Steve Jobs was known for his ability to create products the customers like even they hadn’t been involved in the creation process, however few people has this ability and have to relay on other ways of defining a product.
A product is, in my experience, often defined by the product managers with input from a few internal teams, like user experience team and in some cases with input gained at user and focus groups.
Social Media creates an fantastic opportunity for listening and engaging with customers as an on-going process and not just at a study session. The agile approach often used for much software development fits well with this approach, but the mind-set needs to be, the product creation is a collaboration between the customers and the organisation – when have you last been in a meeting where a product backlog was prioritised (assigned value) based on what had been learned from listen to social media and engaging with customers on Facebook pages and from twitter conversations? That would be a first step towards co-creating of products – customers and organiation collaborating on product creating.
What a customer is willing to pay for a product is based on the perceived valued by the customer and I believe co-creation leads to a product customers perceive has a higher value.