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The Hidden Pitfall of Innovation Prizes

Source | : By Reto Hofstetter ., Z. John Zhang & Andreas Herrmann

Although companies use crowdsourcing more and more to fill their innovation pipeline, it is not so easy to get people to submit their ideas to online innovation platforms. Our data from an online panel reveal that 65% of the contributors do not come back more than twice, and that most of the rest quit after a few tries. This kind of user churn is endemic to online social platforms — on Twitter, for example, a majority of users become inactive over time — and crowdsourcing is no exception. In a way, this turnover is even worse than ordinary customer churn: When a customer defects, a firm knows the value of what it’s lost, but there is no telling how valuable the ideas not submitted might have been.

Despite this limitation, companies still get a lot out of crowdsourced ideas. Encouraged by early successes, many now routinely use crowdsourcing contests to find fresh solutions to various problems, increasing the demand for innovators willing to share their ideas. PepsiCo, for instance, has already used contests nine times to crowdsource creative Super Bowl commercials for its Frito-Lay’s Doritos brand, offering prizes of up to $1 million for the winning submission. Other companies, including GE, DELL, and Starbucks maintain their own platforms on which they continuously source ideas from customers.

It is surprising, then, that crowdsourcing on popular platforms is typically designed in a way that amplifies churn. Right now, in typical innovation contests, rewards are granted to winners only and the rest get no return on their participation. This design choice is often motivated by the greater effort participants exert when there is a top prize much more valuable than the rest. Often, the structure is something like the Wimbledon Tennis Championship, where the winning player wins twice as much as the runner up and four times as much as the semifinalists — with the rest eventually leaving empty handed.

This winner-take-most prize spread increases the incentive to win and thus individual efforts. With only one winner, however, the others are left with nothing to show for their effort, which may significantly reduce their motivation to enter again.

An experiment we recently ran confirmed that the way entrants respond to this kind of winner-take-all prize structure. We invited a cohort of innovators to participate in two successive contests and randomly varied the incentive structure. Half of the participants were routed into winner-take-all contests, and the other half into contests with a multiple prize structure in which the top 20 innovators would receive a prize. Importantly, the total prize money was identical in the two conditions, so that winners in the multiple prize condition received only a fraction of the winner-take-all prize.

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