How Uber solved its chicken and egg problem (and you can too!)

What comes first? The chicken or the egg?

What comes first, the chicken or the egg? An idle question on which children (and sometimes adults) can spend hours shooting the breeze. The question is, however, not so innocuous when it comes to businesses.

Some of the most exciting ventures today have a unique characteristic – they’re multi-sided businesses. What’s a multi-sided business? It’s one which connects two or more distinct user groups that provide each other with benefits. Think of Uber – it connects cab drivers and passengers, who benefit each other. E-commerce marketplaces are also examples – they connect buyers with sellers.

Such companies, once established, have a high barrier to entry. While that’s wonderful, it also means that they’re incredibly hard to build. 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 designers make games for a console only if there are enough people who own it. The proverbial chicken and egg problem. How do one solve this impasse?

 

I face this problem too, in the product that I’m building – connecting advertisers with consumers (launch coming soon – watch this space!). How does one break the deadlock between the two sides? Unlike the philosophical question of which comes first, here the only right answer seems to be both!

There are four ways in which successful multi-sided platforms have overcome this stalemate.

  1. Slow and steady: Build the two sides together in lockstep
  2. Jumpstart: Get one side up quickly, and then build the other
  3. Fake it till you make it: Build one side gradually with a makeshift offering, and then bring in the other
  4. Bait & switch: Start with a single-sided value proposition to build one side, and then introduce the multi-sided offering

 

1. Slow and steady

Need both cab drivers and passengers at the same time

In such a model, your offering needs to be valuable to your very first customers on both sides. One way to achieve this is to start small – very small – at a level where it is possible to get both sides onto the platform and provide the necessary cross-network effects. Focusing on a single city, area or even a neighborhood first can help you prove the model to both sides. Once that happens, you can expand gradually, building the two sides in lockstep one neighborhood at a time.

This is what Uber did in San Francisco – getting the model going in one city, and then applying it to other cities one by one. Going small could also mean focusing on one specific customer or product segment before expanding to others. Amazon, and more recently Flipkart, started with selling just books, building a user base and brand recall before expanding to other products.

Tinder, the dating / swiping app, built initial traction in a very creative manner. In its early months, the marketing lead toured several college campuses. At each campus, she first convinced the girls to download the app. After that, when she showed the app to the male fraternities, they quickly jumped on, seeing the number of girls they knew on the app.

 

2. Jumpstart

Growing both sides of the business slowly in sync is great, but what if you want to speed up growth? Speed is often critical initially – given the high barrier to competing in this space, multiple people with the same idea would try and hustle into pole position. Maybe you don’t need to have both sides up and running from the get-go?

There are many ways one can quickly get one side of the value proposition up, and then build the other gradually.

Get one side of your platform up first, and then build the other.

a. Partner with someone who already has a large user base

One way to break this stalemate is to opportunistically partner with someone who already has a large user base on one side of the platform. This could be another product with mass acceptance in your target user base, or someone who has strong existing relationships that could be leveraged. Once one side is thus engineered into being, you can then build the other.

Google hacked its way to an initial user base using partnerships. It partnered with Netscape to become its default search engine in the late 90s, and also tied up with Yahoo! to power searches on that platform.

b. Make it easy, low-cost and low-risk for one side to come on board

At the same time, you need to make it as easy as possible for one side to say ‘yes’. Drivers are much more open to trying Uber when all they need to do is accept a phone from Uber and keep it on. It’s simple, and it’s low-risk – there’s plenty of upside if any ride requests come on the app, but there’s no downside at all!

Belly, a loyalty program for small businesses, did the same. It gave retailers a very low-risk, easy to install and low-friction loyalty solution. Once a critical mass of retailers had it, localized network effects began to take shape – customers and other retailers, noticing this in some shops, started demanding it of others.

c. Subsidize initial adoption for one side

A subsidy or ‘free’ offer always helps give the initial nudge. This is what video console companies like Xbox or Sony PlayStation do. The console is sold at a subsidized rate to users, and the company takes royalty on the flurry of games that follow. Uber subsidizes both users and cabs initially, to speed up adoption.

