How to Use Scarcity to Hack the Marketplace Chicken-and-Egg Problem

Solving the chicken-and-egg problem is a key one for any marketplace business.

Here’s one hack that uses scarcity to help with solving it.

What is the marketplace chicken-and-egg problem?

When you’re starting a marketplace, you typically have no customers and no suppliers.

With no customers, it’s hard to get suppliers on board. And, having no suppliers, any customers who come to your marketplace will be disappointed and unlikely to return.

This problem applies when getting the overall marketplace started but can also apply on a city-by-city basis for marketplaces relying on local supply and demand — having your marketplace up and running well in London may not help much when you try to launch in Manchester.

How can you get round it?

Many marketplaces never reach the sustained level of ‘liquidity’ they need to break past the chicken-and-egg problem.

At this stage you typically need to get creative and do things that don’t scale.

One hack that can help is to create scarcity and then use that scarcity to persuade hesitant suppliers to come on board.

Restaurant food delivery service Seamless (initially SeamlessWeb) used this tactic to solve the chicken-and-egg problem for their service. Here’s how…

How Seamless used scarcity to bring suppliers on board

Seamless was founded in 1999 and aimed to connect hungry people with restaurants who could delivery food to them.

Jason Finger, their founder, started with the demand side by going to big investment banks and law firms in New York City. He’d tell them he was creating a new delivery service and asked if they were interested in using it for their staff.

With interest from these big firms, he’d then to go restaurants in each niche (e.g. Thai restaurants) and tell them they were only going to onboard two restaurants in that niche and they’d be going to their competitors next. This got the restaurant owners’ attention and allowed him to get a selection of restaurants onto his platform.

From there, Jason could more easily get further corporates interested which represented more demand for restaurant owners and hence made the marketplace more appealing to them. Jason had started the SeamlessWeb flywheel spinning.

After a relatively slow start, Seamless went on to raise $50 million in funding in 2011 and was reportedly on track to generate over $100 million in annual revenue before merging with Grubhub in 2013.

How can you use these ideas for your marketplace?

There are really two key tactics here that you can borrow from Seamless:

1. Tap into hubs of demand. Seamless identified large pools of attractive demand (large banking and law firms) and, by targeting them, efficiently established a base of significant demand they could tap into once they had suppliers in place.
2. Create artificial scarcity to persuade suppliers. Seamless got suppliers on board by offering access to the potential demand from the large corporates then sealed the deal with scarcity they created by limiting access to their platform to just a couple of restaurants for each type of food.

These are powerful tactics that can be applied by many marketplaces, particularly in the early stages.

First, look for ‘demand hubs’ — places that aggregate potential demand for the product or service your marketplace will be offering. See if you can work with these hubs to bring people to your marketplace when you have suppliers in place.

Next, look for a way to create scarcity on your platform when approaching potential suppliers. Perhaps, like Seamless, you’ll limit listings to a small number of suppliers in each category. Use this scarcity to persuade suppliers to come on board.

Where have you spotted these tactics in use by other marketplaces? Do let me know in the comments. I’d love to hear from you.

Further Reading

• Eventbrite’s Brian Rothenberg and Greylock’s Casey Winters discuss marketplace growth tactics.
• Jason Finger of Seamless: The Random Idea That Sparked a $100m Business
• Getting to Critical Mass: 8 Ways to Kickstart a Marketplace Business