The Hidden Pitfall of Innovation Prizes

Reto Hofstetter, John Zhang and Andreas Herrmann at Harvard Business Review: “…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….

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. …

In line with the above reasoning, we found that winner-take-all contests yielded significantly better ideas compared to multiple prizes in the first round. Importantly, however, this result flipped when we invited the same cohort of innovators to participate again in the second subsequent contest. While 50% of the multiple-prize contest chose to participate again, only 37% did so when the winner-took-all in their first contest. Moreover, innovators who had received no reward in the first contest showed significantly lower effort in the second contest and generated fewer ideas. In the second contest, multiple prizes generated better ideas than the second round of the winner-take-all contest….

Other non-monetary positive feedback, such as encouraging comments or ratings, can have similar effects. These techniques are important, because alleviating innovator churn helps companies interested in longer-term success of their crowdsourcing activities….(More)”.