizing the ‘hard’ side works equally well.

Platform Seeding StrategiesAn overview of solving the chicken and egg problem

 

Acquiring new users for an unknown business is difficult1. Startups face this challenge all the time.

This problem gets compounded further when the business is a platform. A platform or network business is a great business to be in once it has been seeded and has achieved critical mass. However, seeding a platform from zero is very complicated and this is the stage at which most user-driven businesses fail. There are three problems that platforms commonly encounter.

The mutual baiting problem (No producer equals no consumer equals…)

Two-sided businesses typically have a producer side and a consumer side which are typically distinct roles. For a two-sided business to work, both producers and consumers need to be on the platform. However, producers won’t come to the platform without consumers and vice versa. Consumers act as a bait to get the producers to come in and vice versa. This is the mutual baiting problem that such networks suffer from which needs to be overcome to seed the platform with users on both sides and spark interactions. This is often referred to as a chicken and egg problem, which isn’t really accurate as the problem is less about seeded one side first and more about bringing on the two together so that they attract each other.

Strategies

SInce consumers are a bait to producers and vice versa, this problem is typically solved by providing an alternate bait to one of the sides. Seeding can be accomplished by:

Providing a bait to consumers

Providing a bait to producers OR

Simply providing a bait to whichever side is most difficult to seed  

Once one side is seeded, it acts as a bait for the other side to come on board.

The ghost town problem (No complementary products)

Platforms, often, don’t have any standalone value. E.g. Wikipedia without the contributors has no meaning, AirBnB without rental listings is useless. A section of users on the platform (in producer roles) create the content and products for consumption. Hence, platforms are initially ghost towns. Users visiting the platform find no activity, and hence no value, in the platform. Producers, in turn, don’t contribute unless they see some consumer interest. As a result of this vicious cycle, a ghost town continues to remain a ghost town. The challenge is to get complementary products/content on the platform from Day One to break the vicious circle.

Strategies

Successful platforms overcome the ghost town problem by either creating the complementary products themselves or incentivizing producers to create the complementary products initially.

Provide a service for producers that enables them to interact with their consumers

Provide access to new production infrastructure that the user would use even if the network was a ghost town:

Signal relevant activity

Get a marquee player

Convert consumers to producers

 

The double company problem 

Building a new business requires acquiring and serving a user base. WIth two-sided networks, this problem gets complicated further as two distinct sets of users need to be acquired and served. Doing this during the initial stages of seeding the platform is twice as difficult as building any other business.

Strategies

Successful platforms solve the double company problem by not trying to go down the double company path. They try to focus only on one set of users at a time. The strategy may be:

Producer-first

Seed the producers on standalone mode

Act as a producer on your own platform

Consumer-First

Heavily incentivize the consumers

Both Sides Together

Provide single-user utility and move to multi-user mode (App to network)

Focus on a niche and serve it really well

Make a two-sided platform one-sided

Don’t try to change behavior on both sides simultaneously  

The Critical Mass Problem

Platforms and networks are not one-sided services provided by a startup. The service is provided by the producers on the platform and the platform creates value by helping both sides get together

and interact. On eBay, a person looking for  Angry Birds inflatable balloons needs to be matched to a person selling them for a transaction to be initiated. On Quora, a question needs to be shown to the closest matches in terms of users who can answer it for the right answers to be sourced.

For a network business to succeed, the right producers need to be matched with the right consumers. The likelihood of having both the right producers and the right consumers for all possible transactions increases as the size of the user base increases. This makes it particularly difficult for a new startup to take off because there might not be enough members of both sides (or in both roles) to spark interactions. Critical mass is the minimum size of the user base at which enough number of producers and consumers exist to .

Strategies

This problem is solved by targeting a niche.

Groupon solved this problem making a transaction the focus of the marketplace sparking transactions from Day 1

Exploit underlying network structures