Game companies subsidize consoles, to speed up user adoption

3. Fake it till you make it

Sometimes, it’s difficult to obtain one side of the model quickly enough. In this case, you have to build one side gradually with a makeshift offering, and then get the other.

a. Be the counterparty till the real counterparty appears

Most large e-commerce marketplaces started with an inventory led model, where they stocked products themselves. Once user base was built, they found it easier to make the shift to the more lucrative marketplace model, connecting product suppliers to buyers.

b. Use existing systems or services

Sometimes, you don’t need to build the entire solution for all sides of your platform – winging one side of the platform is an option, at least until you demonstrate user traction. I’ve heard the story, possibly apocryphal, of how the Flipkart founders would actually go buy books from stores to fulfill their initial orders. Look for a repetitive, non-scalable way to fulfil one end of the bargain initially, rather than investing in building service infrastructure, supplier base, etc. for a model that is yet unproven – not only is the latter risky, it also delays your product’s launch.

 

4. Bait & switch

A very nifty way to build a multi-sided platform is to first offer a single-sided service, that doesn’t need a counterparty. Once a user base is built, you can layer on the multi-sided service. Sounds complicated?

a. Build a user base on one side with a focused (different) offering, then introduce the second side

Square Reader

Square is a payments solution for small businesses in the US. It’s really cool – a small chip-sized device that plugs into a mobile’s headphone slot and allows you to start accepting credit card payments. At least this is what it was initially. Once it built a sufficient scale of retailers, it added a second business model. Today, Square also runs a discounting app offering consumers great deals at its partner retailers, card-less transactions, etc.

LinkedIn also did something similar. It started as a pure play network for professionals. Today, a huge user base allows it to be much more – it now offers unique solutions to recruiters, job seekers, and professionals.

b. Start as an information portal

Another way to do this is to start as an information portal for one side of the platform, offering users a directory of information about the other side. Zomato started as a pure-play information source on restaurants in your neighborhood. Gradually, as user base grew, they started overlaying restaurant promotions. I bet they’ll add other services soon – allowing you to book a table, pay after your meal through the app, etc.


These are the four different approaches that companies have used to resolve their chicken and egg deadlocks. What do you think? Have you faced chicken and egg situations of your own? Would love to hear from you – mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.

 

PS. In the actual chicken and egg problem, the egg comes first (there’s absolutely no doubt about that).

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No, you don’t need a business model.

Startup Stock Photos

Roughly a year ago, Facebook bought Whatsapp for $19Bn. When I heard, my first reaction (as it was for many others) was, “What!!! 19 billion? 380 million per employee. And they don’t even have a proper business model!”. And this was after Evan Spiegel of Snapchat (poster-boy of the business model-less) refused a $3Bn offer from Facebook. Today, their search for the elusive business model just begun, Snapchat is also planning a raise at a $19Bn valuation, and Spiegel looks like a visionary. What’s happening here? Is a business model expendable?

Amid the spate of headlines screaming bubble, I read a couple of articles by Andrew Chen on how the business model is not the main bottleneck for a startup at all. It’s the audience. As Andrew says, the biggest risk, regardless of your monetization model, is whether you can get millions of users or not. This sounds like a corollary of the power law – whether you succeed will depend far more on the size of your audience than on what you sell. If you have the users, you can find the money. So go build that audience instead.

Wait, are we saying you do not need a business model at all? Of course not – you do need to make money. But the point is that it’s not your critical constraint. Build a product that enough users want, and there are any number of off-the-shelf business models you can tag on to it.

Take Facebook – even a year after its IPO, people were concerned it didn’t have a solid business model. Today, Facebook is hitting annual revenue of over $12Bn not due to any innovative business model, but driven by its user base and growth alone. Maybe I’m belaboring this a bit, but especially for a consumer startup, it’s often far more valuable to focus on growing user base from 100K to 2 million, than to try and optimize revenue per customer.

OK, this is all talk – every business can’t use the same models that Facebook does. What are all these off-the-shelf business models we’re blabbering about? Well, I looked around online, but couldn’t find a comprehensive list. So I chose the next best option – I built it myself. I’ve listed 25 business model patterns below, that you can plug onto your business.

 

But first, you need an audience. And for that, you need a value proposition. Let’s say that you’re a platform where users come for widgets – these widgets could be physical objects (e.g., furniture, books, etc.), or digital ones (photos, updates from friends, online services, etc.).

This entrepreneur has bigger problems than his business model.

