This paper was written for Eric Von Hippel's Lead User Innovation class at MIT Sloan.

1. Web 2.0 and Lead User Innovation: Salesforce.com Case Study
By
Garrett Dodge
March 24, 2008
With the advent of the internet, lead user innovation has become easier to encourage,
monitor, and participate in. Through both online and physical user communities,
companies are better able to understand and attempt to accommodate the needs of their
customers. In the extreme situation, customers become the service provider, as in the
case of open-source software. In other cases, existing companies are able to give their
user communities the tools to innovate and distribute their innovations. This paper will
examine frameworks and examples from class as well as look deeper at Salesforce.com
as an example of this phenomenon.
Since the beginnings of the internet, software has proven to be a fertile ground for user
driven innovation. This innovation is a result of the low cost of connecting to other lead
users, as well as the individual incentive for skilled users to improve products for their
own benefit. One excellent example of such user-driven change is the development of
the open-source software Apache, developed by Rob McCool in mid-1994. McCool
posted his software to the internet and within four years it was the most popular web
server software.
Although user innovation communities have existed for much longer than the internet,
three trends have enabled their exponential growth: modularity; digitization of
information; and the decreasing cost of communication. Modularity has been growing in
popularity since the days of the Model T. In the computer world it is evident in both
hardware and software design. We take for granted the ability to customize our desktop
PC with parts purchased at Best Buy or software downloaded from the internet; contrast
this to mobile phone software that is still early on the modularity curve.

2. The digitization of information and decreasing cost of communication has grown hand in
hand over the past couple of decades. These two trends have enabled user communities
to develop between users who are geographically distant. In some cases these
communities might exist solely on the internet, while in other cases their physical
existence is aided by low cost, rapid communication. A primary example is professional
communities that gather for conferences but stay actively engaged through the internet.
Although these trends have enabled user innovation for physical and digital goods, von
Hippel points out one of the challenges to manufacturer sponsored user innovation:
“Because users’ need and habits constantly change, the necessary information cannot be
transferred to manufacturer-based developers all at once. Rather, it evolves at the user
site as the user experiments with prototype innovations.” However, as more software has
moved to an internet distribution model (as opposed to physical media), the opportunity
for lead user innovation has increased dramatically. Such opportunity is evident in “beta”
software releases. In this model of software distribution, companies release an early
version of the software for users to test. Subsequent updates of the software are then
released frequently, as often as daily. Google is one firm that has deployed this type of
software development. In contrast, firms like Microsoft release updates yearly or even
less often. Now both manufactures and lead users can take advantage of the rapid
experimentation phase of product development. In fact, the lifecycle of a piece of
software can actually be viewed as one long experimentation phase.
Given this new model of constant iteration of a product, it makes sense that firms are
looking to lead user innovation as a way to shift resource intensive development efforts to
the user community. Instead of attempting to meet the continually evolving needs of the
community, firms are looking to develop a platform that gives the community the ability
to meet its own needs. Intelligent firms have embraced this move and are working to
position themselves more as platform providers as opposed to complete solution
providers. Notable examples of this model include Facebook, Salesforce.com, and even
SAP.

3. Now let’s examine why user innovation communities are so significant to internet and
software development. For a user innovation community to flourish, three conditions
must be met: 1) at least some users must have sufficient incentive to innovate; 2) users
must have an incentive to voluntarily reveal their innovations and the means to do so; and
3) user-led innovations must be distributable to the community of users in a way that is
competitive with commercial production and distribution.1
Salesforce.com: built for user innovation
In 1999 Salesforce.com was founded by former Oracle employee, Marc Benioff, and
three other individuals. From inception, the company was well positioned to benefit from
lead user innovation. Benioff and his partners saw an opportunity to serve a part of the
market that was being overlooked by the big players like Oracle and Siebel. These
customers included small businesses, nonprofits, and other firms that required unique
CRM solutions. Within four years the company had acquired 8,700 customers, 127,000
subscribers, and numerous awards. By the end of 2007, Salesforce.com had over 38,000
customers and 1 million subscribers.
One key to the rapid growth of Salesforce.com was their skillful nourishment of user
communities. Currently there are over 64 self-managed user groups around the world.
Additionally, the company hosts numerous road shows annually in these and other cities
to engage the user community. While the idea of user communities is not unique,
Salesforce has been especially successful. Their unique success is likely due to the ease
of customization of the product and passionate customer base. Similar to the open-source
movement, many users have shown a rabid loyalty to Salesforce.com.
Salesforce.com’s customers are an especially fertile group of innovating users because of
the characteristics of their business. From the initial launch of the company, Salesforce
focused on small businesses. As an underserved group in the existing world of enterprise
1
“Innovation by User Communities: Learning from Open-Source Software” Eric von Hippel, MIT Sloan
Management Review Summer 2001

