New ways of value creation

Aided by interactive technologies, today’s consumers expect to be able to communicate directly with an organization in their preferred language and style. They don’t want to have products, processes or experiences imposed on them. At the same time, consumer knowledge is increasingly being viewed as a key asset. Company-owned Interaction spaces like online user communities that enable and encourage greater degrees of participation and collaboration are on the rise.

To describe this emerging relationship between customers and companies C.K. Prahalad and Venkat Ramaswamy coined the term co-creation. They define co-creation is an “active, creative and social process, based on collaboration between producers and users, initiated by the firm to generate value for customers” through a range of experiences.

Co-creation transforms the consumer into an active partner for the creation of future value for example by involving them directly in the production or innovation process. A frequently cited example of co-creation is Lego’s former online platform LEGO Factory that allowed consumers to build their own designs using the LEGO Digital Designer software. This attracted several million people each year and helped Lego build an engaged community.

Co-creation is also the concept that lies at the heart of open-source software or crowd-sourcing. Major brands with large online communities such as Coca Cola regularly look to solve some of its business challenges by crowdsourcing ideas from its customers. With a dedicated microsite called “Co-creation lab” (https://www.bmwgroup-cocreationlab.com), BMW encourages consumers to contribute to product development, a process also known as “open innovation”.

By ‘outsourcing’ innovation and value creation to the customer, company boundaries become blurred.  According to Prahalad and Ramaswamy, this demonstrates the shift from a product-centric view to personalized customer experience: “As value shifts to experience, the market is becoming a forum of conversations and interactions between consumers, communities and firms.” These personalized co-creation experiences result in value that is unique to each individual.

For these reasons, co-creation can also be understood as a system to support decision-making. If the customer becomes involved in decisions to co-create future value, for example by being able to vote which product should be marketed, these decisions result not just in experiences, but in representations of knowledge that are “owned” by the consumer. A sense of ownership, also known as the endowment effect (see our latest blogpost “Lessons in behavioral economics”), can increase demand for a product or a brand. However, as a recent study on this effect has shown, the strong correlation between customer empowerment and product demand can be diminished by certain “boundary conditions”.  In other words for the “empowerment–product demand” effect to take hold, the consumer must feel that 1) he or her is truly empowered to make democratic decisions; and 2) the outcome of a joint decision-making process should reflect his or her preferences.

As a note of caution, the authors also add that companies can only benefit from psychological product demand effects “if consumer preferences within a market or market segment are relatively homogeneous.” Giving up decision power to consumers can be associated with risks if consumer preferences are highly fragmented or if products are too complex to easily understand. Lego for example had to close its design service in 2012 due to its failure to meet quality standards and for being too complex.