Many businesses find there are gaps between their new offerings and what the market really needs. An infamous example is the CueCat, awarded the honour of one of the worst gadgets of the century. The CueCat scanned barcodes in magazines or on soda cans, which would then bring you to a specific Web page on your PC. Unfortunately, despite the interest from publishers and advertisers, no user wanted this... on a PC. Fast forward a few years, where everybody has a small computer with camera in their pocket, and the QR code makes perfect sense.
So how do you ensure this doesn’t happen to you? User innovation follows the simple premise that necessity is the mother of innovation: somebody experiences a problem for which no reasonable solution exists yet. This user then finds a reasonable solution, usually with a lot of duct tape. The user innovation can then be taken up by a company to do what companies are good at: sleek designs, engineering to perfection and scaling with mass production at low prices. This approach is not limited to products, but works just as well for services . In an Australian example, two relief teachers set up a Web service which takes the pain out of filling the day's unexpected absences. Their commercialised ReliefRuler now helps 150 schools and many teachers.
Another way to listen to your users is to give them unrefined products and let them figure out what to do with them. A good example is Google Maps, which started out as a digital version of a road atlas, useful in its own right. After lead users hacked mashups (a web page combining several other sources), Google decided to make an official API (application programming interface) public. The API makes it easy to build applications on top of the maps, and enabled disruption behemoths such as Uber and AirBnB.
If your employees are representative for your target customers, you may get user innovation for free. Just listen to your staff. But most organisations are not so lucky. User innovations from your own McGyvers can still be applied to improve internal processes, but other approaches are needed to innovate products and services.
Listening to your customers is imperative, but not necessarily about what they think they want. Henry Ford apocryphally said: "If I had asked people what they wanted, they would have said faster horses." The innovator's dilemma  teaches us that a company's use of resources is driven by current customer needs. Customers may say they are happy with your product, until your competitor comes up with something better.
So then, what customers should you listen to? Your lead users. These are people with the passion and expertise to solve their own problems: 10%-40% of users modify or develop products and services in some way. Once the problem and solution are established, your expert technical staff will be inspired to solve the problem even further. Innovation stalwart 3M found that lead user projects generated eight times as many sales as market research driven product development, because the innovations were more likely to be breakthroughs rather than incremental improvements.
For example in developing countries, home office type printers are used for high volume work. You can imagine replacing ink cartridges is a nightmare. To save time, users would connect an ink cartridge to a bigger, easier to refill reservoir. Observed by the major printing companies, the user innovation was properly engineered (e.g. to avoid air bubbles) and eventually made its way to the developed world in products, such as Canon's Pixma Endurance.
Who are your lead users? Find opportunities to interact with them to inspire new products and services for current and future customers. One way to find lead users is to engage with communities related to your product or service, e.g. at seminars or in online discussion groups. Ask or survey members in these communities who they think is ahead of the curve, and work your way to the lead user. If you need the networking, the lead user probably is not your customer. This pioneer usually has above average skills (enabling innovation), and a motivation to solve problems (basically to do their job better).
Be mindful that lead users will not do the whole innovation process for you. You will still need to do your due diligence, to avoid perpetually small niche markets or technical issues that might prevent scaling to a wide customer base. But when you do find a match, your customers will think you read their minds.
 The Innovator's Dilemma: When new technologies cause great firms to fail. Clayton M. Christensen. Harvard Business Review Press
 "Managing User Involvement in Service Innovation", Peter R Magnusson et al. Journal of Service Research, 6(2), November 2003, pp 111-124. DOI: 10.1177/1094670503257028