Lead User Innovation And Related Revenue Streams In Software

Transcript

Lead User Innovation and Related Revenue Streams in Software Development Radim Špicar INTRODUCTION Innovate or die. These famous words attributed to Tom Peters have been widely accepted in various fields throughout the business world. Innovation is a must, unless you want your company to slowly fall behind the competition and eventually become obsolete altogether. While there is a wide consensus on the need for innovation, opinions vary on exactly how that innovation is supposed to be achieved. When it comes to innovation, options are not exactly limited. There are companies that rely solely on internal research and development, companies that form strategic partnerships, companies that rely on consumer input and companies that value supplier input, among others. And then there are companies, that let their customers realize their ideas into innovations themselves – then they pick up these innovations and incorporate them into the core product. This method of “outsourcing” the innovation process to customers has been given the name lead user innovation. This paper focuses on utilizing lead user innovations in software development, especially in the entertainment sector, and exploring the ways that lead user innovations can enhance and create revenue streams for both the innovator and the company. The first section aims to offer a brief a review of available literature on lead user innovations, the second section then analyzes ways of generating lead-user-innovation-related revenue streams and offers practical examples. 1 REVIEW OF LITERATURE Even though Eric von Hippel came up with the term Lead User Innovation back in 1986 and since then published several articles and 2 books on the subject, there is a very limited amount of literature on lead user innovations available today with only a few articles (if that) available concerning lead user innovations in a given field. 1.1 LEAD USER INNOVATIONS IN GENERAL In [14] von Hippel defines lead users and explores the insights they can offer regarding needs and prototype solutions for novel products, processes and services. It is suggested that the following two characteristics must be met for each lead user:  “Lead users face needs that will be general in a marketplace – but face them months or years before the bulk of that marketplace encounters them, and  lead users are positioned to benefit significantly by obtaining solution to those needs.” [14] also offers a four step method to utilize lead users in marketing research:  “Identify an important market or technical trend;  identify lead users who lead that trend in terms of a) experience and b) intensity of need;  analyze lead user need data;  project lead user need data onto the general market of interest.” [15] describes various sources of innovation that companies can utilize. It categorizes the sources based on “functional relationship through which they derive benefit from a given … innovation”. If a firm or an individual benefits from using the innovation, they are called users. If they benefit from manufacturing the innovation, they are called manufacturers. And if they benefit from supplying components needed to build or use the innovation, they are called suppliers. The book then proceeds to show, that user innovations make up a significant part of all innovation in various fields, such as scientific instruments, plastics additives, thermoplastics, wire termination equipment and others. It concludes that companies need to predict which group of innovators will be the most important for their future and shift their focus accordingly. Von Hippel continues his research as a co-author of various articles (e.g. [11], [5], [8]), that focus on specific fields and their lead users. In [11] the authors focus on the PC-CAD field, identify the lead users, their needs and possible solutions. They then offer these solutions to a representative sample of PC-CAD users and find out that solutions from lead users are strongly preferred. In [5] the authors implement the lead user innovation method at Hilti AG (a manufacturer of products and materials used in construction) and find out, that lead user innovations are much faster than traditional ways of identifying promising new product concepts as well as less costly. [8] focuses on a sample of 64 innovations related to Auger and Esca (scientific instruments used for analysis of surface chemistry of solid materials). Conclusions point to the fact that in this field commercially important innovations tend to come from the manufacturer, while scientifically important innovations tend to come from users. [4] tests the lead user innovation method in the context of kite surfing. The authors find out, that both components of the lead user definition (experiencing needs before the majority; high expected benefit) are independent and therefore neither can be dropped without a significant loss of information. While having high expected benefit leads to increased innovation likelihood, being ahead of the trend leads to both increased innovation likelihood and increased commercial potential for the innovation. [4] also confirms a theory stated and tested in previous von Hippel’s papers that states, that from 10 to nearly 40 per cent of users modify their products or develop entirely new ones. Von Hippel’s second book on the subject [12] discusses several new themes, such as the users’ innovate or buy decisions. It also addresses the questions of why users want custom products (obtained via home innovating) and why they are often willing to freely reveal the innovations. The author concludes, that many users often hold the same (or nearly same) information about a possible innovation, thus making it much more likely that an individual will reveal it (since they often think that their innovation is