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Incentive Based Business Models

Dated: 27 Feb 2013
Posted by David Osgood
Category: Business Model, Healthcare, Innovation Adoption, Investment ROI, Market Leadership, New Markets, Technology
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“You get what you incentivize”

                                       – Peter Diamandis, CEO and Chairmen X Prize Foundation

charlesCharles Lindbergh became world renowned for being the first man to fly across the Atlantic. Lindbergh’s trans-Atlantic flight was a brave effort to win the $25,000 Orteig Prize offered by wealthy hotel owner for the first aviator to successfully fly from Paris to New York or New York to Paris. While Lindbergh’s fight was certainly heroic, the most significant aspect of his achievement is that it changed the way people thought of flight: An industry was born.

As a 25 year old U.S. Air Mail pilot, Charles Lindbergh was not expected to win the Orteig Prize. Many famous aviators with financial backing were also competing for the prize before Lindbergh beat them. In total, teams invested $400,000 to win the $25,000 Orteig Prize.

X Prixe foundation CEO, Peter Diamandis, often cites the Orteig Prize as his inspiration for starting the organization. X Prize is best known for the Ansari X Prize, a competition to fly a three-passenger vehicle into space two times within two weeks. The competing teams invested more than $100 million to win a $10 million prize. In 2004, a team headed by Paul Allen and Burt Rutan won the prize. The winning team  went on to sign a deal to develop a spaceship for Virgin Galactic, helping to usher in a new industry of space tourism.

xprise

Incentive based competitions are not new, infact DARPA (Defense Advanced Research Projects Agency) has been running a cash award program for years. In 2004, DARPA issued a challenge for a fully autonomous car to traverse a 150-mile off-road route. None of the cars completed the course.

The next year the challenge was reissued and five vehicles completed the course. In 2007, the test brought the challenge to the streets, where autonomous cars had to obey street signs. The challenge helped to showcase the capabilities of autonomous vehicles. Now we are beginning to see autonomous cars on public roads, potentially launching a whole new industry.

Incentive based competitions have also been seen merging with crowd funding through sites like Kickstarter. Only the ideas or products that reach their  funding goals are eligible to receive the financial backing, meaning only the best ideas survive. Industry and government are increasingly using incentive based competitions and getting a better return for their dollar.

Over the next few months we will be watching  new incentive-based competitions that can create new industries and transform old ones. The next DARPA Grand Challenge asks for teams to create robots capable of performing search and rescue operations. The latest X Prize looks to transform healthcare, challenging teams to create a “tricorder”, that can diagnose diseases via a smartphone-like device.

Perhaps the most interesting part about these open competitions is that you never know who might win. It is impossible to predict who will be the next Charles Lindbergh.