Inside the Crowdsourcing Boom

By Carol Tice

Ever since the Internet began, entrepreneurs have been trying to figure out how to tap its power to connect people, and use it to create a thriving business. At first, that mostly consisted of opening a store and driving many buyers to it, using that big audience of shoppers to drive prices down -- think Amazon.com.

But a more innovative model also emerged that involved the assembled crowd more in creating what would be sold. An early success in this niche is the decade-old t-shirt company Threadless, where customers design the shirts and the most popular get made up and sold. By 2006, Wired reporter Jeff Howe dubbed this model crowdsourcing.

Crowdsourcing is currently red hot. New companies seem to be springing up everywhere that are using it, and venture capitalists are funding them. Probably the best-known is the online group-discount pioneer Groupon, which got a VC infusion that gave the deal-a-day company a $1 billion valuation.

That gives you an idea of the buying power the crowd can unleash, under the right circumstances. Groupon's model is ideal, in my view -- customers band together to create a big enough pool that a product or service provider is willing to offer them all a great discount. The customers get the deal, Groupon gets a fee per-customer, and the business offering the discount gets a huge, guaranteed uptick in sales volume that helps make the lower price work. (In a chat with Groupon's founder Andrew Mason recently, I learned the biggest successes have been for companies with excess capacity to sell -- seats on a tour boat and tickets to an art museum were both big wins.)

Crowdsourcing is being used a lot now in product creation. You can collaborate online with other designers to create housewares for purchase at Quirky, you can find a writer or designer at Crowdspring from their big talent pool, or post your videogame and earn royalties from the large audience of gamers at Kongregate (just snapped up by gaming retail chain GameStop).

But I've been covering Internet business long enough to know that pulling off a successful crowdsourced business isn't as easy as it looks. There's lots of ways to use the crowd, and not all of them work.

Back at the dawn of ecommerce, I followed the story of Mercata, an online marketplace. Their crowdsourcing theory -- bring together a large number of service providers. Then, when customers come, have the vendors bid against each other to provide the customers with the lowest-priced services! Mercata raised $90 million in venture capital before going bust in 2001.

This model worked for some customers, who got deals on everything from housecleaning to automotive repair. But no vendors wanted to participate in a race to the lowest price. Many customers also sat on the sidelines waiting for prices to go down more.

It was sort of the inverse of eBay -- more customers made prices go down and down, instead of up and up.

Moral of the story? Getting a crowd together is great, and can drive business. But there's got to be something in it for all the players, and a profit at the end of the day for the company.

Are you using crowdsourcing in your business model? Leave a comment and tell us how you make it work.

Photo via Flickr user sandy ferenczi