How Uber, Airbnb, and Etsy Attracted Their First 1,000
Thales Teixeira studies three of the most successful
“platform” startups to understand the chicken-and-egg challenge of how
companies can attract their first customers.
New businesses often struggle finding their first customers. The
challenge is even more difficult with startups in the sharing economy that
launch as platforms connecting independent service providers with consumers.
Taker Uber. Its platform is two-sided, connecting people who
need rides with people who have rides to offer. (Same ideas as Airbnb, which
connects people needing rooms with home-owners.) So to launch as a platform
service, these companies need to find users on both the supply and demand
sides.
“When you have a two-sided platform, you have to acquire both
the customers and the services,” says Harvard Business School’s Thales
Teixeira, Lumry Family Associate Professor of Business Administration.
“It’s the classic chicken-and-egg problem,” he says. You can’t
have one without the other, but which one do you find first—the customer
chicken or the service egg? “As a small company you cannot afford to focus on
both with the same amount of effort. You may need to prioritize one side.”
Preparing to teach a new course on e-commerce marketing next
spring, Teixeira made it his goal to find an answer. He studied three of the
best-known and most successful startups—Uber, Etsy, and Airbnb—hoping to find
some commonalities in how those businesses solved the dilemma.
Spoiler alert: it’s the egg that needs incubating.
As Teixeira reports in a new HBS case, Airbnb, Etsy, Uber: Acquiring the First Thousand Customers,
all three platforms concentrated on getting the service side of the equation
first, customers second. But there’s a catch. “It’s not just the chicken and
the egg, you also want to select the right eggs,” explains Teixeira. “If you
acquire the wrong eggs and ostriches come out, then you are in trouble. The
chickens will run for the hills.”
LESSON ONE: THINK
LIKE A CUSTOMER
From the beginning, it was clear to the founders of
apartment-sharing site Airbnb that they’d need to find people willing to list
their homes before finding people interesting in staying in them.
“If you don’t have a
supply of houses and apartments, people are not going to come,” says Teixeira.
The problem was, where to find people willing to let strangers stay in their
places. It’s not like they could go around San Francisco knocking on doors.
Instead, founders Brian Chesky and Joe Gebbia thought like
customers themselves, trying to figure out where they would go if Airbnb didn’t
exist. It didn’t take them long to figure out the answer: Craigslist. The
entrepreneurs figured they could do a better job of making apartments appealing
than the online classified site, but first they had to siphon away its
customers. To do that, Chesky and Gebbia created software to hack Craigslist to
extract the contact info of property owners, then sent them a pitch to list on
Airbnb as well.
The strategy worked. With nothing to lose, property owners
doubled their chances of finding a potential renter, and Airbnb had a ready
supply of homes with which it could attract customers.
“Poaching customers is something all competitors do in different
ways,” says Teixeira. “If you are a website and you are providing content to
users publicly, others can grab that information.” It’s not enough to just take
someone else’s customers, though, he warns—you’ve got to give them something
better than they had before.
LESSON TWO: CREATE
A BETTER EXPERIENCE
Once they had apartment owners on the hook, the Airbnb founders
realized they had a problem: the subpar photos that property owners were taking
for Craigslist on their iPhones would never work for customers looking for an
alternative to a hotel.
“The first time a person goes on Airbnb, they are comparing the
quality of photos to hotels that take glamorized shots,” says Teixeira. “They
needed to compete at that level.”
In order to do that, Chesky and Gebbia did something that would
never be scalable: hired professional photographers to go to property owners’
homes to take inviting pictures. The gambit worked, making the site much more
attractive than the competition, and setting a standard for photography that
later property owners rose to match in order to compete against other homes.
“The underlying principle of this is you should help your
suppliers portray themselves in the best way possible, even if that is not
scalable,” concludes Teixeira. “If you don’t have customers, there is nothing
to scale.”
Ride-sharing app Uber pursued a similar strategy. Rather than
starting out with Uber Pool or Uber X, in which drivers use their own cars, the
company started with black cars driven by professional drivers. That way, they
could ensure that customers would have a great experience virtually every time
they used the service—and they could then rely on customers to spread the news
of that experience by word of mouth. “That’s why you get the supply side
first—if you get the right suppliers, the customers will experience their high
quality service and then do the marketing for you,” says Teixeira.
