Overcoming the Chicken-and-Egg Problem

Which came first? The chicken or the egg? This age-old question is one that every platform business has to face.

Initially, a platform does not create enough value to attract new users. It’s not economical for consumers to join the platform when there are no producers, and vice versa. The challenge is: which group do you get first, and how? This is the chicken-and-egg problem.

This problem is common to all platforms. For example, Uber needs drivers to get customers, but it also needs customers in order to attract drivers. Similarly, Microsoft needs to first attract consumers to get developers to make apps for Windows Phone. But since the phone doesn’t have many apps, consumers are less likely to buy it.

So how do platforms overcome this challenge?

The answer lies in subsidizing value to one or both sides of your ecosystem. Value subsidies, if done properly, will incentivize consumers and producers to join your platform.

There are three primary ways to subsidize value: monetary subsidies, product feature subsidies and user sequencing.

Monetary Subsidies

Monetary subsidies typically involve giving money directly to a consumer or a producer. One example of this is referral fees, which most platforms use to attract new users. For example, if you invite a friend to join Uber, you and your friend each get your next ride free, up to $30.

Another way to subsidize value is through price. Though less direct than handing out rebates, lowering pricing to one side of your platform is a very common way to subsidize participation. A great example of this is the console industry, where console likes the Xbox One or Playstation 4 are sold at or below cost in order to get as many users as possible onto their platforms. These platforms can then use their large consumer base to attract game developers, who they charge licensing fees.

Many platforms also provide guarantees to producers in order to get them to join. Heavy competition for drivers on ride-sharing platforms has led both Uber and Lyft to offer minimum-earnings guarantees to drivers who join their platforms.

Product Features

Another way to subsidize value is through product features. Many platforms create special functionality for power users in order to increase loyalty and usage among this prized user group.

One example of this is Instagram, which provided a great photo-taking app before it became the social network it is today. By offering this single-user utility, Instagram was able to attract lots of producers to its platform, which it then used to attract consumers and build a social network around photos.

Another example of this is Twitter’s Verified User program. You may have noticed a small checkmark next to some Twitter user’s names. This means that user is a Verified Twitter user. Verified users get additional features like improved security and identity protection. You also get better customer service and the ability to view and talk only to other verified users. This feature is typically offered to high-profile users like celebrities and public figures who will attract a large number of followers. These are some of the most valuable users for Twitter, as they are the people that most users will want to follow and interact with.

The idea behind the Verified program is similar to why other platforms create product features that deliver value for a small subset of highly valuable users. As a result, Twitter will be able to attract more celebrities and public figures. And if it can get more high-profile users to join, then other users will want to join to follow and talk to them.

User-Sequencing

The third way to subsidize value is through user sequencing. This strategy is the deliberate prioritizing the acquisition of certain users groups that others will want to interact with. Then you can use these high-value users to attract a broader audience later on.

A common way to do this is by limiting participation to a high-value subset of users early on. Quora did this by targeting prominent tech entrepreneurs and VC’s and getting them to post high-quality content. After Quora had this initial group of high-value users, it became easy to attract a broader audience. Many new users would want to gain access to the insights of those early users, so they would have a strong incentive to join Quora.

Facebook’s initial strategy was also similar. The platform started at Harvard and then expanded to the rest of the Ivy League. It then used the prestige and exclusivity of the Ivy League to attract students from other colleges. Once Facebook had become the de facto social network for colleges, it was able to use its existing users to attract older users to join.

Conclusion

These ways to subsidize value are the key to overcoming the chicken-and-egg problem. Successful platforms use a combination of all three to attract consumers and producers until they reach “critical mass,” the point where the value of joining the platform becomes greater than the cost of joining for new users. Join one of our recurring Platform Pricing webinars to learn more!

In another post, we’ll look at a few of the key strategies we’ve identified for how platforms use these different ways to subsidize value to get to critical mass and beyond.

Filed under: Platform Innovation | Topics: chicken and egg, platform innovation, platforms