In the digital platform era, the growth rate of new entry startups is a crucial matter to achieve success. Widespread among the fastest-growing internet startups there are the two-sided online platforms: marketplaces sought to
match suppliers of assets for rent, physical products, or services with customers demanding them.
Software such as apps or websites are built to facilitate these transactions and provide the related services, such as a matching algorithm, a payment, and a delivery system. Among the most notable two-sided platforms in terms of their tremendous early growth was Airbnb, nowadays the biggest marketplace for Bed and Breakfast and House booking in the world.
They proved that the fast growth strategy they used not only worked great but is a crucial step for the success of a startup. As two-sided markets grew to scale, network effects kicked in as more consumers bred more suppliers and vice versa. But how did they acquire their first customers when they had so few providers? How did they manage to stay ahead in such a dynamic and competitive market?
What are Launch And Growth?
Since the last 20 years, the world of businesses has been revolutionized by the exponential growth of the internet. During this period the launch process has become a crucial step for all platforms that want to break into a new
or a pre-existent market. Hundreds of entrepreneurs have tried and keep trying different launch methods in order to achieve this. Companies like PayPal, Facebook, OpenTable and YouTube experimented with different strategies to
acquire new potential customers as fast as possible; strategies that nowadays are taken as models in the growth hacking subject.
What is radically changed in the new world of digital platform businesses is that, unlike in the field of traditional pipeline ones, pull strategies are much more relevant and useful than push strategies. The industrial world of pipelines has always relied heavily on push. Consumers are reached through specific marketing and communication channels that the business owns or pays for.
Nowadays, in a highly competitive world, the traditional advertising and public relations industries are focused almost solely on awareness creation, the classic techniques for “pushing” a product or a service into the consciousness of a potential consumer. The push strategies, traditionally used, are focused on getting the service or the product directly to the customers and they involve direct promotional techniques such as encouraging retailers to stock your product, designing point of sale materials, or even selling face to face.
In today’s world, people visualize thousands of promotional messages and products every single day, therefore, creating awareness alone doesn’t drive adoption and customer usage, and pushing goods and services towards customers is no longer the key to success.
Instead, those goods and services must be designed to be so attractive that they naturally pull customers into their orbit. This is the reason why platforms must attract users by structuring incentives for participation with more pull strategies designed to encourage virality of the service or product, exploiting the strength of the peoples’ network or the one of another platform in order to grow exponentially.
The Chicken-or-egg problem
This challenge becomes even more difficult with startups in the sharing economy that launch as platforms connecting independent service providers with consumers.
In this case, there are 2 different types of users to acquire: the customers and the sellers, this leads to the famous “chicken-or-egg” problem: when trying to build two sides of a market, in which both sides are equally
essential, which comes first? And how do you attract one without the other?
There are a number of specific effective strategies that have been developed and used for overcoming the chicken-or-egg problem. In general, these strategies involve three techniques:
Staging value creation
This is a technique that involves platform managers creating the first value units of their platform, to attract one or more sets of users and demonstrate the real value of the platform itself. These Value units will then attract one or more sets of users. Those initial users will create more value units, attracting other users, and setting up positive feedback loops that lead to continuous growth.
Designing the platform to attract one set of users
In this case, the platform is designed to provide services, tools, products, or other benefits that will attract one set of users, either consumers or producers. As a consequence, the mass presence of one kind of user on the platform will attract the other one. The most common strategy to achieve this is the seeding one, through this strategy the platform’s intent is to create value units that will be relevant to at least one set of potential users. Once this set of users are attracted to the platform, the other set of users will follow them.
In this technique, the platform creates conditions in which value units that are relevant to users even if the overall size of the network is small can be created. It then strives to stimulate a burst of activity that will simultaneously attract consumers and producers in sufficient numbers to create larger numbers of value units and value-producing interactions so that network effects can start to take effect. One of these strategies is known as the piggyback. This strategy has been used by many platforms and involves exploiting an existing user base, gathered by a different platform, and staging the creation of value units in order to recruit those users to participate in your platform.
Independently from all these strategies that can be used individually or simultaneously, the most powerful ways to accelerate the growth and so overcoming the chicken-or-egg problem of a platform is by achieving viral growth.
Viral Growth is a pull-based process that implies encouraging users to spread the word about the platform to other potential users. The idea is that, when the network becomes the driver of its own growth, the rate can potentially go exponential.
