The Customer is the Company

Threadless churns out dozens of new items a month -- with no advertising, no professional designers, no sales force and no retail distribution. And it's never produced a flop.

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Jake Nickell stepped to the front of a small classroom on the MIT campus in Cambridge, Massachusetts, and looked around. It was an autumn morning in 2005, and before him sat a dozen executives from some of the country's largest companies -- General Mills, Pitney Bowes, Clorox, and Google (NASDAQ:GOOG) -- and a contingent of innovation researchers from MIT's Sloan School of Management and other business schools. The meeting had been organized by Eric von Hippel, an MIT bigwig and the foremost authority on something called user innovation. Von Hippel had heard about Nickell from a graduate student and had invited him to Cambridge to share his story with the group.

Nickell was somewhat befuddled by all the attention. He was not familiar with the term user innovation -- or, for that matter, the term Eric von Hippel. Business at Nickell's company, Threadless, had been growing quickly -- annual sales were on track to hit $5 million, and he had lately started getting curious calls from venture capitalists and large retailers. But Threadless didn't quite seem like MIT material. At 25, Nickell hadn't even graduated from college.

Von Hippel, a Harvard graduate, entrepreneur, and former McKinsey consultant who was 40 years Nickell's senior, called the room to attention and began lavishing praise on Threadless; he called the company a "perfect example" of a new way of thinking about innovation. Von Hippel's theory, which he had introduced in the late 1970s, was that most product innovations do not come out of corporate research and development labs but from the people who use the products. Nickell shot a confused glance at Jeffrey Kalmikoff, Threadless's chief creative officer, and Jacob DeHart, his chief technology officer. The meeting had barely begun, and they had already learned something.

Nickell started talking about his company. Threadless, he explained, ran design competitions on an online social network. Members of the network submitted their ideas for T-shirts -- hundreds each week -- and then voted on which ones they liked best. Hundreds of thousands of people were using the site as a kind of community center, where they blogged, chatted about designs, socialized with their fellow enthusiasts -- and bought a ton of shirts at $15 each. Revenue was growing 500 percent a year, despite the fact that the company had never advertised, employed no professional designers, used no modeling agency or fashion photographers, had no sales force, and enjoyed no retail distribution. As result, costs were low, margins were above 30 percent, and -- because community members told them precisely which shirts to make -- every product eventually sold out. Nickell's company had never produced a flop.

The audience members listened, rapt. For years they had suspected that this kind of business model was possible -- even inevitable. They had seen the beginnings of it in the open-source-software movement, and they had been trying to make it happen in small ways within their own companies. But somehow, this T-shirt guy had gone whole hog. He had built an entire business around the idea that an online community could drive innovation. "We were blown away," says von Hippel.

Nickell does not seem like the kind of guy whose presence would blow anyone away. He's 5 feet 10 inches but seems smaller, with a frame that barely fills out the medium-size T-shirts he wears like some kind of uniform. His fine features, unkempt hair, and scraggly red beard make him look almost elfin. His mannerisms, including a whisper-quiet voice and a tendency to punctuate his sentences with a faint giggle, do little to dispel this impression.

But Nickell is at the vanguard of a new innovation model that is quietly reshaping a host of industries. Whether it's called user innovation, crowdsourcing, or open source, it means drastically rethinking your relationship with your customers. "Threadless completely blurs that line of who is a producer and who is a consumer," says Karim Lakhani, a professor at the Harvard Business School. "The customers end up playing a critical role across all its operations: idea generation, marketing, sales forecasting. All that has been distributed."

This idea goes against a basic principle that has been taught in business schools since the invention of mass production: Employees make stuff, and customers buy it. But this notion seems anachronistic in a marketplace of ever-narrowing niches and nearly unlimited consumer choices. Meanwhile, a generation of so-called Web 2.0 companies has succeeded by encouraging customers to contribute to, and in some cases create, the product being sold. Not only do we have instantaneous access to countless television programs though video websites, but anyone with a YouTube account and a digital camera can create a show of his or her own. Professionally edited, dead-tree newspapers are besieged by digital news sites that are produced and edited by their readers. The 240-year-old Encyclopaedia Britannica finds itself eclipsed -- at least in terms of readership -- by Wikipedia.com, which pays its writers nothing and requires that they possess no expertise at all.

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