already common knowledge or that someone else will inevitably reveal it too, so they might as well do it themselves). In addition, von Hippel suggests that there is very little profit potential for the lead user innovators, since they would often have to somehow protect their intellectual property. Since there are non-negligible costs associated with protection, a degree of legal knowledge is required and since even such protection cannot discourage potential imitators completely, lead users are prone to freely revealing their innovations both to other users and to the producer. [6] further discusses the separation of innovation sources into the user, manufacturer and supplier categories. Specifically, since there are many fields where all of these sources are viable, which one is the most efficient? The authors tackle this question using 50 years of product innovations in the field of whitewater kayaking. Their conclusion suggests that consumer innovation is 2.4 times more efficient at developing significant innovations than that of producers. They also make a very interesting observation that “consumers are much more prolific and efficient product innovators than producers in the early stages of the field, and that the situation reverses as the field matures.” In [9] the authors find that field-independent personality variables also influence an individual’s “lead userness”. They also uncover that “lead users demonstrate innovative behavior not only by creating new product ideas but also by adopting new commercial products more heavily and faster than ordinary users”. This suggests that using lead users might also be relevant in more general issues of new products’ marketing. [10] offers a new term of “embedded lead users”. The author suggests that many employees of a given company are also customer of its products. Since they are customers, there are bound to be at least some lead users among them. These employees that are also lead users of a product that their employer manufactures are called embedded lead users. [10] argues for an extensive use of these embedded lead users since they exhibit all the standard signs of regular lead users but the can also draw upon the company’s resources, which regular lead users cannot do. In general [10] broadens the lead user innovation horizons by challenging the common assumption whereby users are normally located outside the innovating companies. It uses the sports and leisure industry as its context. 1.2 LEAD USER INNOVATIONS IN SOFTWARE DEVELOPMENT A lot of articles focusing on lead user innovations in the context of software and related services explore the idea and implementation of open source software (e.g. [2]), since this platform lends itself naturally to user innovation. Other articles (e.g. [7], [3]) explore lead user innovations in business software applications while some (e.g. [13]) aim to discuss the tools needed to shift the innovation capabilities to users. Empirical research is lacking in the entertainment part of the software industry though, with only [1] focusing on lead user innovations in the video game industry. [2] argues that the individuals who author open source software, which can often be complex and high-quality computer software and which is usually distributed for free and without any usage restrictions, share many characteristics with lead users. The author uses the IRC method – analysis of communications with the Internet Relay Chat – to determine lead users from a sample of open source software development communities with great success. In [7] the authors present a case study of weblog technology. They study a blogosphere (which they describe as a system of connected personalized and informal publications on the internet in reverse chronological order) and argue that its features “evoke intrinsic and extrinsic motivation to engage in knowledge sharing within a commercial software development project” and that it has an impact on “the motivation of lead users to develop commercial software together with the employees of a large for-profit organization”. [3] uses Salesforce.com as an example of how the advent of the internet made lead user innovation easier to both participate in and encourage. The author mentions the low cost of connecting to other lead users and the high incentives of improving a product of one’s own benefit as the reasons why software development became a very interesting field for lead user innovation. High degree of modularity has also contributed to the spread of user innovations since people can pick and choose just a module of the software that they want to and can improve – they do not need to innovate the software as a whole. The article describes how Salesforce.com utilized self-managed user groups to constantly innovate their product and become especially successful in its respective field. [13] points to how manufacturers need to explore user needs and then develop new innovations based on them. However since this takes time, this approach puts the manufacturer under increasing strain especially in fields where user needs rapidly change and diversify, making it hard to generalize the needs of a given customer to whole market segments. The author argues for the use of toolkits, which allow the manufacturer to stop attempting to understand user needs to a certain extent and transfer aspects of the development to the customer. Since the users likely understand their own needs well, they can skip that part of the traditional innovation process and jump straight to developing their own solution that would satisfy their needs using the provided toolkit. The manufacturer then observes not the needs of the customer directly but the solution that they came up with, thus better understanding their users and saving time. [13] also shows that using toolkits leads to custom products being developed faster and with lower costs. [1] expresses concern about how the “current hype of user-led innovation in the literature entails the risk of the concept being over-applied in terms of its applicability across industries“. By studying the video game industry, where user innovation is very common, the authors conclude that it is not only the technological context (and its advantages as described in [3]) but also the cultural context of industries, which makes lead user innovations applicable and attractive. They conclude that „industries and products that have a following, a group of hobbyists previously organized or disorganized, are the most likely sources of active user-led innovation“ and that this suggests that „user innovation in its applications is constrained in those industries that do not have such a cultural base among users“. 