Using the term “Viral” we refer to a particular growth that can spread like a virus. In nature a virus spread through 4 elements: a host, germs, a medium and a recipient. In business strategy, there are also these 4 elements: the senders, the value unit, the external network, and the recipient. Generally, the strategy begins when a user (called sender) spreads his self-created value unit in order to get social feedback and so indirectly generates awareness and interest in your platform.
The value unit is the fundamental unit for virality, but not all the value created within the platform is spreadable so it is crucial to identify what content will be able to be spread. Users sharing the value on external networks are at the same time demonstrating the platform’s value itself. The key for successful growth is to create a loop from the sender to the recipient, so the recipient will become the “new sender” and start sharing and spreading the unit value again so in this way we can obtain exponential growth.
What has AirBnB done to become an example of fast growth?
One of the most striking cases of successful launches is that of Airbnb, which nowadays is used as a referring model in the world of startups from all the growth hackers.
The chicken-or-egg problem was the main challenge also for the well-known platform: How can they attract potential customers at the beginning, having no apartments listed on the platform? And how to convince apartment owners to register on a platform without a pre-existing user base?
“It’s not just the chicken and the egg, you also want to select the right eggs, if you acquire the wrong eggs and ostriches come out, then you are in trouble. The chickens will run for the hills.”
Harvard Business School’s Thales Teixeira
From the beginning, it was clear to the founders of the apartment-sharing site Airbnb that they’d need to find people willing to list their homes before finding people interested in staying in them. So Airbnb overcame the problem using the two parallels strategies mentioned: the piggyback and the seeding strategy.
They understood that if they would have filled the platform with a sufficient number of apartments, the users would have been attracted to them.
In order to convince apartment owners to register on the platform, they identified an external platform that has been listing all the apartments in the country: Craigslist. This external platform had something that Airbnb did not have, a massive user base.
Airbnb knew through both market research and its own experience that Craigslist was the place where people who wanted something other than the standard hotel experience looked for listings—in other words, Airbnb’s target market.
The genius of that was knowing how they leveraged Craigslist to drive traffic and listings on their own site, each time a listing was made in their area on Craigslist, they would email the homeowner and ask if they would like to list on Airbnb.
The benefits of Airbnb-Craigslist integration were numerous. Not only was it the sheer volume of potential users accessible via Craigslist, but the fact that Airbnb listings were far superior to the other properties available but more personal, with better descriptions and nicer photos; this made them more appealing to Craigslist users looking for vacation properties. Once those Craigslist users made the switch, they were more likely to ignore Craigslist and book through Airbnb in the future.
Using the seeding strategy and exploiting the piggyback, Airbnb managed to fulfill the platform with a sufficient amount of apartments and providing a simple and intuitive user experience, led consequently the consumers to keep using Airbnb instead of other services.
Although Airbnb had temporarily solved the chicken-or-egg problem, when it decided to continue the expansion internationally, the same problem recurred in every new country with the difference that many new startups tried to copy their business model and the market became even more competitive.
Many new-born companies like Wimdu started to compete aggressively against their US rival in building essentially the same business: a marketplace where people can offer and rent rooms and entire private homes for short-term visits, as an alternative to staying in a hotel; basically their own European version.
Surely the idea of Airbnb was excellent but ideas can easily be copied, so how to keep ahead in the growth when you are surrounded by competitive businesses? This is when they relied on Viral Growth.
They parallel started implementing an excellent referral program, as the viral strategy that allowed them to grow even faster than before.
Airbnb created a system in which the active users already signed in the platform (Senders) could invite their friends to join Airbnb (Recipients) in order both a money reward (The unit value) sharing the initiation link through the preferred external network like Facebook, Email, Twitter and whatever.
Using this viral growth strategy they would get not only new users but travelers, people really interested in spending their money on trips and trying out the service of Airbnb platform.
In this way, Airbnb has managed to stay ahead of the competitors obtaining such a great exponential growth rate that is today a model and example for all digital platform startups.
Airbnb was a clear outlier among online two-sided platforms in terms of its extraordinary early-growth rates. Like Airbnb, also Uber and Etsy, despite being in very different industries, had a distinct set of effective approaches to overcome the chicken-or-egg problem on the supply and demand side. As we have seen the idea is relatively trivial without the right launch strategy and the ability to acquire active users before anyone else, in fact what brought Airbnb to become a billion-dollar status is how they grew that idea. Through these examples, what digital platform startups can learn is that the launch and the growth rate are crucial factors to enter the dynamic market of digital platforms.