Co-creating value with customers and users: Mass customization and beyond

by Frank T. Piller and Dennis Hilgers

When TIME Magazine announced their person of the year in 2006, recognizing the person who matters most now, a wide audience noticed that a larger change was going on. In previous years, the person of the years has been a personality like George W. Bush, John F. Kennedy, or Mohandas Gandhi, but also Charles Lindbergh or Bill Gates. In 2006, this person were WE. We, the creative consumers. We, broadcasting our own media on YouTube. We, the engaged tinkerer hacking our TiVi to overcome their limits. We, configuring our sneakers to our preferred running style. We, the co-designers of our personal products. And Time Magazine was not alone. With the advent of Web 2.0 and social commerce applications all over the internet, we recently experience an exploding interest of companies and consumers alike for co-creation, mass customization, and user driven innovation.

Mass customization: The mother of customer-centric value creation

In line of business strategies focusing on the creative consumer, mass customization can be regarded as the first elaborated concept, with a history of more than two decades (the term was coined in 1987 by Stan Davis). Mass customization now seems to become the standard of the 21st century. The term denotes to an offering that meets the demands of each individual customer, but that still can be produced with mass production efficiency. To reach this efficiency requirement, a mass customization system is defined by a fixed solution space, characterized by stable but still flexible and responsive processes. As a result, the costs associated with mass customization should allow for a price level that does not imply a switch into an upper market segment. The solution space is utilized by customers who are integrated in the value creation process of the manufacturer by defining, configuring, or modifying their individual solution within a given set of choice options. Without the customers’ deep involvement, the manufacturer would be unable to adequately fill each individualized product demand. Dedicated toolkits should enable the customers to perform this configuration tasks on their own.

A great industrial example of mass customization is American Power Conversion (APC). APC sells, designs, produces, delivers, and installs large complex infrastructure systems for data centers, and components for these systems. At the heart of its mass customization strategy of this company are a module-based product range and the use of product configuration systems for sales and order processing. In addition, the company has implemented a manufacturing concept, which involves the mass production of standard components in the Far East, and customer order-based final assembly at various production sites around the world within close customer proximity. The results of applying mass customization principles included a reduction of the overall delivery time for a complete system from around 400 to 16 days. Also, production costs were significantly reduced. At the same time, the company’s capability for introducing new products has increased dramatically. Due to the modular system architecture, new component technologies can be integrated within a matter of days, and not months as before.

Mass customization has been seen as the result of new flexible manufacturing systems like rapid manufacturing. But the real drivers of mass customization are consumers not any longer willing to compromise, and new tools allowing them to design their own offerings.

While mass customization originated industrial markets, many initiatives of consumer mass customization have been developed recently. Indeed, not a month has gone by without a major mass customization initiative by an established company or a new start-up. Some good examples of mass customization in consumer goods that were launched recently are Germany’s MyMuesli (customized cereal), Blends For Friends (create your own tea blend), Conde Nast’s TasteBook (customized cookbook with your favorite recipes), or John Maeda’s innovative configurator for Reebok that turns the favorite song of a user into a custom sneaker style. A segment of mass customization that has been exploding recently is the market of user-created photo books, including providers such as Picaboo, LuLu, CeWe, Blurb, Moo, and many others. Zazzle and Cafepress take a similar approach of selling custom printed T-shirts, coffee mugs, mouse pads, and more. There are also mass customizing companies producing children books (flattenme), customized jewellery (Paragon Lake), dolls (My Twinn) and even bras (Zyrra). All these companies reported high double-digit sales and growth in the last year.

Another very interesting approach has Zapfab or Fabidoo, two user manufacturing start-ups which offer a new way of delivering individualized, customized products. They are combining the creativity of user-generated content with the power of 3D Printing (fabbing). 3D Printing is rapidly gaining ground as a way of creating real, physical objects from 3D design data. Zapfab provides an easy way to access this technology: Once you have generated a 3D design you can choose to have it 3D printed: Zapfab will 3D print the design and deliver the finished object to you. Or consider the great custom USB sticks at Fabidoo, turning a ubiquitous commodity into a real piece of personality.

Mass customization offers companies the flexibility to minimize new product development risk, but this flexibility does not come without costs. This strategy requires a redesign of the products and processes. This includes the creation of modular product family structures and often heavy investments in new flexible machinery equipment. For mass customization, also an elicitation system has to be in place to access the preferences of each individual customer and to transfer them into a precise product definition. Thus, while mass customization has plenty of opportunities, it will not become the dominating strategy of user co-creation.

An alternative strategy to mass customization: Crowdsourcing co-design

For an alternative strategy consider Threadless, recently names the ”America’s most innovative small company“ by Inc. magazine. Threadless also includes customers deeply in the value creation process, but still sells mass products. Founded in 2000, this Chicago-based company sells a very simple product with great success: printed t-shirts. Together with just 20 employees, the company’s founders sell more than fifty thousand t-shirts and earn profits amounting to over one hundred thousand dollars per month. This is achieved by transferring all essential productive tasks to their customers who, in turn, fulfill their part with great enthusiasm. Customers design their own t-shirts and help improve the ideas of their peers. They screen and evaluate potential designs, selecting only those that should go into production. Since customers (morally) commit themselves to purchase a favored design before it goes into production, they take over market risk as well. Customers assume responsibility for advertising, supply models and photographers for catalogues, and solicit new customers.