4. software, these businesses could not afford many of the leading CRM solutions -or if they
could, the cost of customization was too high. Salesforce provided a new product that
was both low cost and highly customizable by the average user. As the platform evolved
it increasingly enabled customization, which then enabled the company to acquire more
lead users.
Salesforce.com’s 2007 introduction of the AppExchange platform provided the final
piece of the puzzle necessary to fully enable user driven innovation: a platform for
efficient production and distribution of software. Marc Benioff captured the importance
of the AppExchange when he said rhetorically, “Why can't there be an eBay of enterprise
applications and an iTunes music store of enterprise applications, where we can write to
the services we need to run our business? If it's so easy for us to get our music and news,
how do we do that for our business as well?quot; Interestingly, after the launch, some
commentators noted that the AppExchange faced a challenge of critical user base. With
only 351,000 subscribers at the time, it would not be able to compete with the user
community of Microsoft Windows or QuickBooks. However, as previously noted, what
made Salesforce unique was not only its larger percentage of lead users, but also its
ability to enable users in ways neither Windows nor QuickBooks could.
The AppExchange’s statistics are a testament to its success. Less than a year later there
are over 800 total applications, 203 which are free (80 built by Salesforce). Although the
company is still a bit cagey with in-depth statistics for the platform, they have indicated
that 1 in 4 users have utilized AppExchange.
The AppExchange has skillfully addressed IP issues in its user innovation communities.
Long before AppExchange, Salesforce.com maintained excellent developer relationships.
The company was careful to develop applications for their core CRM product, which did
not compete with successful developers. Although this strategy was useful early on in
the life of the company, it did slow some improvements for customers. If an average
solution was already available, Salesforce.com would not try to improve the solution.
With the introduction of AppExchange, competition was shifted from company/vendor to

5. vendor/user. Individual users usually do not have the ability to develop solutions that
potentially compete with existing vendor products. One of the great innovations of the
AppExchange platform is that it gives the individual users the ability to choose how to
manage their IP. Users can easily attempt to sell their innovation via the platform, or the
innovation can be shared freely.
Another key aspect of user innovation is that users tend to develop functionally novel
innovations, while manufactures tend to develop incremental innovations. A quick look
at the AppExchange marketplace reveals this trend. For example, one application
integrates restaurant data from Yelp.com to show a salesperson the restaurants close to a
client. Such information is potentially very useful for a salesperson looking to schedule
lunch with a client, but it is not something a traditionally CRM company would have
built. One Salesforce user put it well when he said, “I have taken applications off the
AppExchange, downloaded them to my sandbox, and have customized and made it
totally unrecognizable from what it was when I first downloaded it it, so that it would fit
exactly what my business needed.”2
Salesforce.com recently deployed an ideas platform as another means of collecting users’
innovation ideas. Initially Salesforce deployed this ideas platform to their customers
through the site www.ideas.salesforce.com. The site was launched in October of 2006
and currently has 6,868 ideas and more than twice as many comments. Based on the
success of the site, the company launched ideas as a product in the latest version. They
describe the ideas functionality as follows:
“Great ideas can come from anywhere, and Salesforce Ideas lets your
communities post and vote on ideas so that the best ideas get bubbled to the
top. Start collecting innovative ideas, holding discussions and watching the best
ideas from your communities shape your business.”
2
http://youtube.com/watch?v=kcWcnFcVRkU

6. Although this type of tool as been a popular part of Web 2.0 sites, Salesforce.com is
bringing the tool to a mass audience through modular design and ease of use.
Conclusion
What does the success of Salesforce.com mean for other firms? Clearly, lead user
innovation is only growing as products become more modular, information is digitized,
and communication is made easier. Firms should develop a strategy for enabling and
harnessing user driven innovations. A good strategy should include an independent lead
user specialist and an understanding of IP/ownership issues. Lead users do not
necessarily want to be monetarily compensated for their innovations, but maintaining a
good relationship with users may entail other types of compensation for users
(recognition, free stuff, formal input, etc). Additionally, firms need to realize that they
cannot meet all the needs of lead users. By enabling a platform for users to innovate,
firms may be able to capture direct or indirect value from user innovations. Lead user
innovation is increasing part of the innovation toolkit of all firms, and internet firms in
particular [Figure 1]. Salesforce.com has successfully enabled lead user innovation, and
through strategies such as platform fees, the company has provided an excellent example
of how to monetize virtually all user innovations.