Multi-sided markets

The "Zig-Zag Strategy" and "Two-Step Strategy" are concepts used in multi-sided markets, which involve different types of users or participants (like buyers and sellers) interacting on a common platform. These strategies are used by platforms to balance the needs and behaviors of different groups to grow the market or increase engagement. Here’s a breakdown of both strategies:

1. Zig-Zag Strategy (V-Shape)

The Zig-Zag Strategy, also known as the V-Shape strategy, involves alternating focus between different sides of the market to grow the entire platform.

• Objective: This strategy alternates efforts between acquiring users on one side of the market (e.g., buyers) and then focusing on the other side (e.g., sellers) in a sequence.
• How it works: A platform might first attract a critical mass of users on one side (e.g., customers) through incentives, marketing, or promotions. Once there is sufficient demand, the platform shifts focus to the supply side (e.g., sellers) to match the increase in demand.
• Example: Uber may focus on attracting riders by offering discounts, and then shift to attracting drivers once there are enough riders to ensure demand. This back-and-forth continues until a balance is achieved.

2. Two-Step Strategy

The Two-Step Strategy is often used to gain traction in a multi-sided market by initially focusing on one side, and then moving to the other once the first side is well-established.

• Objective: Rather than alternating between the two sides, the platform will take a sequential approach to building the ecosystem.
• How it works: The platform first builds up a strong user base on one side. Once this side reaches critical mass, the platform then focuses on developing the other side of the market.
• Example: A marketplace like eBay might first focus on attracting sellers with low fees and promotional tools. Once there is a robust selection of goods, eBay then shifts focus to attract buyers, offering incentives like free shipping or buyer protection.

Both strategies rely on network effects, where the value of the platform increases as more users participate, but they approach the chicken-and-egg problem of building both sides of the market differently.

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A mixed strategy for scaling startups in multi-sided markets often combines elements of both the Zig-Zag Strategy and the Two-Step Strategy to effectively balance supply and demand. This approach is particularly useful when scaling a startup that serves distinct user groups, such as buyers and sellers, or consumers and service providers.

Here’s how a mixed strategy could work:

1. Phased Two-Step Entry, with Zig-Zag Expansion

• Initial Focus on One Side: Startups might begin with a Two-Step Strategy, where they first focus on building up one side of the market (usually the side with the hardest or most important acquisition challenge). This helps create value that the other side can tap into.
  • For example, a ride-sharing platform may focus first on attracting a large number of drivers before marketing heavily to riders, ensuring that service reliability is high when riders join.
• Zig-Zag Refinement for Scaling: Once the first side gains traction, the startup can switch to a Zig-Zag approach. This means scaling both sides of the platform alternately, making sure neither side outgrows the other too quickly. The startup might:
  • Boost demand by offering discounts to riders during peak times, then pivot to offering drivers performance incentives.
  • Shift back and forth between these two groups to continuously scale the platform while balancing the needs of both sides.

2. Strategic Focus Points for Growth

• Geographical or Niche Expansion: Startups often apply this mixed strategy not just between market sides but across geographies or user segments. For example:
  • A startup might launch in a single city and focus on attracting sellers before buyers. Once the city’s ecosystem is mature, it applies a Zig-Zag strategy as it expands into new cities.
  • Or, in a different approach, a company might target niche groups on one side (e.g., luxury goods sellers) before opening up to broader categories.

3. Monetization Timing

• Delayed Monetization Strategy: In early stages, startups often avoid charging one side of the market to build a critical mass (e.g., offering free services to sellers). As they reach maturity, they gradually shift focus and start monetizing by introducing fees or premium services once the market is balanced.
• This is especially common in a mixed strategy. While using a Zig-Zag approach to balance market sides, startups might also use the Two-Step Strategy when introducing monetization: First, charging one side while keeping the other side free, and eventually transitioning to monetize both sides.

4. Hybrid Incentives

• Incentivizing One Side to Attract the Other: A mixed strategy often includes cross-incentives, where one side benefits from attracting the other side. For example:
  • A platform could give rewards to users (like referral bonuses) for inviting others from the opposite side, effectively combining elements of both strategies to grow.
• Another common tactic is using low-cost strategies to engage both sides in a manner that doesn't overwhelm operational capacity.

Key Benefits of a Mixed Strategy:

• Flexibility: This approach allows startups to adapt to the needs of the market by quickly pivoting between strategies depending on how one side of the market grows relative to the other.
• Risk Mitigation: Instead of betting on a single method, startups hedge their growth by using a phased and adaptive approach, which is particularly useful in rapidly evolving markets.
• Scalability: By targeting different user groups, regions, or niche markets incrementally, the startup can scale without overextending its resources or alienating early users.

Example of a Mixed Strategy in Action

Consider Airbnb:

• Initially, Airbnb focused on building a robust supply side by attracting hosts who would list their properties. They did this by emphasizing ease of use, offering insurance to hosts, and encouraging early adopters through word-of-mouth.
• Once the platform had a solid inventory of listings, they pivoted their focus to demand by marketing aggressively to travelers through promotions, partnerships, and referral programs.
• As they expanded into new markets (geographies), they continued to switch back and forth between host acquisition and traveler acquisition based on market conditions, ensuring neither side outgrew the other.

Final Thoughts

This mixed strategy—starting with a focus on one side (Two-Step) and then alternating between the two sides (Zig-Zag)—is essential for multi-sided platforms and helps overcome the “chicken-and-egg” problem. It provides a balanced approach that ensures steady growth, sustainable network effects, and scalability while keeping both sides of the market engaged.