What is the Chicken and Egg Problem in Startups?
The chicken and egg problem (or the cold start problem) is a dilemma that mostly faces platform-based startups that have to determine what to work on first – bringing buyers on board first or bringing sellers first.
It’s a dilemma because in the absence of buyers, sellers will have no interest in joining the platform. On the other hand, if there are no sellers, buyers will see no need to sign up. This vicious cycle can prevent a platform from taking off leading to failure or stagnation.
It’s a problem that many of the large platforms of today such as Facebook, YouTube, Uber, Airbnb, Tinder and PayPal had to address in their early days. Overcoming it is contingent on developing a strategic, thoughtful approach that attracts both groups of users and forms a positive feedback loop. That could entail:
- Start small and low to avoid making expensive mistakes at the beginning.
- Concentrate on a product niche that can draw a core group of enthusiastic sellers and customers. As the market grows, it can include other markets or categories.
- Provide signup and referral incentives to earliest adopters through discounts and promotions.
- Partner with existing networks. For example, working with local community organizations or business associations could help attract both buyers and sellers.
- Build trust through user-friendly policies, convenient tools, secure payment channels, customization options, quality service and reliability.
- Focusing on one side of users to create a critical mass that will attract the other side.
Still, the right answer to the problem is dependent on the business model and target market.