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

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

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.

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.

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 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 [email protected], 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).