2 LEAD-USER-INNOVATION-RELATED REVENUE STREAMS IN SOFTWARE By examining the available literature both on general lead user innovations and on software specific lead user innovations, there is a lack of focus on exactly how the producer can profit from the innovations. Apart from the evident possibility of increased sales, that successful innovation can bring, there are different ways to profit directly from the lead user innovation process. These options are discussed in the second section along with real world examples provided to illustrate the points where applicable. Software products vary significantly from tangible products since they can be easily modified and, with the widespread of internet, distributed to a vast majority of the user base quickly and with little costs. This allows the developers to fix and enhance their products through patches after they have already been sold. 2.1 INNOVATE A PRODUCT TO ATTRACT NEW CUSTOMERS A basic approach used in many fields follows the process of (1) sell a product, (2) improve the product, (3) sell the innovated product, (4) return to (2) and repeat. Using lead user innovation method during the second step allows for faster and less expensive innovation process while better capturing the needs of the consumers. While this strategy is used widely in commercial software products, where new versions and updates are available for purchase from every few months to every few years, it is largely impossible to implement in the video game industry since paid updates are a thing that is unheard of in the field. Instead, innovations introduced via updates to video games serve two purposes – retaining the player base (in case of games using subscription models or free-to-play games relying on micro transactions) and attracting new players. Large updates and new versions are frequently mentioned on gaming websites which leads to increased interest and potentially increased sales. An example of this approach would be the role playing game The Elder Scrolls V: Skyrim by the developer Bethesda Game Studios. The developer provides the users with extensive toolkit used to modify various aspects of the game called “Creation Kit”. Using this toolkit, users can create small modifications such as modified textures or skills as well as large changes such as entirely new quests and characters. These modifications are then uploaded and made available for download by other users through either the Steam Workshop service or user-ran sites such as the Skyrim Nexus. All of these user made modifications are free of charge and users may pick and choose which modifications they would like to use in their games. In this case the lead user innovations are incorporated into the main product in a modular way over time. Both IGN.com and GameSpot.com, two of the most popular video game websites by traffic [16], periodically publish articles about new Skyrim modifications. These articles usually showcase the best or the most interesting new modifications that all players can freely download and use. If a person has not yet purchased the game, they may be persuaded by new content or additional improvements. 2.2 INNOVATE A PRODUCT IN ORDER TO SELL ADDITIONAL CONTENT While paying for updates in the video game sector is unheard of, recent years brought another possibility for the developers to increase their revenues after a game is released – downloadable content. This content is usually released at least a few weeks after the original game (although exceptions do occur; some games even receive downloadable content at release date, referred to as “Day 1 DLC”) and adds additional content that is nonessential to the core experience. This content may be either free or paid, with prices ranging from few cents to tens of US dollars. The rise of downloadable content also brought an increased focus on consumer loyalty. If the developer wants to attract substantial revenue from downloadable content, they need their customers to continue playing long enough to give the developer enough time to create and market the content. Some games even went as far as to shift their focus on additional content entirely and adopted the free-to-play business model. That model makes the whole initial game free and relies on generating revenue solely from unlocking additional content or providing other advantages in the game. In this case, lead user innovations may be seen as a way to keep users playing (or at least having an interest) long enough that they can be targeted in a marketing campaign to sell the newly offered downloadable content. The constant availability of new modifications for The Elder Scrolls V: Skyrim helps Bethesda Game Studios keep their audience with very little to no costs – the modifications are developed by the lead users and stored and made available to download from a fan-site. The only substantial cost is the cost of developing the “Creation Kit” itself before making it available to all users. Another possibility is to use ideas from lead users or community leaders