Platform users:

How do they impact the approach to the chicken-and-egg problem?
Platform users: How do they impact the approach to the chicken-and-egg problem?
14/07/2017 Nina Schirrmacher

Most platforms fail because they do not succeed to solve the chicken-and-egg problem in a timely manner – Google Video and Yahoo video are only two prominent examples. This central issue to the launch of digital platforms is caused by the two-sidedness of the market and cross-side network effects, due to which the value of the platform to users on one side depends on the number of users on the other side. The initial lack of a user base and the lack of activity need to be solved actively in a timely fashion to ensure the survival of the platform.

Scholars point out that the dynamics of the chicken-and-egg problem may vary depending on the nature of the platform, which therefore determines the suitable launch strategy. Researchers suggest that the underlying chicken-and-egg problem can be solved sequentially, such that the platform has to onboard one side before the other. Or else, the chicken-and-egg problem can be addressed simultaneously, such that users of both sides, i.e., producers and consumers, must be present from the start.
As the existence of a one-size-fits-all strategy is very unlikely, a categorization of platforms with regard to strategic implications is useful. Excluding unsuitable strategies ex-ante allows to save resources for more effective strategies.

A study with 14 digital platforms revealed users’ ability to switch between user sides as a key contingency factor for the suitability of different launch strategies

In a study about digital platforms launched between 2003 and 2016 we investigated how these strategies, which solve the initial chicken-and-egg problem between producers and consumers, are applied in different settings. We empirically examined launch strategies of digital platforms in their specific context. The digital platforms operate in different contexts and enable different interactions between their respective producer and consumer sides. The data set comprises 14 interviews with founders and CEOs of digital platforms.

Our findings suggest that users’ ability to switch between user sides is a key contingency factor for the suitability of different launch strategies. On some platforms, user sides remain restricted to one particular side. Think for instance of the food delivery service Foodora with restaurants on one side and hungry customers at home to the other side. The major part of platforms which implemented a sequential entry strategy constrain their users to being either consumer or producer. The examined platforms are aggregators of a professional group, for instance doctors, or organizations, like start-ups or SMEs. The producer side usually supplies a good, service or information, which is not freely available to the public, but core to the group of producers.

On other platforms, user sides can act both as producer and consumer. AirBnB and BlaBlaCar are examples for such platforms. Most platforms that applied a simultaneous entry strategy allow users to switch from one side to the other. To do so, the user groups need to belong to the same market segment. This means that the platforms with switching user groups serve either a business-to-business market or a peer-to peer market.

Platforms with switching user sides onboard users simultaneously, whereas platforms without switching user sides implement a sequential entry strategy

To put it in a nutshell: Our empirical analysis proposes that platforms with switching user sides tend to onboard users simultaneously to reinforce network effects and enable faster ignition. They implement a simultaneous entry strategy for three reasons. First, users are potentially the same on both sides. This is why a distinction between producer and consumer side is generally not made and prospective users are considered as potential producers as well as consumers. Second, a platform does not know upfront which side a user will engage in first and is therefore advised to promote engagement on both sides equally. This rules out that a prospective user is targeted on the wrong side. Third, a user who acts as producer and consumer simultaneously creates two-fold indirect network effects for the entire network and therefore allows for faster ignition of the platform. 

switch_marketplace_onboarding
Simultaneous onboarding on platforms with switching user sides

Platforms without switching user sides tend to implement a sequential entry strategy as producers are more willing to wait, while consumers require a broad offer that satisfies their heterogeneous demand from the start. Platforms without switching user sides onboard users sequentially for two reasons. First, the interviewed platforms without switching user sides offer producers to distribute their core product or service in an additional sales channel. Due to existing other sales channels, they are reassured about their customers’ existence and only need to wait until they arrive on the corresponding platform. Hence producers may be more patient to wait for the arrival of the consumer-side. In the meantime, platforms make sure that the first side has nothing to lose while waiting for the second side. Second, the goal of a sequential entry strategy is to build up a solid mass of users on one side, which attracts the opposite side. This allows to establish successful interactions as soon as the second side arrives. Initial successful interactions are particularly important, as there is no second chance for the first impression of the platform: A user who does not find what he is looking for in the first place is unlikely to come back a second time.

non-switch_marketplace_onboarding

Sequential onboarding on platforms without switching user sides

Implications for entrepreneurs

A platform with switching user sides faces reduced user acquisition costs, as the users to both sides might be the same. Once onboarded to one side, they already know the platform. By use of the platform they learn about the opportunity to engage to the other side. Intuitively, platforms with switching sides should address a user base that potentially can engage as both producers and consumers to maximize network effects. In our study we observed that kicking-off interactions in a micromarket is especially suitable in the case of side-switching. In a micromarket participants already interact with each other, which allows an effective matching of interactions and the achievement of a critical mass within a smaller scope. The activity can later be scaled towards a bigger market. However, it decelerates the global growth of the user base: An established user base in location A cannot be transferred to a location B. Still, to test the business model, starting at one location might be useful. Once the critical mass there has been reached, the platform can expand into several further markets simultaneously.
Platforms without switching user sides should consider the uncertainty that arises from a sequential entry strategy: The first joiners do not know, when and even if the second side will show up. Therefore, a sequential entry strategy often involves an incentive for first joiners, e.g., free premium accounts for a trial period or other material subsidies. These subsidies convey confidence about the success of the business and shape expectations among first joiners. However, if the sequence before onboarding the second side is too long or even unsuccessful, the first side becomes impatient and will then leave the platform again. One possible solution to minimize the impatience is to communicate openly when the platform plans to onboard the second side.

Nina Schirrmacher, PhD Student

Sources for further readings
Parker, G., Van Alstyne, M., & Choudary, S. P. (2016). Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You. New York, NY, US: W. W. Norton & Company.

Evans, D. S., & Schmalensee, R. (2016). Matchmakers: The New Economics of Multisided Platforms. Boston, MA, US: Harvard Business Review Press.

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