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Get Customers Involved in R&D
Companies like Google and Netflix are using inducement prizes to encourage product innovation—and it's saving them money.
Posted Dec 22, 2008
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One of the underreported announcements that came with Google's introduction of its new Android mobile phone platform was the launch of the $10 million Android Developer Challenge. Instead of spending $10 million on salary, benefits, office space, and equipment to brainstorm, design, and develop Android-compatible applications in-house, Google instead tapped users to participate in the development process. As a result, the company has received 1,788 submissions to date with the average development cost per application being an astonishingly low $5,600. For that investment, Google has received applications that could only result from mining the collective intelligence of the crowd while also gathering valuable customer feedback about what types of mobile applications their community is interested in.

While Google's Android Developer Challenge will pay out to the best entries, another model rewards prizes specifically to the person or group who first solves a specific issue. Netflix, for example, is currently offering a $1 million prize to whomever can improve its movie recommendation algorithm by 10 percent. Thousands of teams around the world are competing for the prize and some of the best minds in the field have dedicated tens of thousands of man hours (at least) to finding a superior formula. If no solution is forthcoming, the prize is not awarded, and the cost to the company is nothing-nor do expenses increase as the number of participants grows.

The Netflix Prize and Android Developer Challenge are excellent examples of the two types of prizes a company can offer: measured performance vs. best entry. When evaluating entrants requires a high degree of subjectivity, the latter is preferable: All the entries meeting a minimum threshold compete against one another and are evaluated by a panel of judges who select a winner. Alternatively, a measured performance challenge is more suitable to a problem that can be specifically and objectively defined, and the prize is awarded to the first submission that meets the very specific guidelines established by the rules.

Inducement prizes benefit companies because they shift responsibility for performing the risk/reward analysis from the company to the participant. Instead of the sponsor having to evaluate the merits and weaknesses of competing proposals, participants decide for themselves whether their approach stands a reasonable chance of being successful. This has the added advantage of encouraging the pursuit of less cautious approaches to a problem.

For companies looking to create an inducement prize as a way to spur innovation while also engaging customers, the most important factor when establishing the prize is ensuring impartiality. In most cases participants will be asked to make a significant investment of time and resources to claim a prize, and most would decline to expend the effort if there is the perception that the challenge is weighted in the favor of a particular group or discipline. Along the same lines, the rules of the challenge must be explicit so participants know exactly what is required to claim the prize. Even for a best entry challenge, participants should know specifically what criteria judges will be using to evaluate submissions.

When establishing a prize, companies must also consider who will own the intellectual property rights of the winning submission. Assigning the IP rights to the sponsor requires that the value of the prize be sufficient to fully compensate claimants for the time and effort that went into the solution's development. However, allowing participants to retain the IP rights, as is the case with the Android Developer Challenge and Netflix prize, offers claimants the opportunity to license their submission to subsidize the development costs. In these cases, the prize's sponsor will typically stipulate the company must be granted a free license to the winning solution.

With careful consideration and planning, inducement prizes can undoubtedly help companies create innovations while also offering a new and innovative way to connect with customers. Inducement prizes have a long history of spurring innovation-from the development of canned food to autonomous, self-navigating cars. Now the Internet makes it easier than ever for a company's core enthusiasts to participate in a product's development while simultaneously being extremely cost effective.

About the Author

J. Kent Pepper is an expert in the administration of inducement prizes and the founder of the site www.bigcarrot.com, which allows users to collaborate to launch and fund prizes.

Please note that the Viewpoints listed in CRM magazine and appearing on destinationCRM.com represent the perspective of the authors, and not necessarily those of the magazine or its editors. If you would like to submit a Viewpoint for consideration on a topic related to customer relationship management, please email viewpoints@destinationCRM.com.

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