“Every year research budgets increase at a faster rate than sales. The current R&D model is broken.” (6)
– Larry Huston, VP of innovation, Proctor & Gamble.
With ~70% market share(1), the top five beauty manufacturers (Loreal, Unilever, P&G, Estee Lauder and Shiseido)(2) have dominated the global skincare industry for decades. The product development process of these companies have stayed stagnant, however. Products are manufactured at scale for massive distribution based on select customer feedback, which often may not be representative of true market demand. Volition Beauty, a beauty startup, is looking to leverage the power of crowdsourcing to: a) identify new SKUs by getting consumers to submit product ideas b) pre-test market demand on potential new products through an online voting system and c) use appropriately sized labs to manufacture units based on forecasted demand.
By crowd-sourcing product ideas from future users of the product, Volition is eliminating the effect of Joy’s Law(3) – the idea that continuous innovation is dependent on distributed knowledge that lies outside the realms of an organization. In 1975, Eric von Hippel also found that product users were the best originators of novel innovation, given users experience novel needs well ahead of manufacturers(4). Thus, by taking in new ideas from its core customer set, Volition Beauty is ensuring product development is closely tied to actual customer demand.
Andrew King and Karim Lakhani, through their research on open innovation, highlighted how companies can decide 1) whether to open the idea-generation process; 2) whether to open the idea-selection process; or 3) whether to open both(5). Volition Beauty has decided to crowdsource both idea generation and idea selection by enabling ranked voting on ideas submitted on the portal. This mechanism ensures an idea that may seem niche (such as face masks for airplane travel – pictured below) resonates with a larger mass audience before they are sent to outsourced production labs.
Incentives are aligned by paying the idea generator a one-time fee, which suffices given their position as “tinkerers”(6), individuals who are more hobbyists and less experts on beauty R&D. Money is not the primary motivation, with more intrinsic qualities such as enjoyment, intellectual challenge, reputation and professional identity playing a stronger role to incent the external innovator. Thus, Volition is using aspects of both competitive markets and collaborative communities to drive open innovation(7).
Capitalizing on a distributed crowdsourced labor market, Volition not only saves on employee and product development costs but also sets up the business for easy expansion into the global market. Native innovators will understand the cultural aspects of beauty consumption in their local markets, thus enabling Volition to scale faster internationally in the long-term.
While the power of the connected internet and e-commerce is core to Volition’s strategy, the company also sells its products at beauty retailers such as Sephora and Ulta. Distribution through offline channels poses certain operational challenges that e-commerce does not. For e-commerce, Volition can utilize just-in-time delivery based on digital orders received; for offline the company needs to ship certain levels of SKUs based on retailer order forms in advance. The retailer reserves the right to order more during stock-outs, or less if sales do not meet forecast, leaving the company to produce units in advance of actual consumer purchases. This may result in mis-match of forecasted demand from online voting. Over time, patterns of consumption in this channel will likely emerge and the company can better manage production. To do so, Volition will have to closely monitor and collect such data to optimize future inventory management.
As the company scales, Volition should also be mindful of maintaining strong relationships with the innovators, and ensure idea-generators are continuously motivated to participate. Over time, the company will likely need to provide additional benefits to keep them engaged, given the innovator’s integral role in product development, and ultimately the success of the company. Creating a feeling of community amongst the innovators will be crucial, which the company can accomplish by showcasing innovator stories on platform and by facilitating meetups. To further pull at intrinsic motivations, Volition can give awards to “innovator of the month” for highest number of votes received or most ideas generated. Volition should also consider internal crowdsourcing(8), to enlist ideas from employees passionate about product research and development to open up newer sources of innovation in the long-term. Similar to motivating the innovators, the company will need to encourage constant voting from the crowd, either by offering product discounts on voted items, or via other non-monetary incentives described above.
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(1) Trefis.com, “Size of the global skin care market from 2012 to 2024”, Statista, https://www-statista-com.ezp-prod1.hul.harvard.edu/statistics/254612/global-skin-care-market-size/.
(2) Women’s Wear Daily, “Revenue of the leading 20 beauty manufacturers worldwide in 2016”, Statista, https://www-statista-com.ezp-prod1.hul.harvard.edu/statistics/243871/revenue-of-the-leading-10-beauty-manufacturers-worldwide/.
(3) Karim R. Lakhani and Jill A. Panetta, “The Principles of Distributed Innovation”, The MIT Press Journals, October 18, 2007, Vol. 2 No. 3, https://www.mitpressjournals.org/doi/pdf/10.1162/itgg.2007.2.3.97.
(4) Eric von Hippel and Ralph Katz, “Shifting innovation to users via toolkits”, Management Science, July 2002, Vol. 48 Iss. 7, https://pubsonline.informs.org/doi/abs/10.1287/mnsc.48.7.821.2817.
(5) Andrew King and Karim R. Lakhani, “Using Open Innovation to Identify the Best Ideas”, MIT Sloan Management Review, Fall 2013, Vol. 55 Iss. 1, https://search-proquest-com.ezp-prod1.hul.harvard.edu/docview/1438826527/590C2B186F64B3APQ/1?accountid=11311.
(6) Jeff Howe, “The Rise of Crowdsourcing”, WIRED magazine, Ideas Section, published June 1st, 2006, https://www.wired.com/2006/06/crowds/.
(7) Kevin J. Boudreau and Karim R. Lakhani, “How to Manage Outside Innovation”, MIT Sloan Management Review, Summer 2009, Vol. 50 Iss. 4, https://search-proquest-com.ezp-prod1.hul.harvard.edu/docview/224962173/211B55A29D924BFFPQ/1?accountid=11311.
(8) Arvind Malhotra, Ann Majchrzak, Lale Kesebi, and Sean Looram, “Developing Innovative Solutions Through Internal Crowdsourcing”, MIT Sloan Management Review, Summer 2017, Vol. 58 Iss. 4, https://search-proquest-com.ezp-prod1.hul.harvard.edu/docview/1916720815/E5C26206F3DD4247PQ/1?accountid=11311.