Launching a two-sided marketplace is a lot like trying to find a date for a dance. You need two people to show up, but it’s tricky to convince either side to commit without knowing the other is definitely coming. In a marketplace, you’re not just building a product; you’re creating a connection – matching problems with solutions, buyers with sellers. But the big question remains: who do you focus on first?

Take Airbnb, for example. When Brian Chesky and Joe Gebbia started, they faced the same conundrum that all two-sided platforms struggle with. They needed hosts to attract renters, but without renters, why would hosts bother signing up? Instead of waiting for the magic to happen, they hacked Craigslist to find their first hosts – a bold, guerrilla move that sparked the connection they needed to get their marketplace off the ground.

This chicken-and-egg challenge in marketplaces can feel impossible to crack. Do you woo the buyers or the sellers first? In this article, we’ll explore how marketplace giants like Uber and Amazon solved this puzzle, and look at creative strategies for sparking those crucial first connections in your own platform.

A chicken-and-egg recipe for your marketplace omelette

The chicken-and-egg conundrum is often framed as a simple catch-22: without buyers, sellers won’t join, and without sellers, buyers won’t show up. However, savvy marketplace startups recognise that solving this challenge is imperative for promoting liquidity, igniting network effects, and scalable growth.

This unique challenge of multi-sided platforms is a feature of marketplace dynamics, not a flaw. The difficulty of solving it makes it a powerful competitive edge in the early stages, one that can evolve into a long-term defensive moat as network effects begin to take hold. While failing to resolve the tension between supply and demand can disrupt liquidity and growth, addressing it creatively unlocks the potential to outsmart the competition.

Why conventional wisdom won’t solve it

One common misconception in marketplaces is the idea of symmetry: that you must balance both sides – buyers and sellers – equally from day one. In reality, most successful platforms prioritise one side first (usually the hardest side), letting the other follow naturally.

Take, for example, early-stage startups like Etsy or Uber. They didn’t rush to acquire buyers and sellers at the same time. Instead, they focused on building supply, knowing that demand would follow. This strategy of prioritising one side isn’t just efficient – it often leads to unexpected growth, especially when paired with scrappy solutions.

“Scrappy” solutions refer to small, often unscalable tactics that solve immediate problems and lay the foundation for future success. These could be simple hacks or brute-force methods that won’t work in the long term but are vital for kickstarting initial growth.

Borrow, hack, and hustle your way to liquidity

Case study: Airbnb

In its early days, Airbnb didn’t rely on organic growth alone to build its user base. Instead, the company “borrowed” traffic from Craigslist, a much more established platform at the time. By enabling Airbnb hosts to cross-post their listings on Craigslist, Airbnb was able to tap into a large, active pool of renters without starting from scratch. This clever hack gave them immediate visibility and access to potential customers while simultaneously positioning Airbnb as a trustworthy alternative for short-term rentals.

The key takeaway is that growth doesn’t always have to come from traditional or organic methods. Sometimes, the most effective strategy is to leverage existing platforms and communities.

Fake it till you make it

Case study: FanPass

FanPass, a platform for buying and selling event tickets, faced a typical chicken-and-egg dilemma: a supply-constrained marketplace with lots of potential buyers, but not enough sellers. So, instead of waiting for sellers to sign up organically, they employed a two-sided hybrid approach. 

On the demand side, FanPass drove a steady stream of buyers through aggressive SEO and content marketing strategies. By integrating a WordPress CMS with the Symfony PHP framework, FanPass enabled platform administrators to quickly create landing pages for events based on previously published content. Whenever those original pages were updated with new information, the new event pages were automatically refreshed as well. This semi-automated process helped FanPass pages appear prominent in search results when potential ticket buyers searched for popular sports events like “Arsenal vs Tottenham”.

To tackle the supply gap, FanPass took a hands-on approach by stepping in as the seller themselves, purchasing tickets from third-party vendors to meet buyer demand. At the same time, they offered to sell tickets transparently on behalf of sellers, bypassing the friction of sellers needing to create an account. This dual effort not only built trust with buyers but also served as a proof of concept for sellers. When FanPass eventually stopped selling on their behalf, it created a pain point for those sellers, forcing them to engage directly with the platform.

By combining scalable strategies like SEO with unscalable, manual work – often referred to as the “concierge” or brokerage approach – FanPass managed to triple conversion rates and increase turnover a hundredfold in just eight months.

The power of free

Case study: Yaga.co.za

To remove the initial friction for sellers, Yaga, a pre-loved fashion marketplace, dropped its seller fees, while buyers pay a premium for Buyer Protection, ensuring secure and accurate deliveries. This strategic shift pulled in a surge of sellers, which in turn attracted more buyers, creating the momentum the marketplace needed to scale.