This entrepreneur has bigger problems than his business model.

Now, if the widgets have direct monetary value, the business model options are fairly straightforward:

1. Manufacture and sell directly to customers
2. Outsource manufacturing, and sell directly to customers
3. Manufacture and list on other marketplaces
4. Become a marketplace and collect brokerage

But I’m guessing that if the widgets have physical value, then the business model wouldn’t be as big a question. Amazon India and Flipkart don’t take much ‘brokerage’ today on their e-commerce marketplaces in India, but their belief is that they can in the future.

It becomes more interesting when the product that your audience comes to you for may not be a physical one with direct value – how do you make money then?

 

A. Advertising

Advertising_Small

Ever since Google revolutionized search by putting ads next to search results, advertising has become a default monetization approach. And let’s not forget that the newspaper industry has revolved around ads since forever. The digital advertising industry today has matured considerably, offering several options to tag onto your product / service.

5. Ad networks: Ad networks collect an inventory of ad content from advertisers. You can tie up with one as a publisher, and the network will then start showing banner ads, pop-ups, etc. on your platform. For every ad seen or clicked on, you collect. A lot of mobile apps today, especially games, use this as an earning model. There are over 200 ad networks around the world today, that you can partner with – Google AdSense, Tribal Fusion, InMobi, etc.

6. Affiliate networks: Fundamentally similar to an ad network, but here the focus is more on driving actual sales. You showcase product ads on your website, and you get a percentage of any sale originating from a click here. Some companies do only affiliate sales – check out Cashkaro.com, for instance. Anyone can become an affiliate to one of the large e-commerce players, or join an affiliate network – just search for ‘Affiliate network’ on Google, and a bunch of them show up.

7. Promoted Content: Ads that look native to your website / app, rather than banners. This is the Facebook model – where your news feed also contains a few ads in the same format. Twitter does the same with Promoted Tweets, and Snapchat Discover is also a variant of this. Some of the smaller apps also do something similar – QuizUp, from time to time, has Quizzes on upcoming movies – these are likely promoted.

8. Sponsored Content: Sometimes, your regular content can also be sponsored. This is the model sometimes followed by digital magazines / newsletters – an issue may be sponsored by a particular company, and free to the user.

 

Now, let’s get into slightly more complicated advertising solutions:

9. Offer Wall: Sometimes, rather than showing banner ads (which can be distracting), mobile games allow you to gain virtual assets (say a missile launcher in a first-person shooter game) by watching a few ads, downloading promoted apps, etc. For each ad you interact with, the game gets paid by the advertiser, and you get that missile launcher! This is called an Offer Wall – Tapjoy is one of the biggest providers of this service.

10. Retargeting: What users do on your site can be valuable to advertisers, even if they don’t actually advertise on your site. For example, the kinds of pictures you pin on Pinterest could be valuable information for an e-commerce player – they can then offer you the right deals when you visit them. You could help make that connection by integrating with a retargeting solution like Adroll or Perfect Audience.

11. Special Offers: You can also run exclusive offers from time to time for your users, in collaboration with advertisers – e.g., a special discount code that they can use in shopping. Often, this can be designed in a way where you get a cut for every user that converts.

12. Special Campaigns: Similar to the previous solution, you can also run special campaigns for advertisers to drive engagement. “Do you love Coke Zero? Upload a video telling us why, to win an exciting hamper!”

13. Behavioral Analytics: Observing how users engage with your platform and with other users on it can be very helpful in understanding their behavior. And this behavioral understanding could be very useful to corporates. Sharing this data with them could be a good way to monetize. Now, this is not really advertising, but it’s similar in that a separate entity pays you for your users and their actions.

 

B. Charge the User

The other option is to charge the user herself. Of course, setting an upfront fee for usage could scare away a lot of users, and hence the need for more creative solutions.

Shop_Small

Some of the business model patterns that exist here are:

14. Rent / Subscription: A simple monthly subscription fee for use of the service – users are more likely to convert for this, as it’s a smaller amount than buying the software outright. This is a primary model in SaaS solutions, but it’s also used by others. World of Warcraft, the hugely popular multiplayer online game, charges $14.99 per month for usage.

