User led innovation is when the user of a product or service helps a company create something else new or at least improve what they are using. Companies have realized that they need user led innovation in order to succeed. Since the user is the one ultimately going to be using the product it pays to get their input. With user led innovation the individuals will test a product, its packaging, and report back to a company with their ideas on how to make it better.
Also with user led innovation the consumer may be in the discussions from the start. The company may be asking for a new product that the consumer wants. So the user led innovation helps create that new product.