The advent of the taxi-aggregator apps like Uber, Lyft, and Ola has led to total disruption in the transportation sector.
Moreover, their increased popularity has lured many entrepreneurs to have a shot at developing their own taxi booking system.
Perhaps, this is the reason why we are witnessing a steep rise in the number of app-based taxi services. But do all of them succeed?
One of the major reasons why these services fail is because of their inability to solve the chicken and egg problem.
So, are we talking about the age-old question of whether the chicken came first or the egg? No, here we are talking about the chicken and egg problem in business. Let’s understand what it means.
The chicken and egg problem arise whenever a business consists of two separate groups having value proposition such that they are dependent on penetration on each other. So, do all the businesses face this problem?
No, only the two-sided or multi-sided business face this problem. These are the businesses that act as a platform or a marketplace to connect two or more distinct user groups which provides mutual benefits to each other.
For example, an eCommerce marketplace like Amazon will need sellers to attract the buyers and vice-versa. Here buyers and sellers are the two separate groups whose value proposition is dependent on each other.
You can’t start an eCommerce business with just sellers as there won’t be any buyers. Similarly, you can’t start it with just buyers as there won’t be anyone to sell.
Here the sellers and buyers can be metaphorically referred to as the chicken and the egg. And the problem thus occurred is known as the chicken and egg problem.
Now, let’s understand the chicken and egg problem in the taxi business. Likewise, in eCommerce, taxi business too has two separate groups which are drivers and riders, and the taxi booking application acts as a platform for them to connect with each other.
In this, the one user group find the platform worth only if the other group exists. So, we understood what chicken and egg problem is, but how to solve it?
To solve the chicken-egg problem for a taxi business is a tricky task. And that’s why we studied different approaches adopted by companies like Uber, Google, and many other on-demand applications in their initial years to solve the chicken and egg problem.
Below is the list of possible solutions or ways in which you can solve your chicken and egg problem.
First approach is to start small and slow. You can start your taxi business in a city, area, or even in your neighborhood to test your model for drivers and riders.
This approach will help you to get both drivers and riders on the platform, so that they can provide their mutual benefits.
Once you get them both, you can then gradually start expanding your business by further building the two sides on the various areas or cities.
The taxi behemoth Uber did the same way back in 2009 by kickstarting its business model only in San Francisco and then slowly expanded it to the other cities.
Facebook is another example which started in the same manner. They started at Harvard and then expanded to other Ivy league schools, and then further to the universities.
In their initial days, Facebook’s charm was due to its exclusivity. People of many universities wanted them to start their services at their place.
If Facebook had opted to start its services for all at once then probably it would’ve met a similar fate as those of other social network platforms such as Friendster and anyone.
There’s another approach of going small which involves focusing and building only one aspect.
This is exactly what eCommerce giants Amazon and Flipkart did by starting to sell just books and then introducing other products in their tally.
Going slow and steady seems to be a good idea. But what if you don’t want to go slow? There are many entrepreneurs who just want their taxi business to get a quick jumpstart.
Many a times, speed is crucial as there are many competitors in the race who have the same idea and are trying to get ahead of you.
In such case, you don’t need to have both the egg and the chicken going from the word go. You can do this by following ways.
One way of moving your ship faster is to team up with a strong partner that has a large user base on either of the platforms.
Partnership like this would be a win-win situation for both the partners. You can use the user base of the existing partner to build your user base on the other side of the platform.
For example, to set-up your taxi business you can partner with a company having a large user base which can be used to attract more drivers to your service.
Another possible way of moving fast is to make the entry of one side of the platform at low risk and cost.
For example, in Uber-like taxi businesses, getting drivers on board is easy as there’s no risk or cost involved in it. All they have to do is accept the ride request straight from their phone.
This technique is effective and usually solves the chicken and egg problem for the taxi business. Thus, focusing on getting the drivers on the board first must be your priority.
Because only after that pitching the taxi services to the riders will make sense.
Another way of building one side of your business is by providing subsidy, discounts, referrals, and other types of benefits to the initial adopters of the service.
Uber did the same and also went one step ahead by providing benefits to both drivers and riders. They first attracted drivers by offering them lucrative incentive plans, festival bonus, and referral benefits. These benefits served as a huge motivation for drivers to work for Uber.
As Uber increased the number of drivers under their belt, then they started focusing on the riders. They provided heavy discounts on first few rides.
They also gave them referral bonus. These benefits played a major role in building two-sides of their business efficiently.
To get your taxi business going, it’s important to have both driver and rider side stronger.
However, many a time, it’s difficult to maintain both. In such cases, you can build one side with a makeshift offering to get the other.
For a taxi business, you can start your services initially by having your own drivers. As soon as you services attract more customers, you can afford to allow other drivers to use of platform in order to meet the demand. Thus you can start from a taxi fleet business to a taxi aggregator firm.
Another way of solving the chicken and the egg problem is to initially offer only a single-sided service devoid of any counterparty.
Once the user base is built, you can smartly build or lay another layer in your multi-sided service.
There have been many services that initially started providing only a simpler service. But as their customer base grew, they added more services and ultimately made it a multi-sided service.
Uber is a good example of this. They started their business by offering simple taxi-hailing services to its customers.
However, as their customer-base grew up, they introduced other services such as Uber pool, auto, bike, rental, and outstation.
Similarly, LinkedIn started as a network of professionals. However, today with its huge user base it allows additional services for job seekers, recruiters, and the professionals.
Another way of getting rid of the chicken & egg problem is to begin as an information portal. Zomato is a great example for this.
It began its services in major Indian cities as an information portal, where it provided information of several restaurants.
Slowly, it grew its user base and then started with restaurant promotions. And then eventually, they entered the market of on-demand food delivery.
I am sure that in the coming days they will add more services like table booking and online payment on their app after the meal.
Starting an on-demand taxi business is not easy and the cut-throat competition makes it even more difficult.
The entry barrier for on-demand taxi business or any other on-demand business is high due to the chicken and the egg problem.
The entrepreneurs are always confused whether they should focus more on the passenger app solution or the driver app solution? Or how will they get the customers on-board without drivers or vice-versa.
In this blog, we discussed various possible ways by which you can solve the chicken and egg problem and start your taxi business successfully.
I hope this blog provided you with some key information and insights on how to solve the chicken and egg problems faced by the taxi businesses.