Etsy also pursued a decidedly non-scalable strategy in finding
the right eggs with which to launch its business. The platform, which serves as
an online marketplace for craft vendors, started its business with an offline
strategy: scouring craft fairs across the country to identify the best vendors
at each, and pitching them on opening up an online store on the site. “They
first brought their customers, and then they brought other artisans who
followed the customers.” Once Etsy had the first-tier artisans on the site, the
next tier naturally followed them.
LESSON THREE:
SEQUENCING IS EVERYTHING
Uber and Airbnb were also smart about how they chose to expand,
picking the right cities at the right time to maximize their success.
Since Uber’s main competition was taxi cab companies, the
startup researched which cities had the biggest discrepancy between supply and
demand for taxis. They then launched during times when that demand was likely
to be the highest, for example during the holidays when people tend to stay out
late partying. It also ran promotions during large concerts or sporting events,
when big crowds of people all needed cabs at the same time, and an individual
might be more likely to take a chance on an unfamiliar company named Uber.
In that way, the company acquired a large group of customers in
one swoop. “First, they figured out how to get a bunch of customers all in one
night, when the demand was high. Then, they made sure this first group of users
had a great experience and brought in the next wave of customers via
word-of-mouth,” says Teixeira. The company banked on the fact that once users
realized how easy it was, it was only a matter of time before they started
using it to go to work, then shopping for groceries, and so on.
Airbnb followed a similar strategy with its rollout, launching
in Denver in 2008 to coincide with the lack of hotel space during the
Democratic National Convention and adding new cities at times when they had
major conventions or other events.
In addition to the obvious demand, the strategy has another
benefit: “Your competitors don’t see you as a threat, since you are not taking
away from their demand,” says Teixeira. By the time you have a foothold in the
marketplace, it’s already too late for them to do anything about it.
Launching in situations of high demand and low supply also helps
startups acquire the right type of customers—those early adopters who might be
more forgiving of a company while it works out the kinks. After all, beggars
can’t be choosers, and if you are thankful to even have a room during a
conference, maybe you’ll forgive the lack of hand towels. The last thing a
company wants during its early phases is negative word-of-mouth.
“You are still a startup,” says Teixeira. “You have to find
people who are willing to accept your flaws and cut you some slack. Satisfying
all their needs and wants is just not feasible at this early stage.”
Next Lesson: From
1,000 to 100,000,000
With early adopters in place, a company can start thinking about
how to expand their customer base through more traditional means of marketing.
To tackle that problem, Teixeira wrote a sequel case
study, Airbnb, Etsy, Uber: Growing from One Thousand to One
Million Customers, and is currently working on a third entry in the
trilogy that will examine how a platform can go from one million to many
millions of customers.
In each case the strategies are different. While word-of-mouth
might work for the first thousand it’s not going to get you to a million. “You
have to be more proactive and control the acquisition process, which
word-of-mouth does not allow for.”
That’s where digital marketing can help, allowing companies to
target specific customers through search ads or social media at a low cost.
“It’s highly targetable and you can do it on the cheap,” says
Teixeira—adding that digital marketing also makes it easy for companies to
rapidly iterate its advertising message, tweaking it to figure out what works
best. “Only after passing the millionth customer can you go into advertising on
traditional media. That’s when you need massive scale, so you go to mass
marketing.”
As a company grows, it must consider the purpose of advertising
in order to achieve the best effects in gaining new customers.
“Some tools are better for the beginning, some are better when you
are bigger,” says Teixeira. “It’s not about, should I use digital marketing or
word-of-mouth or TV ads. The question only makes sense when you say, 'I am at
this stage, what approach should I take?' Only when you answer that question
will you know what tool is most appropriate.”
In other words, he says, “You need the right size of eggs for
each stage of your nest.”
by Michael Blanding
http://hbswk.hbs.edu/item/how-uber-airbnb-and-etsy-attracted-their-first-1-000-customers?cid=spmailing-13162039-WK%20Newsletter%2007-13-2016%20(1)-July%2013,%202016
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