The “chicken and egg problem” in labor marketplaces refers to the challenge of attracting both workers and customers to a platform when one group is needed to attract the other. This problem can have a significant impact on the growth of a startup in the early stages, as it can be difficult to establish a critical mass of workers or customers at the same pace.
The chicken and egg problem is the single biggest issue that marketplace builders face. Good platforms live or die based on how they tackle this problem (or fail to).
As someone looking to build a services platform — you need to deeply understand the chicken and egg problem. Let’s dive in.
Examples of The Chicken and Egg Problem One example of the chicken and egg problem in the context of labor marketplaces is the case of ride-hailing platforms like Uber and Lyft. In order for these platforms to be successful, they need to have a sufficient number of drivers available to pick up passengers when they request a ride. However, drivers may be reluctant to join the platform if there are not enough passengers using the service, as they will not be able to make a sufficient amount of money. On the other hand, passengers may be hesitant to use the service if there are not enough drivers available to provide rides, as they may have to wait a long time for a ride or may not be able to find one at all.
Another example of the chicken and egg problem in labor marketplaces can be found in platforms like Upwork, which connects freelancers with clients looking for their services. In order for Upwork to be successful, it needs to have a sufficient number of freelancers available to complete the work requested by clients. However, freelancers may be reluctant to join the platform if there are not enough clients using the service, as they will not have enough work to do. On the other hand, clients may be hesitant to use the service if there are not enough freelancers available to complete their projects, as they may not be able to find the talent they need.
Consequences of The Chicken and Egg Problem The chicken and egg problem can have a major impact on the growth of a startup in the early stages, as it can be difficult to establish a critical mass of either workers or customers without the other. This can make it difficult for the startup to gain traction and achieve the necessary scale to be successful.
The chicken and egg problem also has major negative consequences for users — it makes it harder for users to find counterparties on platforms. This problem has a huge impact on user behavior; forcing workers and hirers alike to use multiple platforms to be able to have their needs met. One very common example of this is “multi-homing” in ride-sharing apps. Similarly, freelancers don’t “want to” use 5 platforms to find work — they are forced to because one platform alone will not provide them with enough work to get by. This issue further negatively affects platforms — reducing user retention and loyalty.
Solving The Chicken and Egg Problem Incentives One way that startups can address the chicken and egg problem is by offering incentives to either workers or customers to join the platform, such as sign-up bonuses or discounts on services. This can help to attract the initial group of workers or customers needed to get the platform off the ground and establish a critical mass.
Co-ownership Many blockchain-based freelance marketplaces are leveraging tokens that confer shared ownership of the ecosystem to gain support and commitment from users. These tokens are oftentimes issued as incentives initially, and later confer things like governance rights or shares of revenue from the protocol. More on this phenomenon in “Crypto-Economic User Owned Networks” chapter of The Great Evolution of The Marketplace.
Increasing Liquidity via Network Protocols Another solution to the chicken and egg problem is leveraging existing protocols to increase liquidity on your marketplace. TalentLayer is a protocol and developer toolkit for interoperable labor marketplaces; it allows marketplaces to increase access to counterparties by pooling users across many platforms. With TalentLayer, your marketplace can query in jobs and profiles from the network to display to your users; allowing them to transact with more counterparties, while your platform splits proceeds from that job with other platforms facilitating the relationship.
Building Better Networks The chicken and egg problem is a common challenge faced by labor marketplaces and other types of platforms, and it can have a significant impact on the growth of a startup. By offering incentives, offering shared ownership, and leveraging network protocols like TalentLayer, you can work to overcome this challenge and scale your marketplace platform.