Hi, I’m Kartik, and I’m going to talk about how customers can help us identify opportunities worth pursuing. Now, recollect that the odds of success for most ventures is quite low. Venture funds explicitly account for this by maintaining portfolios. But how do you, as an entrepreneur, deal with this high level of uncertainty?
There are two things that one can do. First, you can simultaneously explore and nurture multiple alternatives. This is the tournament approach that was outlined earlier.
Second, you can test these ideas with multiple potential customers to identify the truly exceptional opportunities, and then invest in those opportunities and build out those specific products or services. In this session, I will discuss how you can achieve both these goals, that is generating multiple ideas and second, testing these ideas with customers in one shot. That’s essentially the idea of using customers as sources of opportunities. This session is particularly relevant for corporate entrepreneurship, wherein a firm has an existing base of customers that it can leverage to identify new product opportunities. But when approached creatively, startup entrepreneurs can also use prospective customers to source ideas and opportunities in a very similar manner.
Now I’ll use a case study of Threadless to illustrate this concept of using customers to source opportunities or ideas worth pursuing. Threadless is a website for crowd sourced T-shirt designs and also designs of other apparel.
Threadless was an early innovator in this space and the company was founded in 2000 by a designer named Jake Nickell. Now Jake participated in an online T-shirt design challenge, which he won and when he won the challenge, he got an award, but he did not receive a print of his design. That got him thinking, what if he created a weekly design contest where the winning designs were actually printed and sold to people. This led him to launch the website and he had these weekly contests. Designers from all over the world came and contributed their designs, and his team announced winners each week and also printed these designs and sold them on the website. Winners received cash and also royalties on the sales that were generated on Threadless.com.
Now, what’s interesting about Threadless is the unparalleled volume and diversity of designs that were generated on the website. Every week, close to 1,000 different designs are submitted and the company selects roughly around 10 for printing.
Over time, this has resulted in about 500,000 unique designs being submitted to the company by roughly around 300,000 contributors. The firm has printed somewhere between 7 and 8,000 designs over this period of time. Now, this is really interesting to note because while they have gone through a great number of designs and printed a large number of them, Threadless does not have a single designer on its staff.
And not only do you get a large volume of designs, you get a great diversity of designs. Seventy percent of the designs on Threadless come from outside the U.S., including from South Asia, Southeast Asia, Europe, South America and Australia. The people who contribute these designs range from 14 year old kids to people who are retirees around 65 years old. You get this great volume and diversity of designs on Threadless and Threadless has been able to pursue this model, as I said, without a single designer. Threadless is particularly instructive for us even though Threadless is not really pursuing this idea of crowd sourcing to come up with startup ideas. It is nonetheless useful for us as entrepreneurs because apparel design, like startup creation, is inherently risky and unpredictable. Most designs for apparel, especially for unique apparel, actually fail. Threadless is able to address that by trying to maximize the number of designs they get and using customers to select the best designs and then minimize the risks in the process.
While Threadless doesn’t exactly represent the case where customers help generate entrepreneurial opportunities, it nonetheless highlights a process which is fraught with uncertainty about customer demand. And how we can transform that when you use customers to both generate the idea and also select the ideas that are worth pursuing. In fact, the fundamental idea of crowd sourcing has been used in a number of other contexts where customers are being used to generate ideas for new products and new opportunities. For example, Dell has a website called IdeaStorm where Dell customers can post suggestions on new products as well as service improvements that they would like to see on Dell.
Over time, Dell has been able to obtain a little under 25,000 different ideas on this website and several product innovations have been implemented based on ideas submitted by community members. For example, Dell launched back lit keyboards based on the popularity of that suggestion on Dell’s website. Another such example is MyStarbucks idea, which is a website launched by Starbucks to allow customers to suggest new services and new products that Starbucks could launch. On this website, Starbucks has received over 200,000 different ideas and has implemented a number of them, including launching new products such as their flat white, which is essentially an espresso with steamed milk. This was a product that was available to people in Australia and New Zealand and it was suggested to Starbucks by some loyal customers. In addition to launching the flat white, there’s a number of other products, like the reintroduction of the mocha coconut frappuccino was again based on ideas suggested on MyStarbucks idea. Now crowd sourcing is not only a great source of a large number of diverse ideas, it can also be a very useful tool for opportunity selection, as well.
Votes on a crowd sourcing platform can be a great proxy for demand and the company can observe how many up votes a certain idea has obtained to get a sense for how popular that product idea might be among consumers. This is particularly beneficial given the uncertainty during the early phase of opportunity selection. For example, on Threadless, the company selects the top 5% of ideas in terms of votes. These are considered by the management and the management then selects some very specific designs from among this top 5% and then rolls them out.
Notice here that Threadless does not launch the top five or top ten designs, they just take the top 5% and then use managerial judgment to figure out which ones to select. This is important because voting is costless but purchases are not, and so voting might not perfectly reflect purchase intent. For example, there are certain designs that I think are cool, I might vote for them but I might think that they are perhaps not appropriate for me to wear on my T-shirt. So there might be certain mismatch between votes and purchase intent. Similarly, it’s possible that the voting population might not exactly reflect the preferences of your actual customers because for example, on Threadless, most of the voters are going to be those who are passionate about design, perhaps designers themselves. Whereas, your average buyer is not a designer and so there might be differences in preferences so you want to account for that.