in patches, through which the developer aims to show the user base that they are listening to their voices and steadily improving the product, which makes it more attractive for users to invest in additional content. In the case of Sid Meier’s Civilization V developed by Firaxis Games and released in 2010, the developer allows its users to create and share modifications through in-game interface. A group of users quickly got together and used this system to fix any bugs and incosistencies they could find in the game. They called this modification the „unofficial patch“. They also ran community polls to see which features the user base liked and which changes were desirable. Several of the fixes and features found in this modification also made their way into official patches released directly by Firaxis Games to improve their core product. These patches usually coincided with the release of new downloadable content such as map packs, scenarios or new civilizations. By showing that they listen to their players and act upon their ideas and wishes, the developer hoped to both increase the sales of the concurrently released downloadable content and retain the user base so that they could be offered more additional content in the future. 2.3 CHARGE USERS FOR THEIR IDEAS Current literature (e.g. [12]) concludes that lead users innovate by themselves and freely distribute their ideas and innovations to be used by the producer. However, if the lead users are willing to share their intellectual property free of charge, the following question logically follows – wouldn’t the lead users be willing to pay to have their ideas and innovations realized on a global scale? [12] already confirms that lead users stand to gain little by withholding information but do lead users stand to gain something by actually sharing their ideas and have them incorporated into a product by the producer? If so, is this perceived utility high enough that some lead users would be willing to incur costs in order to receive the utility? Certain fields are obviously more suited to this approach than others. Considering that the lead user can modify their own product without any additional costs (beyond the actual innovation costs), there needs to be something to be gained from other users also having the same innovation as the lead user. Software development is especially attractive in this regard, since it is often required that all users who want to work or play together need to have exactly the same build of the software. The vast majority of games that allow both user-created modifications and their use in multiplayer modes require that all parties involved in a multiplayer game have the same modifications enabled. Therefore, lead users who modified their own games are unable to use these modifications when playing with others, unless they can persuade all other players to also install and enable the modifications. That can be a lengthy process, since players may be located all around the world, may speak different languages and may be unwilling to install unofficial modifications for their games due to fear of potentially malicious content. On top of that, this same process would need to be repeated for every player in every game the lead user would want to play in multiplayer mode. Such lead user would undoubtedly gain a certain amount of utility from having their modification be made official and be incorporated into the official build. It logically follows that such lead user would also be willing to pay a certain amount of money (less than or equal to the utility gained) to achieve the incorporation. Another category of software that would be suitable for the approach of charging users for their ideas is software available as a service. In this case, lead user innovations are largely impossible directly since the user does not have access to the core of the software and can only access the user interface. Therefore if a user wants to innovate the software, their only option is contacting the developer with their idea and hoping that the developer will agree to implement it. In this case, the user stands to gain a certain amount of utility since the implementation of their idea would allow them to perform things not previously available or in a not previously available way. The case of Path of Exile action role playing game from Grinding Gear Games developer would suggest that the perceived utility is indeed non-negligible. Grinding Gear Games has allowed the users of its product, Path of Exile, to purchase a “supporter” pack which enabled them to innovate the game by adding a custom item designed according to the user’s idea. This item would not be automatically added to the creator‘s inventory, nor would the creator benefit in any other way. The item would be placed into the game’s world and would be available to every single user under the same conditions. Therefore a single user would pay a significant amount of money ($1000, later changed to $1500) to enhance the experience of all users equally. During the Closed Beta period of Path of Exile more than 250 such packages were purchased and the revenue from these purchases accounted for more than 10% of the total product revenue. This example suggests that lead users are not only willing to share their ideas for free, they are willing to pay to innovate and help shape the product. The same method of generating a new revenue stream could be applied to any game that requires all of its users to have the exact same version. Since lead users would have a lot of ideas for potential improvement and since they would be unable to realize them directly (because all users would be required to have the same version, thus making any changes impossible), they would be willing to pay to have their ideas realized. CONCLUSION While lead user innovation provides a cheaper and faster alternative