How to Solve the Two-sided Platform Chicken-and-Egg Problem: A Great Harvest!Posted by David Sokoler on Nov 3, 2011 | Tags: Harvesting, lean startup, Multi-sided Platforms, Two-sided Networks | 2 comments
Multi-sided platforms (also known as two-sided networks), bring together two distinct groups who each benefit from the other’s presence on the platform (e.g. Monster.com is a classic two-sided networ
k where employers post jobs on the site because of the breadth and depth of the jobseeker base and jobseekers come to the site because of the quantity and quality of jobs on the site). Much of the existing literature on multi-sided platforms has focused on possible solutions to the inherent chicken-and-egg/Catch-22 condition of the model. The thinking goes that prospective users on each side of the platform will be reluctant to join without the presence of users on the other side. To skirt this issue, most solutions focus on one of four approaches:
- Subsidize one side of the platform to motivate those users to join.
- Establish exclusive relationships with key users on one side of the platform to lure users on the other side.
- Start off as a vendor to one side of the network and after building a loyal base of customers, begin facilitating transactions between those customers and other suppliers.
- Start off as a merchant acquiring inventory from suppliers and then resell that inventory to customers on the other side of the network before transitioning to a non-risk taking intermediary.
From my perspective, these strategies seem to be optimal for startups with completely innovative business models or those that reject the precepts of the lean startup methodology (http://www.startuplessonslearned.com/2009/08/minimum-viable-product-guide.html). To the extent that no content already exists on the web from either side of the platform, I believe the aforementioned would be the best place to start. However, given the vast availability of content on the internet, there may be an approach to starting a multi-sided platform that would be far more consistent with lean startup methodology, harvesting.
Harvesting is the collection and processing of information already stored elsewhere. RentJungle (apartment aggregator), Kayak (flight aggregator), theLadders (job aggregator), Yipit (daily deals aggregator) are all multi-sided platforms that harvest content already on the web to solve the inherent chicken-and-egg problem of the two-sided network without subsidization, exclusivity, or starting off as a vendor or merchant to one set of users. Since both sides of each of the platforms above already transacted over the internet in a fragmented way (two key requisites), the simplest approach for serving as an intermediary was to aggregate the data from all the “sellers” (content providers) and serve as a one-stop shop for all of the “buyers” (users). In this way, each of these companies was able to avoid the Catch-22 by eliminating the need for one side of the platform to join the site in the first place.
At this point it is worth taking a step back to think about how harvesting fits in with the context of the lean startup methodology. Eric Ries, whose recently published book The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses has garnered much acclaim, writes that one of the most important techniques for a lean startup is the “minimum viable product”. Ries states that “the minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.” The four traditional approaches to solving the chicken-and-egg issue of multi-sided platforms all most commonly require substantial effort and/or resources and do not lend themselves to rapid experimentation and testing. In contrast, harvesting is an extremely fast and easy way to acquire content from one side of the platform (as outlined below) and the harvested data can be pruned for different users to test various iterations of the platform.
All that said, how easy is it to harvest? In the absence of an API or direct-feed into one side of the platform, the lean startup can develop a simple scraper to acquire data from one side of the platform which then can be used to attract users on the other side. That said, if an API does exist, it might not even be necessary to build a scraper as the data may be readily available from a content provider (Amazon, Google, CNET, Facebook, Twitter and even the World Bank all offer APIs). In either case/whenever possible, I believe entrepreneurs adhering to the lean startup methodology should first attempt to harvest one side of the multi-sided platform in order to eliminate the chicken-and-egg problem before moving on to one of the more traditional approaches for vetting the viability of a multi-sided business model.