What is Chicken/Egg Dilemma?

In the previous parts of the Network Effects series, we talked about the characteristics of networks, growth patterns, and their importance for your startup or digital product against competitors or other alternatives. In the upcoming parts, we will discuss the most common flaws and challenges that may affect the development of your network, such as the Chicken/Egg Problem, Platform Leakage, and Multi-Tenanting. Finally, we will present some proposed solutions to avoid these issues.

Tables of Content:

• Chicken/Egg Dilemma
• Negative Network Effects
• Multi-Tenanting
• 9 Suggested Solutions

1. Chicken/Egg Dilemma:

This problem arises when trying to reach the critical mass necessary to create value and a positive impact on the network. If we need users in the network to generate value for more users, how do we attract the first users? This dilemma is evident in multi-sided markets, where buyers need sellers and sellers need buyers, and one party needs an initial incentive to join before the other party exists.

2. Negative Network Effects:

The Negative Network Effect is the opposite of the Network Effect and occurs when each new user decreases the value of the product/service for someone in the network. There are three forms of the Negative Network Effect: Same Side, Network Congestion, and Network Pollution.

The Same Side Negative Network Effect always occurs from users on the same side of the network. An example of this is marketplaces, where there is a positive network effect between buyers and sellers, but also a negative one between sellers since every new seller creates competition for existing sellers. Another example is Uber, where an increase in the number of passengers during peak times leads to an increase in prices.

The second form is Network Congestion, which occurs due to increased usage leading to network congestion, as seen in road networks or communication networks. The last form is Network Pollution, which occurs due to the increase in the size of the network and can be seen in social media networks like Facebook, where content becomes irrelevant.

It is possible to find networks with both positive and negative effects at the same time, and it is necessary for founders to balance both to ensure a positive net effect for the network.

3. Multi-Tenanting:

This term refers to allowing network users to use multiple alternatives at the same time. This can be found in Marketplaces and Platforms, where the same vendor can sell on multiple platforms, and the same buyer can compare and purchase from several platforms. It is difficult to prevent new competitors, and the only solution is to continue providing higher value to network users. Examples of this can be seen with Uber and Careem, Amazon and Jumia, and Android and IOS.

9 Suggested Solutions:

1. Getting the harder side first:

In some markets, obtaining supply is harder than demand and in others, it is the opposite. To determine the nature of your market, you can read this article about supply-constrained vs demand-constrained markets here https://bit.ly/3sajUMl. Usually, the harder side to obtain is the more valuable side.

2. Targeting a small segment first:

The idea here is to target a small active segment that is relevant to your platform and start expanding from there. You can also achieve this by targeting a small geographic area and expanding from it because targeting a small segment will create a larger engagement between the platform users.

3. Compensate the most valuable segment first:

Pay upfront and in cash if necessary to the side or segment with the highest value to get them to join your platform. Uber, for example, did this with drivers in some major cities in the beginning.

4. Showing the supply larger than its actual size:

The intention is to collect a larger amount of data and display it on the platform before launching it, in order to give an impression of activity. Examples include content websites, job, and book listings at the beginning.

Some founders take this tactic a step further and fake the activity and display it at the beginning - Fake it till you make it. An example of this is Reddit, which allows fake accounts to post provocative questions to attract interaction. However, this choice may be subject to ethical debate outside the context of this article.

5. Build a SaaS for one side:

This would be a useful and attractive method for the platform, regardless of the existence of the other side. In my opinion, this is one of the most powerful and sustainable methods, despite its high cost. An example of this is Glamera, a platform for reserving beauty salons that provide SaaS tools for managing beauty salons regardless of reservation requests.

6. Build a product first and then turn it into a platform:

This is similar to the previous tactic and can occur with tangible or digital products. An example of this is Amazon, which began by selling its own products and then turned into a marketplace with thousands of suppliers, and Apple, which developed the first 32 iPhone apps before launching the App Store.

7. Offer something for free unexpectedly:

This tactic attracts a large customer base to the platform as users are used to paying for it. The most recent example of this is Instapay, which allows you to make payment transfers of any amount without any fees temporarily, while other alternative money transfer methods still have transaction fees.

8. Manually connect the platform endpoints:

This might include executing customer orders manually at the beginning without the need for service providers. An example of this is Zappos, whose founders used to take purchase orders themselves from stores and ship them to customers.

9. Target markets where sellers are also buyers:

The purpose of this tactic is to avoid the chicken-and-egg dilemma by avoiding building a multi-sided platform in the first place and instead building a single-sided platform where the sellers themselves are buyers. An example of this is the OLX platform, where the same segment can buy and sell on the platform.

Ultimately, the impact of the network is vital for your company, but there are also some challenges that you need to be aware of when designing and implementing the network. In the next part, we will talk about some other network shortcomings and propose solutions for them.