Crowd-Powered Business

Robot Resurrection: Bay Area Maker Faire 2015. CC BY-NC-ND 3.0

Increasingly, there are two ways to do business with your customers: 1) fight, trick and cajole your customers, or 2) partner with them. Businesses in the former category are dying. This post is part of a series about the latter.

In 2 previous posts I’ve explored how and why customer networks and online communities can help established companies develop collaborative economy business models. In this post, I’d like to explore how developing an effective community strategy can help startups and emerging collaborative economy companies scale and achieve healthy, sustainable growth.

Let’s take a look at 3 popular crowd business models: Crowdfunding, Crowdsourcing and Crowd Marketplaces.

Crowdfunding

Examples: Kickstarter, Indiegogo and Rockethub
On the surface, crowdfunding platforms are pretty straightforward: you post a project, solicit financial contributions to the project and the project either successfully funds or fails. The crowdfunding platform provider typically takes a percentage of funds raised (usually from 1–9%), and the project creator usually needs to fully fund the project before getting distribution of the funds raised. Different platforms have slightly different rules, but the basics are post a project, raise funding, take money. The crowdfunding and microloan space is experiencing rapid growth, with over 1250 global platforms raising $16.2 Billion dollars throughout 2014.

Crowdfunding can be an effective way to raise money for a product, a project, a business or even a personal need. With all the positive coverage it is easy to overlook the one critical thing about crowdfunding: it is very hard work. The reasons are myriad and include:

  • A successful project campaign takes time, effort and money. Agencies that specialize in crowdfunding campaign promotion can charge an additional 4–10% on top of the platform fees;
  • The majority of project funders generally come from a project creator’s network and project marketing efforts (typically not on the platform);
  • Most project funders grossly underestimate the amount of time and effort required for the overall project campaign, which can have a negative impact on the actual product or project they are trying to fund.

The most sobering fact: Failure rates on popular platforms can be as high as 91%.

Added to the high project failure rate is a growing problem of differentiation for crowdfunding platforms. With an overwhelming number of platform choices for project creators, coupled with the fact that creators need to “bring their own network” to the platform, project acquisition and customer retention are critical issues for the platforms that want to survive and grow.

Developing an effective online community could help a crowdfunding platform differentiate and grow in a number of ways:

  • Project backers that are engaged in a community experience can be nurtured into serial backers and potentially recruit new projects from their networks.
  • Previous project creators and backers can mentor new project creators in a private community.
  • A community can help amplify project campaign efforts, especially if the platform and community are aligned around common values and goals (like environmental or social issues).
  • Project creators and backers can share their ideas, challenges and aspirations related to the areas that the crowdfunding platform serves, creating the fabric of the community via sharing and conversation.

Crowdsourcing

Examples: Tongal, Local Motors, FirstBuild, IdeaStorm

Compared to Crowdfunding platforms, crowdsourcing platforms cover a much wider range of activity, from tapping in to a crowd for ad campaign ideas (Tongal), to partnering with the crowd to concept, design and build fully-functioning vehicles (Local Motors). The most basic functions of a crowdsourcing activity are the ability for the Host to define a need, objective or problem and the Crowd to offer solutions in the form of ideas, concepts, digital artifacts and prototypes. The best crowdfunding platforms have a defined and staged process that facilitates exploration, selection and refinement of the best ideas by the community. Many of the best crowdsourcing initiatives also rely on community as a way to keep their creative audiences engaged over time. Some great examples of Crowdsourcing platforms with strong communities include:

Local Motors, a crowd-powered automotive company attracts some of the most talented Industrial Designers and Engineers to their global online community. The Local Motors community has created many amazing production vehicles, from the Rally Fighter to the worlds first 3D Printed car. Local Motors is also expanding their real world community presence by building local “Micro Factories”.

FirstBuild, a hackerspace in partnership wth GE Appliances, relies on their online community to compliment the local community they facilitate at their shop in Louisville, KY. Like Local Motors, FirstBuild facilitates crowd hackathons around specific problems and product ideas, hosted both online and in their shop. FirstBuild also lets their community propose and develop original product ideas.

Dell’s IdeaStorm, the first brand-hosted open innovation platform (which I was responsible for), had a dedicated community manager and IdeaPartners (Dell staff) that were responsible for working with the community to evolve product concepts. We studied the financial impact of IdeaStorm and the IdeaStorm community in 2011. We found very compelling evidence of the value for this type of customer-led innovation and also the postive impact of the community on the site and overall business. Key findings included:

  • Ideas sourced from IdeaStorm had a financial impact of over $100 Million.
  • The average value of an idea was $10,000
  • IdeaStorm Community members spent 50% more that non members and purchased 33% more frequently.

Crowd Marketplaces

Examples: Lyft, AirBNB, Fiverr

Crowd Marketplaces are the current darlings of the media and VC community. Crowd Marketplaces essentially offer access to underutilized (and previously unavailable) assets on-demand. The best marketplaces offer elegant user experiences, optimized for mobile. Trust is built over time with reputation systems that allow both providers and buyers to rate one another. Marketplaces are typically tied to locations with high urban density, ensuring enough supply and demand to make the on-demand nature of the marketplace worthwhile. The marketplace only works if there is enough demand to utilize an asset more than the current owner does, and conversely, enough supply to keep the market of buyers engaged. It’s a tricky balance.

Some of the larger marketplaces, including AirBNB, are expanding at such a rapid scale and pace that they are in danger of blowing past their ability to scale operationally. In the ride sharing space, the problem is similar to the key crowdfunding platform issue: differentiation. The driver pool for Uber and Lyft is so disloyal in markets the that they share that many drivers are driving for both services (running both the Uber and Lyft app, and picking up riders from either app) at the same time. On the customer side, preference for either service usually comes down to who can get there first.

How could an effective online community strategy help in the Marketplace space?

  • Engaging customers in a community experience would reduce churn and build preference on the buyer side.
  • Advocate community programs, like AirBNB’s Super Host program, could be used to connect those on the supply side of the market, building connective tissue and reducing the churn of suppliers.
  • Customers could help define new products, service and experiences.
  • Community members could potentially use a white label version of the platform for their individual businesses.
  • Customer communities could be used to help reduce certain types of customer service issues.

In Summary

Many of the innovative companies emerging in the Collaborative Economy are in danger of making the same customer relationship mistakes that their disrupted predecessors made. Companies that create online communities from the start and make the community experience core to their products will be healthier, more innovative and more sustainable than their competitors who don’t.

Update: 9am 10/15/15
As I publish this, serious policy battles for the future of Crowd businesses are taking place in cities around the world. Most notably (and locally for me), AirBNB and other home sharing services are engaged in a fight to keep unlimited vacation rentals legal (or at least make limits mostly unenforceable). Uber is engaged in similar battles across the globe to enter new markets. Crowd businesses are forcing review and reframing of serious, complex policy issues tied to a local community’s context (values, economics, traditions). No matter what crowd and community driven business approach companies follow, ensuring equitable and valuable outcomes for all stakeholders in each market is a must. Anything less is just commercial exploitation packaged in a sharing wrapper.