Engaging in or escaping co-creation? An analytical model

Customer co-creation, the practice of involving the customer in a firm’s new product development, has received increasing attention. We develop a unique analytical model to study co-creation and examine the conditions under which co-creation is economically beneficial for both the customer and the firm. In our model, the customer and the firm determine (simultaneously or sequentially) their innovation share in the co-created product, directly affecting their share in the development costs and the final co-created product quality. The firm decides the product price (affecting customer demand, firm revenues and customer purchasing costs) and its level of manufacturing flexibility (affecting its unit production cost and fixed investment). Our model generates new and important insights. We show that when the consumer surplus and firm profit are both positive, both the customer and firm want to “engage”in co-creation, and when either the customer or the firm obtains a negative economic value from co-creation they prefer to avoid co-creation. We find that co-creation thrives when customers are more sensitive to quality and less sensitive to price, the environment is less investment intensive, and demand for the product is high. Under these conditions, the co-created product quality and the firm’s flexibility increase. How innovation efforts are shared between the customer and the firm is an important instrument to guide the co-creation process. When the customer is first to contribute to co-creation, our results show that both the customer’s share in the innovation effort and the final co-created product quality increase.