Astonishingly, customers do not feel as though they are being exploited. In fact, they show great enthusiasm for the company that has made collaboration possible. They protect Threadless from imitators, (whose websites they tend to hack) and send innumerable ideas on how the company can become more productive and even better at what it does already. In return, the company Threadless focuses its attention on the operation and further development of their communication platform, over which interaction with and among customers takes place. Additionally, the company defines the rules of the game, honors those customer-designers whose designs were selected for production, and manages processes involved with the material delivery of goods (production and distribution). By doing so this small company was able to generate thousands of new designs with almost without any paid stuff.

While mass customization has been successfully implemented in many industrial markets and, for example, the sports good industry, we see large opportunities for health related products and services. People are becoming more health conscious and companies will find techniques to design for the individual, based on age, weight, diet, family history, lifestyle and behaviors.

Comparing the strategy of Threadless with a company offering mass customized t-shirts reveals the difference between both business models: Take Spreadshirt, the market leader in custom t-shirts. Here, users can design their individual t-shirt that is produced just for them with a digital printing machine. At Threadless the production of t-shirts is going on in the classical way of good old mass production. But Threadless is following the bright idea of turning market research expenditures into quick sales. This method, which is called collective customer commitment, exploits the commitment of users to screen, evaluate and score new designs as a powerful mechanism to reduce flops of new products. The method breaks with the known practices of new product development. It utilizes the capabilities of customers and users for the innovation process.

Open Innovation: Integrating the periphery of your firm into R&D

But Threadless is just another step on the continuum of customer-driven value creation. On top of contributing to the design and customization of products, some customers even contribute to research and technical development of completely new products. Berkeley professor Henry Chesbrough introduced the term ’open innovation“ in 2003 to describe the systematic integration of external inputs in some (or even all) stages of the innovation process. One of his principles is that companies that adopt an open innovative approach have to recognize that ”not all the smart people work for my company.“

A great example of a company making a business out of this statement’s power is InnoCentive. InnoCentive was launched in June 2001 by Eli Lilly, the pharmaceutical company, as a research venture. Today InnoCentive is an independent enterprise that describes itself as the result of a new model of distributed research. It provides a way to search for solutions to technological problems outside of the conventional internal research and development structures of a firm. InnoCentive posts its clients’ (called ”seekers“) problems on its web site together with a financial reward for the best solution delivered within a given timeframe. Seeker companies are mostly large R&D operations like Procter&Gamble, BASF etc. They use InnoCentive when they are looking for brand new approaches and new ideas, especially when they are stumped in a particular research area. InnoCentive provides access to a global network of more than 100,000 scientists who offer solutions in the hope of winning the offered reward. The company facilitates problem formulation and posting, solution screening, confidentiality, intellectual property agreements, and award payment. Using this approach of distributed or open innovation, seeker companies get access to the specialized talents of tens of thousands of scientists without adding to their fixed costs.

A recent research by Harvard Business School’s Karim Lakhani of analysing 166 problems that had been posted on InnoCentive.com by large corporations from the chemical and pharmaceutical industry shows that the InnoCentive model is not just different, but also highly efficient. The seekers previously had spent between six months to two years trying to solve the problems internally, without success. Offering on average $30,000 for a successful problem solution, these problems were posted on InnoCentive. In general, solutions had to be submitted within six months of initial posting. Of the 166 problems studied, 49 (29.5%) were solved by the InnoCentive community. This is an impressive success, given that individual solvers were competing with organized corporate research labs. But even more impressive is the finding that on average a winning solver spent just 74 hours to solve the problem – compared to six to 24 unsuccessful months by the big corporations. The reason for this almost unbelievable result is rather simple: winning solvers already knew the solution! InnoCentive helps seekers by leveraging pre-existing knowledge distributed in their broad community of 100,000 scientists. In 72.5% of all cases, the winner just reused an existing solution from a previous task he or she had solved in a different context. In most cases, the solution was outside of the seeker’s field of expertise, which means that the seekers would have been very unlikely to find the solutions on their own.

The companies using InnoCentive are pioneering an important new approach to the innovation process. It is based on a Broadcast of Search by posting problems on that platform – not solution seeking. The new model suggests that companies can benefit from making a severe break from the expectation that R&D should be closed and private. Useful sources for inno-vative ideas and solutions lie beyond their external borders and a problem-broadcasting model may be much more efficient than trial-and-error. One may suspect that the efficiency of problem broadcasting is only realized for the toughest problems, but the efficiencies of open innovation apply to a much broader class of products and processes, and concern not only inputs from specialists, but solutions from innovative (lead) users, and even ordinary customers.

Companies always have been craving for people’s needs, opinions, and attitudes. The rise of information technology opens the door to the customers mind. How about transferring these principles to the political and social sphere? Where is crowdsourced politics? E-Democracy and web-based-toolkits at the ballot may be just ahead.

In all three cases we have seen above, mass customization, crowdsourcing co-design, and open innovation, companies could benefit from opening a closed value creation process and integrating actors in their periphery. This process could yield some impressive benefits and effects. At the end, however, we do not expect that open innovation and mass customization will become the only dominating strategies in our society, replacing today’s development and production systems. For most items, we still just want to shop for a mass-produced item, just consume and not to create, just being surprised by a designer’s ideas and not to co-design. But for some items, for which we really care and where our involvement is high, we want more and to become involved.

Most of the smartest people always will work for someone else. By crowdsourcing internal development tasks, external experts supplement the skills of the firm. InnoCentive may be one way to also meet the demographic crisis of a lack of talents and qualified engineers/developers in many countries.