For a long time I have been interested in what happens with the cost structure of new product development when you start involving users in the innovation process. For the last decade research has pointed out that traditional NPD is becoming more expensive because of:
- Increasing investments in NPD of overall budget
- Increasing NPD cost per product
- Decreasing NPD cycle time
- Increasing NDP failure rate
In order to reduce risk and increase sales, companies often choose products aimed at a segment’s lowest common denominator, which results in a poor fit between consumer preferences and products and lately we have seen several examples of adverse consumer reaction to mass market products. Co-creation can make NPD cheaper and more successful
By creating an innovation infrastructure and involving end users in the NPD process, some companies (LEGO, Adidas, Nike, Burberry, Microsoft) have been successful in lowering the cost of development, speeding up NPD cycle and reducing failure rate. This effectively means that co-creation is changing the cost structure of innovation by ‘outsourcing’ parts of the innovation process to end users through online communities.
One of the most interesting implications of the changing cost structure is how it enables a new profitable ‘mass’ market of niche products. By making the development of products cheaper and making sure that there is a market for them before you start production, suddenly it is becoming viable to produce products in much smaller quantities. This burgeoning ‘mass’ market of niche products is what I call the ‘long tail of innovation’ – products produced close to mass market cost but in much smaller quantities.
- David
I like your concept of ‘the long tail’ – it is such a different understanding that the original term that it begs its own name. The ‘Long Tail of products’ approach was still based on guesswork at the production phase. It was a long-term strategy based on having patience for long-term sales, and implied warehousing of items that might take a while to find their buyers.
If I understand you correctly, your concept could be called ‘the long tail of demand,’ since it moves the concept from sales to upfront market research. This shift was not conceivable back when Andersen coined the term – it is only possible now because internet access in western markets is nearly ubiquitous, and because the analytics to interpret and act on large amounts of disparate data are available.
A ‘long tail of demand’ also dovetails with efforts towards sustainable NPD, because at its core is the act of refining (or killing) ideas before they become objects.
You are absolutely right that the ‘long tail of innovation’ is a quite different idea than ‘the long tail of products’. But conceptually it is linked to Andersen’s original idea of how the changing cost structure of retail (no stock cost and no distribution cost) is enabling ‘the long tail’ of demand, or in other words showing that the aggregated sales of many different niche products can rival the block buster products and thus change the standard 80/20 sales distribution. (80% of revenue is generated by 20% of your product portfolio).
The ‘Long Tail of Innovation’ is how the changing cost structure of innovation makes it possible to put niche products into production and still make money on them even though their sales numbers are low.
The changing cost structure of innovation is in part enabled by tapping into the ‘Long Tail of Demand’ by making sure that only bespoke products are produced using web 2.0 tools in qualifying / disqualifying products on the idea stage. However the cost structure is also changed by letting the community perform other tasks such as designing the product, marketing the product and by cutting out the middle man.
The result is that now it is becoming financially viable to develop products where the total sales are only counted in the hundreds.
- David
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