This strategy has resulted in remarkable growth. As of 2023, Yaga boasts 5 million monthly visits and 100,000 transactions per month, with over 1.5 million items listed for sale. The platform has tripled its global sales in 18 months, while in South Africa, sales increased sevenfold in the same period.

The takeaway: sometimes received wisdom should be turned on its head by charging buyers instead of sellers. This counter-intuitive approach, followed by other startups like FanPass, has put pressure on established platforms like eBay, illustrating how agile startups can disrupt even the previous disruptors.

Start with carefully chosen niches

Case study: Amazon’s Books Strategy

When Amazon launched, it didn’t set out to become the “everything store” overnight. Instead, it strategically focused on the book market, which was a highly liquid niche with a significant volume of activity. This choice allowed Amazon to tap into an existing demand for books, while the internet facilitated easy access to a wide selection. 

Initially, Amazon resold books rather than allowing third-party sellers on its platform. By maintaining tight control over the process, Amazon could optimise logistics, manage inventory, and ensure quality customer experiences – all critical to building trust with its users. As a result  quarterly revenues surged by more than 100% within the first year of operating. This focused approach enabled Amazon to build a blueprint for the supply-and-demand challenge before expanding into other categories. 

The lesson is clear: start small and focus deeply. By honing in on a specific product niche and successfully addressing the marketplace dilemma within that niche, you can build a strong foundation for future growth.

Data is your North star

Case study: MobyPark

MobyPark, a booking engine for parking space in European cities, discovered through data analysis that demand spikes occurred around major events such as the Amsterdam Light Festival. Armed with this information, they targeted visitors looking for parking with granular Facebook ads during peak demand periods. This significantly boosting parking space uptake and contributed to a tenfold increase in revenue, along with a fourfold growth in repeat purchases

Similarly, Affordable Art Fair implemented a data-driven strategy by building a comprehensive data pipeline. They utilised tools such as Snowplow for data collection and Amazon Kinesis for analysing user behaviour. This setup enabled them to track user interests, like which art categories users browsed and which artists they added to their wish lists. By understanding their audience better, they could craft targeted ads on platforms like Google, Facebook, and Pinterest tailored to different buyer personas, such as art lovers and investors. The results were impressive: engagement increased almost three-fold! 

The key takeaway here is that data should be the driving force behind your growth strategy. By identifying predictable demand triggers, you can efficiently attract users and address the chicken-and-egg dilemma in a targeted manner.

Referred becomes preferred

Case study: Uber

Uber’s referral program played a crucial role in its early success. As a provider of a commoditised service, the company understood that attracting drivers was essential; without a sufficient supply of drivers, the platform simply wouldn’t function. To achieve this, Uber implemented a series of attractive referral incentives that resonated with potential drivers.

One of the standout incentives was a cash bonus for both existing drivers and new recruits. For instance, if a current driver referred a friend who completed a certain number of rides (often around 10), both the referrer and the new driver could earn bonuses ranging from $100 to $500, depending on the market and the promotion.

Additionally, Uber offered a flexible working model that appealed to potential drivers. They highlighted the benefits of being able to choose their own hours and earn money on their terms, a powerful lure for many individuals looking for extra income or a change in career. The combination of financial incentives and the promise of flexible work drew in a significant number of drivers: active drivers skyrocketed from virtually zero in mid-2012 to over 160,000 by the end of 2014.

By building its supply side first, Uber laid the groundwork for a robust rider base. With more drivers on the road, riders had shorter wait times and a greater variety of options, creating a positive feedback loop that further attracted both drivers and riders to the platform. This strategic focus on supply through targeted incentives not only helped Uber establish itself in a competitive market but also set the stage for its explosive growth in the following years.

Piggybacking on brand recognition

Case study: Nestify

Nestify, a property management service, found a clever way to attract landlords by tapping into the growing popularity of Airbnb. By positioning itself as a complementary service, Nestify quickly built a strong reputation and gained traction in the market. They offered property owners a seamless way to manage their listings, from revenue management to cleaning services, enhancing the overall Airbnb experience, which contributed to a 50% improvement in landlord retention.

TaskRabbit took a similar approach, leveraging the surge in e-commerce and delivery services. They connected retail buyers with local freelancers who could help with tasks like assembly, cleaning, or moving their purchases. By integrating their platform with popular online retailers, TaskRabbit created a hassle-free experience for users looking for quick help.

