A key characteristic of a marketplace is that every new user who joins strengthens and increases the network’s value. Once a critical mass of users is reached, the momentum — or ‘flywheel effect’ — starts to kick in.
The challenging part is bridging the initial gap. How do we accumulate a sufficient volume of users during the phase when marketplaces are prone to self-destruction due to high user churn?
There are three useful approaches to consider when cold starting a marketplace from 0 to 1 to reach its inflection point:
- Build a single-player utility — provide a high single-player value
- Lower the inflection point — require fewer # of customers to reach the inflection point
- Seed — acquire customer faster than the churn rate
(1) Build a single-player utility
What kind of standalone utility can we offer to new customers that will keep them engaged while marketplace liquidity is still building? For instance, OpenTable initially developed a SaaS tool that enabled restaurants to manage their operations efficiently. This standalone tool attracted restaurants, who then stuck around for the added benefit of the marketplace (customer bookings) once it gained enough liquidity. Similarly, Uber guaranteed a certain hourly income for drivers, effectively paying them upfront until there were enough riders to ensure consistent fares. This concept of a standalone, or “single-player”, utility gives customers a reason to use the service even before the marketplace reaches its tipping point.
(2) Lower the inflection point
Our aim is to decrease the customer base size necessary to reach a marketplace’s tipping point. A common strategy for achieving this is to significantly narrow the marketplace’s focus. A prime example of this approach is Amazon, which initially started with books before evolving into a store for everything. Similarly, Facebook began within the Ivy League schools. As the marketplace dynamics start to take shape, we can then extend into related verticals or demographics to gain a wider reach.
There are numerous strategies that go beyond simply narrowing the marketplace’s scope. The ultimate goal is to set the marketplace’s momentum, or “flywheel,” in motion with a minimal user base. For instance, Airbnb accelerated its inventory growth by leveraging Craigslist to source listings.
(3) Seed
This is about concentrating our efforts to acquire customers as quickly as possible. We often end up doing things that don’t scale — for the purpose of crossing the chasm.
For instance, Uber created a dedicated team known as ‘Launchers’. These ‘Launchers’ would be dispatched to new cities with the sole mission of recruiting drivers for Uber. During my tenure in Southeast Asia, we strategically targeted ‘aggregator’ locations — places where taxi drivers would congregate. For weeks on end, we would canvass these areas to convert thousands of taxi drivers to Uber. Despite high churn rates, the goal was to onboard drivers quickly enough to reach the marketplace’s liquidity tipping point. Once this point was achieved, the self-sustaining dynamics of Uber’s marketplace would come into play. This strategy can be effective when there’s a clear and achievable target for initiating growth that will help us cross the initial growth chasm.
