I had a brief email conversation with a startup founder struggling with how to tackle customer development in marketplace business models.  I thought I’d share a bit about what we discussed, in case others have a similar dilemma.

Customer Development does not equal User Acquisition

Customer development is a method for discovering, testing and validating user acquisition and conversion methods.  So that a marketplace suffers from the “Chicken and Egg” problem, i.e., there’s only a true market when they’re both there doesn’t affect Customer Discovery and some amount of Customer Validation.  In other words, you can interview both sides of the market place, show them solution ideas, validate MVP features all without the other side of the marketplace being involved at all.
The pre-development signal you are trying to hone in on is “What will it take minimally for each side of the equation to come to the market?”  In most marketplaces, what you will discover is that one side of the market is actually the product, and the other side is the consumer of the product.

Product vs Consumer

In truth, the “Chicken and Egg” problem doesn’t exist.  I hate to burst your object impermanence bubble, but your local weekend farmer’s market exists even when you don’t go.  ; )  Marketplaces can exist with products, but no customers — just not for long.  One side creates the marketplace, i.e., is the “product”; the other side creates the market, i.e., is the consumer of the product.
To put it another way, the business doesn’t exist without product, but doesn’t succeed without customers.  (Exists, but fails.)   In the groupon example, clearly coupons are the product.  (Groupon doesn’t exist without coupons, Groupon doesn’t succeed without consumers.)  A client of mine had photographers on one side of a marketplace business model and people who need custom photos on the other.  The business doesn’t exist without photographers; doesn’t succeed without people buying photos.

Marketplace User Acquisition

The “Chicken and Egg” dilemma does (potentially) exist, when it comes to converting prospects into customers or users.  “Network Effect” businesses have a great potential to grow virally  if they nail their value prop, but need the effect to get the effect!  Some marketplaces suffer from the same dilemma: there’s no value to either side until both sides are there and engaged.
BTW, Customer Development doesn’t have a specific process that will instruct you how to get both sides to your product and get them engaged.  Customer Discovery will not tell you how to solve the acquisition and retention chicken/egg problem.  Is this the much-ballyhooed Customer Development “Fallacy?”  (I don’t get what the fallacy is supposed to be.) Like most aspects of building a business, you won’t find an answer in a book.  You actually have to try methods others have used or think up some new ones and SEE WHAT WORKS.

• Namesake has done a good job using a velvet-rope strategy to test, validate and grow its network effect.  They carefully invite early-adopter types to ensure that site activity is consistent and of decent quality so that there is something for new users to engage with;
• Use a tight geographic approach to control environment;
• You have to get product to market, so make it dead simple for the product side of your marketplace to engage.  Not just cheap (or free, initially), but simple. Do the work for them if you must.

I hope you find this helpful!