Both Nestify and TaskRabbit show us the power of piggybacking on established platforms. They’ve effectively built credibility and accelerated their growth in competitive markets by aligning themselves with existing demand and providing valuable services. This strategy not only helps them stand out but also enables them to tap into a ready-made customer base that’s eager for their offerings.

Signs that you’ve cracked the chicken-and-egg challenge

High liquidity – when buyers and sellers can effortlessly find each other and complete transactions – is a strong indication that you’ve cracked the chicken-and-egg problem. But what does liquidity actually look like? Here are some key metrics to monitor:

  • Time-to-Match: This measures how long it takes for a buyer to connect with a seller or vice versa. A shorter time indicates a more efficient marketplace.
  • Transaction Volume: This metric counts the total number of transactions occurring on your platform, providing insight into overall activity levels.
  • Search-to-Fill Ratio: This ratio examines whether user searches are translating into actual sales. A low ratio suggests a mismatch between buyers and suppliers, indicating that buyers aren’t finding what they need.
  • Supplier Utilisation Rate: This tracks the percentage of suppliers who are actively fulfilling buyer requests. A low utilisation rate may signal that demand is insufficient or that some suppliers are not competitive, highlighting the need for better supplier engagement.
  • Fill Rate: This shows the percentage of buyer requests that successfully result in matches. A low fill rate can be a red flag, indicating supply shortages or inefficiencies in the marketplace.
  • User Retention: This measures whether users return to your platform after their initial transaction. High retention is a positive sign, showing that customers found value in their experience.

When these metrics show positive trends, it’s a good sign that you’re on your way to solving the supply vs demand dilemma.

Eventually, network effects kick in

Once liquidity is achieved in a marketplace, network effects start to kick in. As more buyers come in, sellers see greater potential for sales, and in turn, more sellers create a richer selection for buyers. This self-reinforcing cycle is the holy grail for marketplaces. When you reach a tipping point where growth becomes incremental, you’ve likely overcome the chicken-and-egg dilemma.

The best way to solve marketplace demand and supply challenges

Of course not all marketplaces are the same, and strategies that worked for companies like Airbnb or Uber may not necessarily apply to your business. To determine the best approach for solving the chicken-and-egg problem in your marketplace, consider the following:

  • Focus on highly liquid niches: It’s easier to solve the chicken-and-egg problem in a vertical with high levels of activity. E.g. Amazon with books.
  • Evaluate how each funnel – for buyers and sellers – performs. For example, if one side of the marketplace has more liquidity or faster conversions, prioritise it to jumpstart growth. E.g. FanPass focussed on ticket buyers for specific events like the Man City vs Man United derby.
  • Assess the ROI of each funnel to determine where to concentrate your efforts.For example, if it costs me $1,000 to attract one seller who sells only $50 in goods per month, it’s probably not a good ROI. 
  • Geography matters: 

Many startups make the mistake of fixating on familiar geographical locations, which can limit their potential. When selecting locations for your marketplace, focus on areas where you have a unique advantage or where competitors may be falling short. For example, Yaga, which was founded in Estonia, chose South Africa for its initial testing phase due to its larger, more diverse market. This decision was strategic: South Africa offers a growing second-hand goods market, operates in the same time zone, has a high rate of internet usage, and is predominantly English-speaking, making it a gateway to the African continent.

  • Beware highly consolidated markets: online marketplaces thrive on a high degree of market fragmentation where high volumes of buyers and sellers can’t efficiently find and transact with each other. If there are only a few sources of supply or demand in a target market, the marketplace model generally struggles.
  • Data-driven decisions: To match buyers and sellers effectively, you need the right data. Use analytics to identify which verticals (e.g. location, product type, seller or buyer type) offer the highest return on investment and where your marketplace can gain the most traction. 

Test, tweak, repeat

We’ve already established that there’s no universal solution to the chicken-and-egg problem in marketplaces. A thorough discovery process that illuminates your market characteristics and users’ needs should form the groundwork for effective strategies. This starts with market research, gathering user insights, and analysing competitors to identify attack angles. From there, experimentation becomes essential – test different niches and activation funnels, adjust based on results, and refine your methods until you find what resonates with your audience.

A blend of creative, scrappy tactics coupled with user feedback will help you tackle this challenge effectively. Leveraging analytics can guide your efforts, allowing you to identify which side of the marketplace might yield quicker wins.

It’s also important to recognise that off-the-shelf marketplace builders might seem convenient, but they often limit the experimentation necessary to solve this vital puzzle. A custom-built solution empowers you to test, adapt, and scale in a way that aligns with your unique business needs.