Creating value through technology is a global business priority. According to market intelligence provider International Data Corporation, digital transformation spending will reach $3.9 trillion worldwide by 2027.
To capitalize on that trend, many business professionals have transitioned to platform business models or launched their own platform companies.
“Every business today must work effectively with platforms to thrive,” says Harvard Business School Professor Feng Zhu, who teaches the online course Winning with Digital Platforms.
While digital platforms offer exciting opportunities, attracting users can be challenging because of the “chicken-or-egg problem.”
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DOWNLOAD NOWWhat Is the Chicken-or-Problem?
The chicken-or-egg problem is a dilemma platform companies face when deciding whether to prioritize building a user network or developing services.
In a Working Knowledge article, HBS Associate Professor Thales Teixeira breaks down the concept.
“When you have a two-sided platform, you have to acquire both the customers and the services,” Teixeira says. “You can’t have one without the other, but which one do you find first: The customer chicken or the service egg?”
For example, imagine you’ve created a new social media platform. Users may be unlikely to sign up if it doesn’t have enough content to engage with. Service providers—like influencers—will also likely hesitate to invest time and effort into creating high-quality content if your platform has a limited target audience.
One way to navigate the chicken-or-egg problem in this scenario is by using network properties—characteristics that affect how platform users interact with and influence each other. By implementing features to incentivize content sharing, you can foster user engagement and create a positive feedback loop that promotes long-term growth.
If you want to dive deeper into strategies for overcoming the chicken-or-egg problem, here’s how network properties can help.
4 Network Properties for Overcoming the Chicken-or-Egg Problem
1. Network Effects
One of the best ways to surmount your platform’s growth challenges is by nurturing network effects to increase your platform’s value as users join and attract others.
Airbnb is an example of a platform that’s benefited from network effects. Despite initial trouble attracting hosts and guests, it experienced significant improvement and growth as users joined.
Increased hosts led to better service availability, attracting more guests and incentivizing property owners to list their homes—creating a positive feedback loop that fueled Airbnb’s expansion.
To enhance network effects, Airbnb offered subsidies to users who joined or participated.
According to Winning with Digital Platforms, subsidies can be:
- Fixed: Set payments to network participants based on general affiliation with your platform
- Variable: Proportionate payments made to participants based on their contributions to your platform
- User: Direct payments made to users to join your platform
- Per-transaction: Payments made to users for each instance they use your platform
In addition, it provided guests discounts and travel credits to encourage them to use the platform and offered guarantees and insurance to hosts to reduce their perceived risk and embolden them to list their properties.
Such financial incentives or discounts can help attract more users and, in turn, increase your platform’s value.
2. Network Structure
Your platform’s network is pivotal to your business, but its structure must support scalability.
In Winning with Digital Platforms, Zhu discusses the importance of evaluating network structure when building a large user base.
“A new platform’s ability to scale—and an existing platform’s ability to defend itself against new competitors—depends in part on the network structure of the industry they’re operating in,” Zhu says.
For instance, local delivery platforms benefit from locally clustered networks—systems where platform users connect with complementors, platform providers that add value by offering more options and attracting users in the same region. For example, grocery delivery platform Instacart needs a strong network of nearby grocery stores to ensure consumers and shoppers can access local products.
Alternatively, platforms that allow buyers in one region to connect with and purchase services from providers in others require interconnected network clusters. One example is freelance work platform Upwork, which needs an interconnected system to link clients and independent professionals worldwide.
Building network clusters is a powerful business strategy for overcoming the chicken-or-egg problem. By strategically connecting users, you can create a dynamic ecosystem structured for long-term scalability.
3. Network Competition
Competition doesn’t have to negatively impact your platform business. In many cases, it can benefit scalability.
For example, multi-homing is when users engage with multiple platforms simultaneously, which can be a strategic advantage for new platforms.
For instance, Winning with Digital Platforms features a case study centered on ride-sharing platform Fasten. In the course, Fasten Co-Founder Vlad Christoff shares how the company leveraged other platforms’ drivers to enter the market with lower costs compared to predecessors like Uber and Lyft.
Christoff points out that Uber and Lyft had already:
- Educated the market about ride-sharing
- Tackled regulatory challenges
- Normalized the concept of using personal vehicles for ride-sharing services
That allowed Fasten to offer drivers and riders a more favorable financial model.
“Uber and Lyft paved the way,” Christoff says in the course. “It was then very easy for us to come in behind them and take their drivers, take their riders, and offer both sides a better business model.”
Fasten’s success expanding its network with multi-homing largely resulted from taking advantage of increased transparency in the platform industry.
“Information about complementors—such as ratings and sales—have been made public by many platforms as a means of attracting customers and building trust,” Zhu says in Winning with Digital Platforms. “This transparency can encourage multi-homing because rival platforms can use this information to selectively poach high-performing complementors and encourage them to adopt their own platforms.”
This approach not only reduces entry barriers but fosters an environment where platforms can coexist and thrive.
4. Network Bridging
Network bridging plays a critical role in platform scalability. By connecting an existing network to others, you can overcome the chicken-or-egg problem through synergies.
“By ‘synergies,’ we mean the ability to take advantage of opportunities for mutual reinforcement,” Zhu says in Winning with Digital Platforms.
Fostering direct interactions within your network often requires disintermediation.
“Disintermediation takes place when network participants—after being matched by a platform— begin to transact directly with each other to avoid platform fees or other restrictions,” Zhu says. “For example, after using a platform to connect with, say, a pet sitter, sometimes users will hire the pet sitter directly rather than continue to hire through the platform and pay the service fee to the platform.”
Consider a traditional media company that previously distributed digital content through third-party retailers, like Amazon or Apple. If the company transitions to a platform business model to sell digital content directly to consumers, it eliminates the need for intermediaries and offers an enhanced level of control over the user experience, data analytics, and customer relationships. It can also partner with social media platforms like Instagram or TikTok to integrate its digital storefront into those channels.
By similarly bridging networks and eliminating intermediaries, you can unlock growth opportunities for your platform.
Launch and Scale Your Platform Business
If you aim to launch and scale a platform business, understanding how to overcome the chicken-or-egg problem is vital.
One of the best ways to gain that knowledge is by enrolling in an online course, such as Winning with Digital Platforms. Through real-world learning, you can discover how to attract and retain users to achieve long-term growth and success.
Do you want to learn more about scaling a platform business? Explore Winning with Digital Platforms—one of our online entrepreneurship and innovation courses—and download our free entrepreneurship e-book to take the next step in your educational journey.
