During my design school days (8 yrs ago) when I was working on interaction design projects, paper prototyping helped me a lot in giving the concrete shapes to my abstract ideas. Paper prototyping cleared a lot of ambiguity. I was able to demonstrate how the digital product would look like and how it will behave.
Since then, I have been an ardent follower and practitioner of paper prototyping. I have seen that some interaction designers have an inclination to skip this step and jump directly to tools like Axure, iRise, Visio, etc. The interaction design students too have tendency to disregard the power of paper prototyping and the possibilities that it opens up.
Paper prototype helps you to give concrete form to the user task flows. It is a starting point of everything related to your digital product design. A social app, an iPad app, a desktop widget, enterprise applications or dashboard – everything can be designed on paper.
I was designing an astrology portal four years ago. The product manager did not have any clue of what design process I followed. I did exhaustive sessions with his development team to arrive at the information architecture. When the first sketches (paper prototypes) of the portal started to emerge, the manager got curious. Subsequent discussions on the paper prototype ensured that all the “requirements” had been addressed and we finalized the user journeys. Only after that visual design mockups were produced. The development team harnessed the utility of paper prototypes and saved a lot of development cost, in this process.
Known web entities too champion for the need of prototyping (some root for paper prototyping & some for iterative prototyping). 37signals recommends to prototype fast and often. I have worked as a consultant to eBay and eBay gives thumbs up for paper prototyping. So does AT&T.
Whenever in doubt, go back to paper. It will help you a lot. Just take out the paper and pencil, sketch it out. If you are convinced, you will convince others about the next ground breaking product. And paper prototype will help you to just do that.