Crowdsourcing Their Way to Profits

For some companies, crowdsourcing is still more of an annoyance than an innovation tool. Crowdsourcing is the outsourcing of idea generation or tasks that would normally be tackled by employed workers or contractors for a particular company. The task or idea is outsourced to the masses via the Internet or social media technology. If one wants to get an idea of just how valuable this concept is, look no further than Groupon. The Web-based company pools together the purchasing power of many consumers by offering a daily discount coupon for popular products, restaurants, or services. The coupon only kicks in if a certain number of consumers purchase it. Just a few months ago, it was believed that the company had a value of close to $1 billion, but Groupon reportedly just turned down a $6 billion offer from Google. Last week, Amazon.com also made a $175 million investment in Groupon's competitor LivingSocial, showing that perhaps the power of crowds is still undervalued.

While most companies don't have a business model based on crowdsourcing, many are trying to incorporate it to generate ideas and create and improve products. For some large companies that have embraced crowdsourcing, the rewards have been profitable, but others that merely use it as a marketing technique have experienced different results. In a corporate environment, where companies are slow to change and egos run supreme, it's difficult for some to admit that maybe the wisdom of a crowd can create more innovative ideas than highly paid executives. I believe that crowdsourcing is an incredible tool for any organization that can embrace change and ideas from outsiders, but if it isn't fully embraced, the effort is dead on arrival.

Failing the crowd
Just last year, Kraft Foods (NYSE: KFT  ) was a company not ready to fully embrace crowdsourcing; instead it was more focused on crowd-pleasing, and it suffered the consequences. The company held a contest in Australia to name a new version of one of its most popular snacks, Vegemite. The new snack would be a more spreadable version, made with cream cheese (sounds tasty on a bagel). Kraft received nearly 48,000 entries, and the winning name was iSnack 2.0, which sounds almost as appetizing as the actual product. The problem was, it wasn't the consumers who made the final decision. Instead, executives picked the winner out of the crowd, and the crowd didn't like the decision. After the public outcry, Kraft was forced to rename the product just days later based on an online vote.

Kraft's mistake was not allowing the consumers to make the ultimate decision. While the company accepted ideas, it ultimately made its own decision -- one clearly out of touch with its passionate Australian customers. Kraft didn't fully embrace crowdsourcing as an agent of change; instead, it was used as marketing campaign, and one that failed badly.

Embracing the crowd
While Kraft hit that bump in implementing innovation through crowdsourcing, other large corporations have proven that conglomerates can succeed at this when management fully embraces it. Procter & Gamble (NYSE: PG  ) has not only fully embraced the crowd; it has made it an important part of its business model that accounts for more than 50% of its product initiatives. In its Connect + Develop initiative, the company seeks ideas and innovation from all its partners including its suppliers, researchers, consumers, and mothers, among others. Procter & Gamble brings together different groups to collaborate on ideas and improve existing ones. Important and highly used products like the Swiffer, Mr. Clean Magic Eraser, innovative toothbrushes, and improved Tide detergents are all a result of the company's crowdsourcing.

The detergent improvement came from an idea that is very familiar to the company: getting more from less. The idea was to make a more compact liquid detergent that compressed more than double the cleaning power into the same amount of liquid, reducing the company's production and packaging costs. This idea caught competitors off-guard and created an industry disruption that led to a major competitive advantage for P&G. All thanks to crowdsourcing.

Procter & Gamble is not the only large company that has been able to embrace ideas from outside the company. If you have an incredible cereal innovation or just want to help develop an easier way to disinfect your sink, General Mills (NYSE: GIS  ) and Clorox (NYSE: CLX  ) have innovation portals similar to Procter & Gamble. Starbucks' (NYSE: SBUX  ) has also embraced ideas from consumers. The coffee giant's collaboration site has spawned ideas for new drinks, flavors, and in-store decor changes.

Crowdsourcing isn't a panacea, and as Kraft's Vegemite fiasco shows, there can be consequences if it's done haphazardly. However, it has proven to be a low-cost and effective way for many businesses to create ideas and even generate groundbreaking innovations. More important, as an investor, I believe companies that actively involve resources outside the organization, whether with customers or suppliers, are more equipped to adapt to a changing and more competitive business landscape. These are the types of businesses I like to invest in.

Fool contributor Andrew Bond doesn't own shares in the companies listed. Amazon.com and Starbucks are Motley Fool Stock Advisor selections. Google is a Motley Fool Inside Value choice and a Rule Breakers selection. Clorox and Procter & Gamble are Income Investor recommendations. The Fool owns shares of Google and Procter & Gamble. The Fool has written covered calls on Procter & Gamble. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On December 07, 2010, at 11:07 PM, zepone wrote:

    Andrew - You understand crowdsourcing better than most. Great examples. Too many people are struck with the fatal conceit and have a hard time handing the reins over to the crowd, as your Kraft example demonstrates.

    Another way to think of crowdsourcing is a cheap way to run idea to experiments to find hits. You get much more and get fast feedback on things that have potential when compared to the old, centralized product development methods.

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