Nonetheless, you get valuable data through these votes that can help you select the right product ideas that are most valuable to customers. Paired with managerial judgment, these votes can be highly useful in addressing the uncertainty around what’s going to stick with customers. Now, of course, while I say that crowd sourcing is a powerful tool, from both the supply and demand standpoint, meaning that from a supply standpoint, it helps generate a lot of ideas, which can be very useful early on. And from a demand standpoint, they help us figure out which ideas are actually addressing the paying point for customers and therefore, help us select the right idea.
Now while it’s useful on both supply and demand dimensions, for crowd sourcing to work, customers need to have a clear incentive to participate in the process and provide their best ideas to the company. It’s important to think through what’s the right incentive and they’re many incentives that are relevant here. I’ll mention three of the most important. The first incentive is a monetary incentive. For example, on Threadless, the winners get lump sum payments, there are revenue sharing arrangements, as well. Therefore, I might submit my best designs to Threadless because I feel I have a chance to win.
Another reason to participate might be because you want to encourage a company to solve your own problems. If you look at Dell IdeaStorm or My Starbucks Idea, I post suggestions on these websites because if the company implements those suggestions, it solves a personal problem for me. It helps me get the Dell I want or it helps me get the Starbucks expedience or the Starbucks product I want at the store.
Finally, another important reason might be that I participate in such a website for skill development. On Threadless, some designers might submit designs even if they think that their chance of winning is low because it helps them practice and develop their skills. It helps them get feedback from the community, all of which is important and useful from a skill development standpoint.
Putting all this together, looking at Threadless, IdeaStorm and other such website, here are some best practices that companies might implement when trying to get customers to share their best ideas with firms. First, one has to think carefully about incentives. Think about whether monetary incentives are relevant, and if so, what’s the right structure. Is it a fixed payment, is it revenue sharing or things of that nature?
Second, it’s important to provide value to even those participants who do not win so that they have a reason to come back. For example, that value might be from feedback that the community provides to the participant. On Threadless, I submit the designs, people comment on them, and that’s valuable to me as a designer.
Finally, it’s useful to encourage a sense of community. For example, we’re providing a forum for people to interact and if you get that kind of a forum, then one might be more willing to participate, even if there’s no monetary incentive. Now despite all these incentives, I will mention or share that there are environments in which it might be hard to convince customers to give us their best ideas even though we have certain incentives in place. In these kinds of environments, one has to think about other ways of getting feedback from customers to get information on what they’re thinking about, even if they’re not willing to directly share it with the firm.
For example, people might leave behind product reviews, or they might share their opinions on social media posts, on Facebook or on Twitter. How might we extract that to figure out what are customer pain points and what are problems worth solving? A good case study in here is a company called C&A Marketing which is in the consumer products space. This company was founded on 2003, and today has 11 different brands and has a product portfolio of about 50,000 different products. They have had a lot of success in this space primarily because they figure out which product to build based on feedback from customers. But they don’t have that direct contact with customers because they don’t have a direct customer base with whom they have a relationship that they can go back to. Instead, the company mines product reviews on Amazon to figure out what’s a worthwhile new product to develop. For example, they might look at wireless or Bluetooth speakers and they might look at reviews for these products. One reviewer might say hey, I love this Bluetooth speaker, I took it to the shower with me, but it stopped working because it turned out, it’s very sensitive to water. Another review might say good speaker, but it would be great if it was waterproof, as well. You might notice a pattern that people like a wireless speaker, but they would love the feature of waterproofness in there. That may lead CNA to develop a product which is very similar in other dimensions such as a size or performance or wireless capabilities as an existing speaker. But they might add new product features such as it being waterproof, and that allows that product to be developed without a whole lot of research because the customers ideated their product. Furthermore, the chances this product will be successful will be high because customers actually helped ideate that. This has led the company to roll out, they have a line of products called Jumbl, which are essentially consumer products that they retail on Amazon primarily because they’re based on reviews from Amazon. They have entered their product line called Ivation which is essentially the products that are highly successful in the jumbl product line. These are redesigned, made as little more higher end, upscale versions that are then sold, sometimes on Amazon, but at other times, in traditional retail stores. Here’s an example of a company that has a huge product portfolio, 50,000 products and rather than coming up with the ideas on their own, they research the digital traces that customers leave behind in the form of reviews and social media posts, and they identify product opportunities from there. Not only do they get good product ideas, and they get a lot of product ideas, but most of these succeed because the customers have helped them select these ideas.
In summary, customers can be a great source of ideas for companies. They can help them identify new products or they can help us identify new features for existing products. Of course, in order for this to work at scale, you need a large community of customers who will share that kind of feedback. Therefore, this idea is most powerful for corporate entrepreneurship, where you have an existing base of customers. Having said that, I think startups and early stage entrepreneurs can also leverage this idea by reaching out to prospective customers at a lower scale. Furthermore, they can also look for indirect feedback in the form of reviews and social media posts which are none the less going to be very useful.
I suspect that the idea of crowd sourcing in order to identify new opportunities, worth pursuing is perhaps going to be effective for very practical, but sometimes somewhat incremental, product improvements. Rather than completely innovative ideas that break the mold that nobody’s thought about. Because if you want an idea which nobody’s thought about, it’s unlikely that there’s a lot of customers who are posting comments about it and who are asking for it. Nonetheless, getting customers to help you ideate, getting customers to help you select can both speed the process of idea generation and also speed the process of finding product market fit and finding customer validation. Therefore, it’s a very powerful tool to keep in a entrepreneur’s arsenal during the early stage of opportunity selection.