to innovating a product or service according to customers’ current and future needs, it can also be used to generate substantial revenue streams directly. Since lead users are in general willing to share their ideas and innovations freely, there is little reason to pay for these innovations. On the contrary, software development field provides a background that allows for charging lead users for the implementation of their ideas and innovations. This approach is especially effective in those cases, where users realize additional utility from having their innovations be made official. The ideal circumstances range from requiring that all users have the same version of the software in order to work or play together to disabling the implementation of the lead user innovations directly by offering the software as a service and restricting access to the actual code of the software. It remains unclear exactly which fields are most suitable for implementing paid lead user innovations, what defines a product where this strategy would be the most appropriate or whether there are any other external factors that determine the success of such strategy. The most profitable pricing structure depending on the type of the product and the user base could also be the basis of further research as well as demographic factors that may be relevant to this strategy. This paper was created with support of the SGS-2012-028 project. REFERENCES [1] AOYAMA, Yuko a Hiro IZUSHI. User led innovation and the video game industry. In: DIME | Dynamics of Institutions & Markets in Europe [online]. 2008 [cit. 2013-10-03]. Dostupné z: http://www.dime-eu.org/files/active/0/AoyamaIzushiPAPER.pdf [2] BREACH, Geoff. I’m not chatting, I’m innovating! Locating lead users in open source communities. University of Technology Sydney School of Management Working Paper no. 2008/7, 2008. [3] DODGE, Garett. Web 2.0 and lead user innovation: Salesforce.com Case Study. In: Slideshare [online]. 2008 [cit. 2013-10-03]. Dostupné z: http://www.slideshare.net/gdodge/lead-user-atsalesforcecom-presentation [4] FRANKE, Nikolaus, Eric VON HIPPEL a Martin SCHREIER. Finding Commercially Attractive User Innovations: A Test of Lead-User Theory*. Journal of Product Innovation Management. 2006, vol. 23, issue 4, s. 301-315. DOI: 10.1111/j.1540-5885.2006.00203.x. Dostupné z: http://doi.wiley.com/10.1111/j.1540-5885.2006.00203.x [5] HERSTATT, C a Eric VON HIPPEL. From experience: Developing new product concepts via the lead user method. Journal of Product Innovation Management. Linthicum: INFORMS, 1988, vol. 9, issue 3, s. 213-221. DOI: 10.1016/0737-6782(92)90031-7. Dostupné z: http://doi.wiley.com/10.1016/0737-6782(92)90031-7 [6] HIENERTH, Christoph, Eric VON HIPPEL a Morten Berg JENSEN. User Community vs. Producer Innovation Development Efficiency: A First Empirical Study. MIT Sloan Working Paper No. 4926-11, 2013. [7] KAISER, Stephan a Gordon MÜLLER‐SEITZ. Leveraging Lead User Knowledge in Software Development—The Case of Weblog Technology. Industry. 2008, vol. 15, issue 2, s. 199-221. DOI: 10.1080/13662710801954542. Dostupné z: http://www.tandfonline.com/doi/abs/10.1080/13662710801954542 [8] RIGGS, William a Eric VON HIPPEL. Incentives to innovate and the sources of innovation: the case of scientific instruments. Research Policy. Linthicum: INFORMS, 1994, vol. 23, issue 4, s. 459-469. DOI: 10.1016/0048-7333(94)90008-6. Dostupné z: http://linkinghub.elsevier.com/retrieve/pii/0048733394900086 [9] SCHREIER, Martin a Reinhard PRÜGL. Extending Lead-User Theory: Antecedents and Consequences of Consumers' Lead Userness. Journal of Product Innovation Management. 2008, vol. 25, issue 4, s. 331-346. DOI: 10.1111/j.1540-5885.2008.00305.x. Dostupné z: http://doi.wiley.com/10.1111/j.1540-5885.2008.00305.x [10] SCHWEISFURTH, Tim. Embedded lead users inside the firm: how innovative user employees contribute to the corporate product innovation process. 1st ed. New York: Springer, 2012, p. cm. ISBN 978-365-8000-660. [11] URBAN, Glen I. a Eric VON HIPPEL. Lead User Analyses for the Development of New Industrial Products. Management Science. Linthicum: INFORMS, 1988, roč. 34, č. 5. [12] VON HIPPEL, Eric. Democratizing innovation. 1st MIT Press pbk. ed. Cambridge, Mass: MIT Press, 2005. ISBN 978-026-2720-472. [13] VON HIPPEL, Eric a Ralph KATZ. Shifting Innovation to Users Via Toolkits. MIT Sloan Working Paper No. 4232-02, 2002. [14] VON HIPPEL, Eric. Source of Novel Product Concepts. Management Science. Linthicum: INFORMS, 1986, roč. 32, č. 7. [15] VON HIPPEL, Eric. The sources of innovation. Paperback [ed.]. New York: Oxford University Press, 1988. ISBN 978-019-5094-220. [16] Top 15 Most Popular Video Game Websites | October 2013. EBizMBA [online]. 2013 [cit. 201310-03]. Dostupné z: http://www.ebizmba.com/articles/video-game-websites Adresa autora: Ing. Radim Špicar, Západočeská univerzita v Plzni, Fakulta ekonomická, Katedra podnikové ekonomiky a managementu, e-mail: [email protected] Lead User Innovation and Related Revenue Streams in Software Development Abstract This paper focuses on lead user innovation in the field of software development with a special focus on the field of video games. Its first part aims to provide a brief review of currently available literature on both lead user innovations in general and their use in software development in particular. Its second part focuses on a topic that is not widely explored in available literature – possible revenue streams that lead user innovations enable. These streams are briefly characterized and an example case is offered for each one. A new way of utilizing lead user innovations is also suggested. This new approach aims to charge users for implementing their innovation ideas, thus improving the product while also generating revenue. Key words Innovation, Lead users, Software, Revenue streams . JEL Classification L86, M10