Chicken/Egg Problem for the Online World: Building an Online Marketplace

Image courtesy of
Flickr user pshab.

I love business ideas that attempt to build a niche online marketplace. You aren’t selling anything – just bringing two groups of people together: one group that has something to give, the other who wants that something. Just charge a finder’s fee, membership fee, or take a % transaction fee. Highly scalable with relatively low operating expense during the latter part of the growth curve. This is of course completely dependent on keeping a quality customer experience and, oh right, the whole “does this add value” thing. (Oh right, that thing).

The problem that anyone who has built one or two online marketplaces can tell you is how to get the ball rolling in the first place. It truly is an online incarnation of the old chicken/egg conundrum: which came first? The buyer or the seller?

No one wants to be first, no matter how much our society rewards leadership. As one of my mentors said to me:

“Everyone wants to be a leader, but no one wants to be first.”

So true but it stands to reason. Why risk being the first one to try a new web site when there maybe clearly safer and consumer-tested alternatives? Heck, even an “expected bad” could be better than taking a risk on something in the slim chance it’s an “unknown good” (or is that “known unknowns” and “unknown un–” Ah, screw it.)

But if you don’t have buyers coming to your site, how will you attract sellers? Without buyers buzzing around, why would a seller hock their wares at your site?

How to break the conundrum? Here are some suggestions I’ve seen work personally or experienced first hand:

  1. Seed Your Marketplace from an alternate source. Perhaps you become a licensed reseller or affiliate of a competitor product. Or you purchase inventory yourself to sell directly. Whatever you do, try to “fill-out” your site enough that a new visitor doesn’t feel like “the only one in the room”. It doesn’t take much.
  2. Pay Your Customers to use your site. This could take the form of waived posting fees for sellers, free or unlimited transactions, or just outright cash. In my experience, we’ve paid people to be the first 100 users. PayPal did when they launched years ago. I got $20 in my account if i was the first 100 users. Then $10 for the next 1000, then $5 and so on. It seems crazy – but you can easily quantify your spend and justify it as truly performance-based, analytics-driven marketing.
  3. Shrink Your Footprint to encourage word of mouth. Perhaps just start with focusing on building a userbase in your home state, heck, even just your zip code. With online and mobile marketing tools these days, you can easily geo-target and demo-target your customers. Dealing with a much smaller universe of customers while adding a “local” flare to your site could get the ball rolling.

But all of these suggestions won’t matter a darn bit if the initial customer experience sucks. Which is why it pays to spoon feed, handhold, carry on your back, do whatever it takes to make sure your first customers are WOWed by the experience. And they deserve it – they took the risk, and the reward should be sweet.

While most of what I write is merely a personal typing exercise, I have launched a few marketplaces either in my own companies or for larger corporations like BMW. One or two sentences herein could actually contain value. But not much.