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Multi-sided business models - how to break the chicken and egg problem

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Multi-sided businesses - like Uber, Airbnb or e-commerce marketplaces - create a high barrier to entry once established. But they're also incredibly hard to build, due to the chicken-and-egg problem - both buyers and sellers need to be on the platform at the same time.

If you're trying to build such a multi-sided business, how do you break this deadlock?

This framework and checklist will help you brainstorm ways to launch and scale your multi-sided business.

Based on http://jitha.me/how-uber-solved-its-chicken-and-egg-problem/

Multi-sided business models - how to break the chicken and egg problem

  1. 1. MULTI-SIDED BUSINESS MODELS HOW TO BREAK THE CHICKEN AND EGG PROBLEM – A FRAMEWORK JITHAMITHRA THATHACHARI
  2. 2. jitha.me CONTENTS  What are multi-sided business models?  How to scale a multi-sided business – A framework  Checklist to apply the framework to your own business Note: Based on How Uber solved its chicken and egg problem (and you can too!)
  3. 3. jitha.me CONTENTS  What are multi-sided business models?  How to scale a multi-sided business – A framework  Checklist to apply the framework to your own business
  4. 4. jitha.me WHAT ARE MULTI-SIDED BUSINESS MODELS? A multi-sided business is a platform which connects two or more distinct user groups that provide benefits to each other In the simplest case, a two-sided platform connects buyers and sellers Connecting drivers and passengers Connecting buyers and sellers Connecting homestays and tourists Connecting app developers and mobile users
  5. 5. jitha.me MULTI-SIDED MODELS – THE CHICKEN-AND-EGG PROBLEM Multi-sided businesses, once established, offer a high barrier to entry; however, they’re incredibly hard to build, due to the chicken-and-egg problem High barrier to entry…  Other players will need to create all sides of the platform simultaneously, to compete effectively  …But hard to build  To work, the multi-sided model needs to be valuable to the very first customers on all sides – Users on one side of the business model find the platform useful only if the other side also exists  People buy video game consoles only if there are enough games they can play, but game designers develop games for a console only if it has enough users Thus, multi-sided models suffer from the proverbial chicken-and-egg problem
  6. 6. jitha.me MULTI-SIDED MODELS – THE CHICKEN-AND-EGG PROBLEM Even in a two-sided model, both supply- and demand-sides need to be built together, to be useful How does one break this deadlock? Multi- sided Platform Sellers Buyers Find value in the platform only if there are enough buyers Find value in the platform only if there’s enough choice (i.e., sellers)
  7. 7. jitha.me CONTENTS  What are multi-sided business models?  How to scale a multi-sided business – A framework  Checklist to apply the framework to your own business
  8. 8. jitha.me BREAKING THE CHICKEN-AND-EGG PROBLEM – A FRAMEWORK There are four ways in which multi-sided platforms can successfully break the deadlock Slow and steady Jumpstart Fake it till you make it Bait and switch Build the different sides together, in lockstep Get one side up quickly, then build the others Build one side up gradually with a makeshift offering, and then bring in the other Start with a single-sided value proposition to build one side, and then introduce the multi-sided offering 1 2 3 4
  9. 9. jitha.me SLOW AND STEADY Start small, building both sides together for a narrower base – a town, a community, or a specific consumer segment; then, gradually expand to more towns, communities or segments 1 Multi- sided Platform Sellers Buyers Create supply in a very small cohort – e.g., a small town Target buyers in the same narrow cohort By starting small, one can obtain cross-network effects, and satisfy both sides from the very beginning
  10. 10. jitha.me SLOW AND STEADY – EXAMPLES There are numerous examples of multi-sided businesses that started small, by focusing on one city, one community, or even a specific consumer segment 1 Company Initial Users One city San Francisco One Campus University of Arizona One segment Book lovers Note: Read How Uber solved its chicken and egg problem (and you can too!) for more info
  11. 11. jitha.me JUMPSTART Get one side of the model up quickly, and then gradually build the other 2 Multi- sided Platform Buyers Then build consumer base gradually, offering them high-quality service If you’re able to get one side of the value proposition up quickly, then you can build the other side more sustainably Sellers Get sellers on board quickly through various mechanisms
  12. 12. jitha.me JUMPSTART – EXAMPLES There are three ways to jumpstart a multi-sided business by building one side quickly 2 Note: Read How Uber solved its chicken and egg problem (and you can too!) for more info Partnerships Easy, Low-Risk Onboarding Subsidize Initial Adoption  Opportunistically partner with someone who already has a large user base on one side – Google partnered with Netscape to become its default search engine; tied up with Yahoo! to power its search  Make it easy and low-risk for one side to come on board in advance of the other side; minimize downside – Uber makes it very simple for drivers to come on board, and even gives them a phone! – Belly Card gave its retailers a low-risk, easy-to-install and low- friction loyalty solution  Make it low cost for one side to come on board – Xbox and Sony Playstation are sold to users at subsidized rates, to speed up initial adoption A B C
