On the importance of design research
There's an interesting discussion emerging on the blogosphere on the importance of design research. Don Norman argues that research works when iterating over existing products and services but isn't a great fit when coming up with innovative breakthrough ideas. Adam Richardson of Frog Design points that design research doesn't necessarily equate to user research, which is what Don frames his article on and adds quite a few good points to the table.
I've been reading Warren Berger's book Glimmer (amazon link) and mulling over this exact same question in the last few days, and I am somewhere between the two camps. One might argue that some of the greatest products of our time are not necessarily a product of design research but of genius design (Berger talks about Jonathan Ive's work for Apple). But you could also say that genius design doesn't necessarily emerge out of a vacuum - it is the product of deep thinking about how people use the products and services around them, and the realization that things can often be better through design.
Whenever I read about design research being the be-all-end-all of figuring out what people need, I remember the Ford quote "If I had asked my customers what they wanted, they would have said a faster horse." In fact, most companies that claim to do design research go out and ask people what they're lacking about a product - and people do want "everything, really" (including a faster horse).
Ultimately, I believe the answer to "what do I do to know what people need?" is to use design research in order to create a bond with the target audience - dive into the challenge -, and then go with the instincts of the design team. While instinct alone may work in the realm of the inexplicable (and may often return odd results), it is unquestionable that an informed (by research) instinct is where lies the secret to the next iPhone, Netflix or Nike Plus.