15. On-Demand / Pay as you go: The opposite of the Subscription model is the On-Demand one – users pay only when they actually use a service. Cab services like Uber and Ola are great examples of this – you pay only when you use the service.

16. Bait & Hook: The bait and hook model involves having a low entry barrier for users, with regular, high ongoing charges. Printers and razors popularized this model, with relatively low-cost devices and high cartridge costs. But this is something we see among newer companies as well – US telecom players sell mobile handsets at a loss but have expensive paid plans with lock-in periods. Video game consoles are similar – cheap consoles, costly games.

17. Retainer + Usage: Another model to reduce upfront costs (and increase adoption) is to charge a low retainer for accessing the product / service, and then pay-as-you-go, depending on the amount you use. This is halfway between subscription and on-demand, and hence potentially less attractive to users than either.

Freemium business models

Freemium business models, where some consumers use the product for free and others pay a premium and cross-subsidize them, have gained a lot of traction over the years. There are several examples of the freemium pattern:

18. XX no. of uses free: Many services allow you to use them a certain no. of times per month for free, beyond which you need to pay. For example, the Financial Times website allows you to read 3 articles a month for free, after which you need to pay a subscription fee. Tinder is experimenting with this – it is considering limiting free users to only 100 swipes a day, with an option to upgrade to Tinder Plus. Some of us will now need to find something else to do at lunch unless we’re ready to pay.

19. XX no. of users free: An app that involves collaboration could limit the no. of people collaborating on the free plan. For example, an office chatting app could limit the number of colleagues you can add on one account to five. Todoist, the task manager that I use, allows you to add only 5 people to a project in the free version.

20. Limited scope for free users: Services sometimes limit scope of use for a free user, and you need to upgrade to do more. Taking the example of Todoist again (I love the tool, btw!) – the free version allows you to list and complete tasks and projects, but you need to pay if you want to label tasks, write comments, etc. Similarly, many content websites allow you to see the latest reports for free, but you have to become a paid member to access their archives. LinkedIn also uses this freemium model to great effect – they have different premium plans for job seekers, recruiters, and so on.

21. In-app purchases / virtual goods: This is popular among mobile games. Reduce the entry barrier by keeping it free, and allow users to purchase virtual goods within the app. If you’ve played Angry Birds, you’ll remember the Mighty Eagle. In a particularly difficult level, you can buy the Mighty Eagle (only $0.99) to kill all the well-sequestered pigs. And the stickers that you can buy on WeChat or Viber are also examples of in-app purchases.

22. Trial period: A variation on freemium is to allow consumers to use your product for free for 1 month, and then start paying. Most online software tools offer this – in fact, even if they are freemium and have a paid plan, they offer a trial period on the paid plan. The trick here is to use this first month to really sell your product and convince the user that she can’t live without it. A good onboarding process, assuming your product really adds value, can work wonders.

If you’re deploying a freemium model, you should initially assume that only 0.5%-1% of your users will convert.

Offering other services

Sometimes, you can offer other products / services to your customers to earn revenue.

23. Value added services: Offer users tools or services to help them better use your core offering, which remains free / inexpensive. For example, a photo-sharing software could offer certain paid filters that you can apply to your photos before sharing. Similar to the many paid Instagram filters that exist for iOS and Android today.

24. Diversified services: Sometimes, companies also offer completely unrelated services to their user base. WeChat has gradually added a myriad services to what one thought was a messaging app – mobile games, peer-to-peer payments, e-commerce, you name it.

25. Events: An offering which has a community built around it can also monetize by running events or get-togethers. And if the company can procure advertising / sponsorship for the event, that’s an additional revenue stream. VCCircle, a content company in India focusing on startups and investing, runs a large number of information / networking events that its subscribers and others can attend for a fee.

 

Thus, there are several business models that you can use, provided (and this is the million dollar question repeated for the millionth time) you have a large enough audience. Can’t find one that fits your offering in this list? Don’t fret – continue to build your product and user base. As long as you add value, you’ll eventually find a way to share part of it.


What do you think – is a business model a commodity yet? Would love to hear your thoughts. And if you want more information on any of these – how they work, how you can integrate them, tools you can use, etc. – do comment here / email me at gt.jithamithra@gmail.com / tweet at @jithamithra. And yes, do subscribe to this blog – I post roughly once a week on startups, consumer behavior, books, etc.

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