  13. 13. jitha.me FAKE IT TILL YOU MAKE IT Create a makeshift offering on one side of the platform to attract the other side, and then build both gradually 3 Multi- sided Platform Buyers Offer service to gradually build buyer base, before getting actual sellers If you can offer the service without actually building one side up first, you can break the chicken-and-egg deadlock Sellers Create makeshift offering, without actually getting sellers on board
  14. 14. jitha.me FAKE IT TILL YOU MAKE IT – EXAMPLES There are two ways in which you can put together a makeshift offering on one side without actually building it 3 Be the counterparty till the real counterparty appears A Use existing systems or services B Most ecommerce players start with inventory models (where they are themselves the seller), before getting actual sellers on board and transforming to a marketplace Zappos and Flipkart started without any actual inventory; whenever a user purchased an item, they would buy the product from a physical store and ship it Note: Read How Uber solved its chicken and egg problem (and you can too!) for more info
  15. 15. jitha.me BAIT & SWITCH Create a one-sided model first, offering a targeted value proposition; after one side is built, introduce the multi-sided offering 4 Multi- sided Platform Offer a single-sided service to build user base first By launching with a one-sided offering, you avoid the chicken-and-egg problem that prevents you from starting Sellers Create seller-side after buyer-side has been built Buyers
  16. 16. jitha.me BAIT & SWITCH – EXAMPLES Many successful multi-sided models started with a focused one-sided offering to build a user base, before layering on a (different) multi-sided value proposition 4 Square started as a simple payment solution for retailers, before layering on the consumer-side value proposition (deals and coupons) LinkedIn started as a pure-play network for professionals; today, a huge user base allows it to offer unique solutions for recruiters, jobseekers, etc. Zomato started as a simple information portal on restaurants; after building a large user base, it started offering adjacent services – online ordering, table reservations, etc. Note: Read How Uber solved its chicken and egg problem (and you can too!) for more info
  17. 17. jitha.me CONTENTS  What are multi-sided business models?  How to scale a multi-sided business – A framework  Checklist to apply the framework to your own business
  18. 18. jitha.me THE CHICKEN AND EGG CHECKLIST – HOW TO USE IT  This checklist will help you develop your own strategy to break the chicken-and-egg problem in your multi-sided business  Use it as a tool to facilitate brainstorming – use each question in the checklist to think of tactics to break the buyer-seller deadlock in your multi-sided business model  The different tactics are not mutually exclusive; you can use multiple tactics from among these to break the buyer-seller deadlock
  19. 19. jitha.me THE CHICKEN AND EGG CHECKLIST [1/2] Type of Tactic Questions If “Yes” Slow and Steady Can you start in one city / locality? Which locality? ________ Can you start with one specific service? Which service? ________ Can you start with one consumer segment? Which segment? _______ Jumpstart Can you leverage network effects by getting one side of the business (either buyers or sellers) in place? Which side? _______ Can you partner with someone in an adjacent market, to reach their user base? With whom? ________ Can you partner with someone in an adjacent market, to access their supplier network? With whom? ________ Can you partner with someone in an adjacent market, to access their platform technology? With whom? ________ Can you reduce risk of coming on board for one side (usually sellers / side that generates network effects)? How? ________ Can you give one side (usually sellers) some perks for coming on board? What perks? ________ Can you simplify onboarding (1-step registration) for one side (applicable to both buyers and sellers)? How? ________ Can you give one side a subsidy to speed up adoption? Which side? _______
  20. 20. jitha.me THE CHICKEN AND EGG CHECKLIST [2/2] Type of Tactic Questions If “Yes” Fake it till you make it Can you temporarily act as one side of the business (usually the seller-side)? How? ________ Do some parts of your offering already exist individually? Which parts? ________ Can you temporarily use the above existing services to deliver the offering for your initial (small) user base? What services? ________ Bait & Switch Are there any other single-sided services that your buyers / sellers need? What services? ________ Can you offer any of these single-sided services, to build user base on one side of the platform? What services? ________ Can you build an information portal for any side(s) of your platform? Which sides? ________
  21. 21. BACKGROUND
  22. 22. jitha.me BRIEF BACKGROUND  Co-founder of Rouse Digital – building Smart Saver, a platform where consumers can get rewards on their daily purchases  Writer on startups, business and strategy at jitha.me – Featured in YourStory, Rediff, and other publications – Curate two widely subscribed newsletters – So it Goes (entrepreneurship, business and strategy) and The Startup Weekly (primarily startup-related articles)  Ex-Project Manager at Monitor Group (now Monitor Deloitte), a strategy consulting firm started by Michael Porter  MBA, IIM Ahmedabad; B. E. Computer Science, Mumbai University
  23. 23. jitha.me CONTACT DETAILS  Email: gt.jithamithra@gmail.com  Twitter: @jithamithra  Website: jitha.me (Subscribe here)  Weekly Newsletters – So it Goes, curating articles and books on entrepreneurship, business and strategy – The Startup Weekly, curating startup-related articles

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