The Chicken and Egg problem (Tinder, Airbnb, Uber)
The Chicken and Egg problem it's a problem of marketplace-type businesses. When you are launching a two-sided platform, you need supply and demand. And it makes a big problem for founders, putting a high barrier for entry. You need to find not just users, but two different types of users (what is x2 times harder). Users on one side of the business model find the platform useful only if the other side also exists. For example, people buy video game consoles only if there are games they can play. And game developers make games for a console only if there are enough people who use it.
A lot of founders ask us - How to solve The Chicken and Egg problem? We decided to review several very popular marketplaces, that everybody knows, to show how they successfully addressed this issue.
Tinder. 15,000 first users
Everybody heard about Tinder. Today (in 2019) 1 million dates happen each week thanks to the Tinder. But how it was in the first days of service? How did they overcome a nightmare of all marketplaces? Here is an interesting story behind it.
Whitney Wolfe, Co-Founder of Tinder, packed her suitcase and set off to travel around the country.
In each city, she made a presentation to the women's communities, motivating them to register in the app, explaining how it's cool and useful.
Then she gave presentations to male communities, showing the app that is full of those local girls, who already registered.
When Whitney returned from a trip, 15,000 first users already used the application.
“Her pitch was pretty genius. She would go to chapters of her sorority, do her presentation, and have all the girls at the meetings install the app. Then she’d go to the corresponding brother fraternity—they’d open the app and see all these cute girls they knew...” - coder Angel Munoz.
In 2014 Whitney left the Tinder and founded Bumble (the biggest competitor of Tinder). Today Bumble valued at more than $1 billion, and it is rumored that they are preparing for IPO.
Dating? Definitely, this girl knows how to make money on it.
Airbnb. 6,000 first users
Today Airbnb is a huge company with $35B valuation and 11k employees all around the globe. But in 2008 they were just starting with an idea of air beds and breakfasts for strangers. And like all marketplaces, they faced The Chicken and Egg problem:
landlords are not interested in adding their apartments to the service without visitors.
tenants have nothing to rent at the platform.
How did Airbnb get out of the situation? (it’s already a legendary example)
They created a script that scanned all landlords offers on Craigslist and collected their emails.
Then the same script sent a letter on behalf of a pretty young girl who "liked the apartment so much" and asked the owner to add his apartment to Airbnb.
So Airbnb quickly acquired 60,000 first landlords, which solved The Chicken and Egg problem.
What’s more, they made it easy for users to post listings to Craigslist through Airbnb with one click.
Later Craigslist closed this backdoor for collecting emails, but the main idea in the approach. If you need first users, you can simply copy them from somewhere. Besides, such holes appear regularly at many services. You just need to check such opportunities.
For example, our friends started a music project in 2016, and they managed to scan from various sources around a million (!) emails of musicians and music institutions. They also sent letters on behalf of a “young girl,” and the opening rate of these letters was > 50%.
Uber’s story began in Paris in 2008. Two friends, Travis Kalanick and Garrett Camp, were attending the LeWeb, an annual tech conference the Economist describes as “where revolutionaries gather to plot the future". Rumor has it that the concept for Uber was born one winter night during the conference when the pair was unable to get a cab. Initially, the idea was for a timeshare limo service that could be ordered via an app. After the conference, the entrepreneurs went their separate ways, but when Camp returned to San Francisco, he continued to be fixated on the idea and bought the domain name UberCab.com.
To get their first drivers, Travis cold called black car drivers and offered to pay them an hourly rate while they tried out the platform. 3 of 10 drivers that he called, agreed to give it a try.
Then, to incentivize passengers, they offered free rides at local events in the tech-savvy San Francisco community and worked hard to make each experience the best it could be. According to Kalanick, word of mouth was the biggest driver of sales and Uber spent almost nothing on traditional marketing.
“I’m talking old school word of mouth, you know at the water cooler in the office, at a restaurant when you’re paying the bill, at a party with friends — ‘Who’s Ubering home?’ 95% of all our riders have heard about Uber from other Uber riders.” — Travis Kalanick
“When someone sees the ease of use, the fact that they press a button on their phone and in under 5 minutes a car appears, they inevitably become a brand advocate.” — Max J. Crowley , Business Development at Uber
Entering new markets.
Since Uber’s main competition was taxicab companies, the startup researched which cities had the biggest discrepancy between supply and demand for taxis. They then launched during times when that demand was likely to be the highest, for example during the holidays when people tend to stay out late partying. It also ran promotions during large concerts or sporting events, when big crowds of people all needed cabs at the same time, and an individual might be more likely to take a chance on an unfamiliar company named Uber.
In that way, the company acquired a large group of customers in one swoop. “First, they figured out how to get a bunch of customers all in one night, when the demand was high. Then, they made sure this first group of users had a great experience and brought in the next wave of customers via word-of-mouth,” says Teixeira. The company banked on the fact that once users realized how easy it was, it was only a matter of time before they started using it to go to work, then shopping for groceries, and so on.
Launching in situations of high demand and low supply also helps startups acquire the right type of customers—those early adopters who might be more forgiving of a company while it works out the kinks.
But what is the secret?
Besides the fact that you need first users (and you see that startups use different hacks how to get these users on the board, creativity should help you overcome this problem too), you have to satisfy these users by your service. It can be quality, speed, usability, great support, etc. A long list of possible options. But the main idea - make your customers really happy.
Some founders say that getting your idea off the ground “it's a numbers game”. But it’s not. It’s a way how you treat your first customers. Do they stay happy by sharing your link with all their friends, or writing a 1-star review in App Store?
Paul Graham, Co-Founder of Y Combinator, wrote a famous essay “Do things that don’t scale” where he described all main things for early stage startups. And I want to finish this article with his main advice: