Open Innovation with Customers: Crowdsourcing

and Co-Creation at Threadless

Frank T. Piller

TIM Research Group, RWTH Aachen University

Kackertstrasse 15, 52072 Aachen, Germany
[email protected]
+49 241 809 3577
tim.rwth-aachen.de | open-innovation.com

Threadless' product is rather simple: A graphic t-shirt. But the company has become one of
textbook examples and pioneers of customer co-creation – open innovation with customers.
The Chicago-based start-up, founded in 2001, created a unique infrastructure for deep
involvement of customers and external experts in the new product development process. It has
become the role-model for many entrepreneurs in the field. This paper describes how
Threadless "crowdsourcing" approach works and what the factors of its success are. The
paper also comments briefly on idea to transfer the Threadless model onto other industries. 1

1
This paper has been drafted as a chapter for the book "A Guide to Open Innovation and Crowdsourcing",
edited by Paul Sloane (to be published with Kogan-Page in 2011). It builds on my earlier analysis of
Threadless in Ogawa & Piller (2006).

Electronic
Electroniccopy
copyavailable
availableat:
at:https://ssrn.com/abstract=1688018
http://ssrn.com/abstract=1688018
Challenges of Identifying What Customers Want

Recent research studies confirm large failure rates in new product commercialization.2 Newly
launched products have shown notoriously high failure rates over the years, often reaching
fifty percent or more. The primary reason for these flops has been found to be inaccurate
understanding of user needs. Many new product development projects are unsuccessful
because of poor commercial prospects rather than due to technical problems. Research found
that timely and reliable information on customer preferences and requirements is the most
critical information for successful product development.3 Conventionally, heavy investments
in market research are seen as the only measure to access this information.

So the basic question remains: How can a company identify perfectly the customers’ needs to
forecast their future desires and design and produce on this basis optimal assortment? One
opportunity to handle these challenges is shown by Threadless (threadless.com). Besides
reducing inventories, eliminating markdowns and increasing customer loyalty, they do a
marvelous thing: producing exactly what their customers want – by co-creating with the in the
product development process. How is this different to a conventional company? Most fashion
companies also “ask” their customers “what they want” by various means of market research.
But the clue on Threadless' approach is that (i) they ask not just a sample, but almost every
consumer of their products, that (ii) they test every single product concept with their
customers, (iii) and that the decision about their assortment composition is entirely based on
the customer's feedback. In addition, all of their designs are co-created by its community, not
by in-house designers.

Co-Creation at Threadless

Threadless follows an innovative business model that allows it to create a high variety of
products without risk and without heavy investments in market research to access customer
preferences before production starts. Its business model has been called "the most innovative
start-up" by Inc. magazine in 2008. Started in 2000 by designers Jake Nickell and Jacob
DeHart, Threadless focuses on a hot fashion item, t-shirts with colorful graphics. This is a

2
Balachandra & Friar (1997); Urban & Hauser (1993); Poolton & Barclay (1998); Redmond (1995); Tollin
(2002).
3
Henkel & von Hippel (2005). Refer also to Adams et al. (1998); Bacon et al. (1994); Teas (1994).

Electronic
Electroniccopy
copyavailable
availableat:
at:https://ssrn.com/abstract=1688018
http://ssrn.com/abstract=1688018
typical hit-or-miss product. Its success is defined by fast changing trends, peer recognition,
and finding the right distribution outlets for specific designs. Despite these challenges, none
of Threadless' many product variants ever flopped. But the company has neither sophisticated
market research or forecasting capabilities nor a complicated flexible manufacturing system.
Rather, all products sold by Threadless are created, inspected, improved, approved, and
selected by a user community before any larger investment is made into a new product.
Together with 51 employees, the company’s founders sell about 160-170 thousand t-shirts per
month for between $18 and $24 apiece with a 30% profit margin on sales. Sales in 2009 hit
almost $30 million -- with profits of roughly $9 million.4 Since 2006, annual growth
continued at more than 150 percent, with similar margins. Threadless has 1.5 million
followers on Twitter and more than 100,000 fans on Facebook. The company's website has
logged 2.5 million unique visitors in August 2010, a 50 percent increase over the same month
last year.5

This is achieved by transferring all essential productive tasks to their customers who, in turn,
fulfill their part with great enthusiasm. Customers design their own t-shirts and help improve
the ideas of their peers. They screen and evaluate potential designs, selecting only those that
should go into production. Since customers (morally) commit themselves to purchase a
favored design before it goes into production, they take over market risk as well. Customers
assume responsibility for advertising, supply models and photographers for catalogues, and
solicit new customers.

Threadless is a textbook example of customer co-creation. The term co-creation (also: co-
design, user innovation, or open innovation with customers) denotes a product development
approach where customers are actively involved and take part in the design of their own
product. More specifically, co-creation has been defined as an active, creative and social
process, based on collaboration between producers (retailers) and users to generate value for
customers.6 Customers are actively involved and take part in the design of their own product
and their co-creation activities are performed in an act of company-to-customer interaction

4
Burkitt (2010).
5
Saadi (2010).
6
Piller & Ihl (2010).

Electronic copy available at: https://ssrn.com/abstract=1688018

and cooperation.7 The method breaks with the known practices of new product development.
It utilizes the capabilities of customers and users for the innovation process. The main benefit
of customer co-creation is to enlarge the base of information about needs, applications, and
solution technologies that resides in the domain of the customers and users of a product or
service.8

So how is co-creation working at Threadless? The process starts when an idea for a new t-
shirt design is posted on a dedicated web site by a community member. All new designs are
submitted entirely by the community, which includes hobbyists, but also many professional
graphic designers. The company exploits a large pool of talent and ideas to get new designs
(much larger than it could afford if the design process would have been internalized). Creators
of submissions which are selected by other users get a $2000 reward, $500 worth of free t-
shirts, and their name is printed on the particular t-shirt’s label. Today, Threadless has over
one million registered users and receives approximately 300 submissions per day.

Next, reactions and evaluations of other consumers towards the posted idea are encouraged in
form of internet forums (comments) and opinion polls. Users evaluate each week all new
designs on a scale from zero (“I don’t like this design”) to five (“I love this design”). In
average, each design is scored by 2500 people, and about 90-100 users also write an explicit
comment on each design. A good score corresponds to a value above 3.0. But in addition,
customers not only express their marked preference for specific designs, but can also opt-in to
purchase the design directly once it has been chosen by the collective. For this, they check a
box “I’d buy it” next to the scale – providing an informal commitment to later purchase the
product concept if it would be selected. From the designs receiving the top votes and largest
commitment of users to purchase, Threadless is producing about six new products each week,
awarding about 600 winners each year. New designs regularly sell out fast, but are reproduced
only if a large enough number of additional customers commit to purchase a reprint first. This
process of getting the market's exact feedback first before committing any resources in final
product development, manufacturing, and sales has been called "collective customer

7
Franke & Piller (2003, 2004); Tseng, Kjellberg and Lu (2003); von Hippel (1998). A related method of
customer co-creation are user idea contests. Several studies investigate those in a consumer goods setting,
for example, Ebner et al. (2008); Piller & Walcher (2006); Sawhney, Verona & Prandelli (2005).
8
A good review of research on customers as sources of innovation provide von Hippel (2005), Rindfleisch
& O’Hern (2008), and Piller & Ihl (2010). Sawhney, Prandelli and Verona (2003) show that these
customers are often organized in communities by a manufacturer or intermediary.

Electronic copy available at: https://ssrn.com/abstract=1688018

commitment".9 It exploits the commitment of users to screen, evaluate, and score new designs
as a powerful mechanism to reduce flops of new products.

It is important to note that in the end management keeps the final word. First; the Threadless
team reviews each short listed design to make sure that no user cheated by analyzing IP
addresses and IP chains for voters and the respective scores given. But more fundamental,
Threadless' team also has its own saying in the selection process. The company learned that
the collective input of their customers has to be combined with the companies’ internal
market knowledge to succeed successfully with the commercialization of the selected
products. At Threadless, the winning designs are chosen from the top scoring designs, but
they are not necessarily the top scoring designs. Important factors are the originality of the
design (is it somehow timeless, not too similar to other recent winners), legal issues (are there
any copyright related issues), and assortment policy (will the design contribute to a wide
variety of styles). For this decision process, however, the community again provides
important input: Their long list of comments on each design provides helpful information if a
design is plagiarism, but also if it could be modified to look better.

Over the time, Threadless has refined the customer co-creation process. For example, to keep
the competition interesting and encourage users to participate continuously, the number of
designs at one give time has to be limited so that users don’t get confused. Usually, each
design gets seven days to be scored. But if a new design has received a low arbitrary score
(made up of multiple variables including the number of “I'd buy it” requests and the design's
average score) within the first 24 hours of its positing, it will be dropped from the running.
This happens to about one third of the submissions. The early user feedback has proven to be
a very strong indicator of the success of a design in the competition and enables the company
to increase the usability and experience for users who vote.

Threadless has inspired a number of similar companies. While some have just cloned the idea
(e.g., projectnvohk.com, look-zippy.com, buutvrij.com, lafraise.com – in total there have been
more than 30 exact clones of the Threadless idea in the t-shirt market), companies like
RYZwear, myfab.com or dreamheels.com have transferred the idea into another market
segments (shoes, sneakers, furniture).

9
Ogawa and Piller (2006). Elofson and Robinson (1998) describe a similar system called “custom mass
production“: Users first negotiate on a particular product design, find consensus about a solution that is
fitting the desires of all, and then auction the resulting common to interested manufacturers. Note that the
Threadless model is very different to mass customization, i.e. the creation of customer products for each
individual customer with means of flexible manufacturing technology, refer to Salvador et al. (2009).

Electronic copy available at: https://ssrn.com/abstract=1688018

Recently, Threadless also enabled other companies to profit directly from its community. In
summer 2010, it teamed up with computer maker Dell for a Laptop design contest. Dell
finally published 12 special edition computers with designs created and vetted by the
Threadless community. For an additional $85, Dell customers can select one of the designs
that will be etched onto the exteriors of its notebooks. The designs caught on quickly,
according to Dell, even if the company does not reveal specific sales figures.10 Another
company that partnered with Threadless has been Alpargatas, the Brazilian company with its
famous brand of rubber flip-flops Havaianas. At the beginning of 2010, the company
published an open call for participation for a special line of designs on Threadless.com. This
was Threadless' first foray into accessories. More than 600 design submissions were received.
Finally six sandals went on sale, and the Threadless line is now the No. 2 bestselling category
of Havaianas online.

When Customer Co-Creation Makes Sense

The kind of co-creation employed by Threadless makes especially sense in markets where
customer demand is very heterogeneous, a common situation today. Here, information about
the demand for (new) products is distributed in an extremely diverse way. If the knowledge of
manufacturers about the needs of an emerging market is scare and costly to achieve via
conventional market research, user contributions are becoming a valuable source of
innovation. The possibility of open contributions encourages a self-screening by potential
contributors.

When discussing the specifics of customer co-creation, it is important to note that not
everyone wants to actively participate in product development activities. Not all customers are
highly motivated co-creators. Customers can decide about the degree of their involvement: At
Threadless, most new designs are indeed submitted by young professional designers, i.e. users
with typical lead user or trendsetting characteristics. They contribute not only because the
monetary incentive of $2000 is higher than the average honorarium paid for a commissioned
design by a conventional clothing company (about $300 to $500). Their main motivator is to
get larger exposure in the professional design scene, a rather closed market which is difficult
to enter for newcomers. The openness of Threadless’ community makes it easy for designers
to present their work and to get immediate feedback.

10
Saadi (2010).

Electronic copy available at: https://ssrn.com/abstract=1688018

But Threadless also allows pure hobbyists to submit a design as the screening activities by its
community enable this openness at no risk and with no costs. Indeed, one of their most
successful contributors is a gifted teenager without any formal design education – and with a
little chance to get a contract by a traditional company. The majority of Threadless’ users,
however, just screens the proposals and contributes to the elicitation of demand by polling for
the designs they like most. For these customers, browsing through the ideas is often a novel
experience and a welcomed change from traditional shopping activities. They discover new
potential products, exchange comments, and feel empowered by their authority to make a
favorite idea happen. Some users want a bit more of engagement. They comment on the
submissions and propose amendments or additions.

While everyone who submits a design has the same chance to win the contest, the expert
knowledge of the designers gives them a clear advantage. From an economic point of view,
bearing expert knowledge provides a cost advantage to the contributor. Another participant
with less domain knowledge may be able to submit an equal contribution in the end, but at a
much higher burden (development cost). However, there are many examples at Threadless
where also an outsider has submitted some highly creative and innovative designs. In these
cases, often the intrinsic motivation of these hobbyists has counterbalanced their lack of
experience. It may be exactly this openness to utilize expert knowledge on the one hand but
also to allow contributions from "untrained" (and hence, unbiased) outsiders on the other, that
explains the success of the Threadless model.

Implementing Co-Creation

There are several benefits for manufacturers to implement customer co-creation. By creating
an open line for their customers, manufacturers get access to ideas for new products or even
complete designs. Supporting customers to organize themselves as a group and to express
commitment for a specific design turns market research expenditures into sales. Once this
commitment is explicit, manufacturers can exploit this collective demand and serve the
market very efficiently without the conventional costs of identifying this segment and the risk
of developing and producing a not appealing offering.

However, we do not claim that customer co-creation always is beneficial. Conventional

product development and customer co-creation have to be seen as supplementary − not as
substitutes. Successful innovation management is like any other management task, first of all,
a decision about trade-offs, choosing what to do and what not to do. There will be

Electronic copy available at: https://ssrn.com/abstract=1688018

contingency factors in favor of a manufacturer-dominated innovation process without any
participation of the customer. But there is no doubt that customer integration matters in the
new product development process. A number of conditions tell whether customer co-creation
makes sense:

• First, companies have to face uncertainty of demand. Especially in volatile markets

influenced by fast moving trends, integrating the customer in a different, much closer way
makes sense.

• Second, the product has to be modular in a way that it can be split in components that are
pre-defined (and which in the best case could be pre-fabricated to reduce lead times) and
others where customer co-creation can take place. This split reduces the complexity of the
entire process and allows the external contributors to focus on just one aspect of the co-
development. Splitting the product in such an "internal" and "external" should start at the
level of uncertainty about market demand. The components which are rather certain and
bear a low planning risk (like the basic t-shirt and size distribution in the example of
Threadless) will become pre-defined. Those components with larger demand uncertainty
however will become customer co-created.

• Third, consumers have to be interested and motivated in co-creation for the product. This
demands a specific level of involvement for the product. Looking into the motivators of
potential contributors is crucial for success.

• Finally, the company has to be able to create a community of contributors or to connect with
an existing one. This often is the most challenging task. It took Threadless more than five
years to get its community running and working. An important condition for success is the
full disclosure of the entire process from initial consumer comments to final product
commercialization. Co-creation, like open innovation, demands an open, transparent
development process contrarily to the conventional practice of keeping innovation private
and secret. Being able to make this mental shift perhaps is the most important condition
for implementation.

Threadless has been able to make this cultural shift. But even further, it has tapped into a
fundamental economic shift, a movement away from passive consumerism. Eventually,
Threadless-like communities could form around industries as diverse as semiconductors, auto
parts, and toys. "Threadless is one of the first firms to systematically mine a community for

Electronic copy available at: https://ssrn.com/abstract=1688018

designs, but everything is moving in this direction," MIT Professor Eric von Hippel has been
quoted in an interview (Inc. Magazine, August 2008). This may or may not come to pass, but
the lesson of Threadless is more basic. Its success demonstrates what happens when a
company allows what its customers want it to be. Threadless succeeds by asking more than
any modern fashion company has ever asked of its customers -- to design the products, to
serve as the sales force, to become the employees. Its founders have pioneered a new kind of
innovation. It doesn't require huge research budgets or creative brilliance -- just a willingness
to keep looking outward.

References
M.E. Adams, G.S. Day and D. Dougherty, “Enhancing New Product Development
Performance: An Organizational Learning Perspective,” Journal of Product Innovation
Management 15 (September 1998): 403-422.
G. Bacon, S. Beckman, D. Mowery, E. Wilson, “Managing Product Definition in High-
Technology Industries,” California Management Review 36 (Spring 1994): 32-56.
R. Balachandra and J.H. Friar, “Factors for Success in R&D Projects and New Product
Introduction,” IEEE Transactions on Engineering Management 44, no. 3 (1997): 276-287.
L. Burkitt, "Need To Build A Community? Learn From Threadless," Forbes January 2010
(01.07.10), online at http://bit.ly/8WYmdH.
W. Ebner, M. Leimeister, Marco; U. Bretschneider and H. Krcmar, "Leveraging the Wisdom
of Crowds: Designing an IT-supported Idea Competitions," (Proceedings of the 41 Annual
Hawaii International Conference on System Sciences, 2008).
G. Elofson and W.N. Robinson, “Creating a Custom Mass-Production Channel on the
Internet,” Communications of the ACM 41 (March 1998): 56-62.
N. Franke and F. Piller, Frank, "Key research issues in user interaction with configuration
toolkits in a mass customization system," International Journal of Technology Management
26, no. 5 (May 2003): 578-599.
N. Franke and F. Piller, Frank, "Toolkits for user innovation and design: exploring user
interaction and value creation in the watch market," Journal of Product Innovation
Management 21, no. 6 (June 2004): 401-415.
J. Henkel and E. von Hippel, “Welfare Implications of User Innovation,” Journal of
Technology Transfer 30 (January 2005): 73-88.
S. Ogawa and F. Piller, "Reducing the Risks of New Product Development," MIT Sloan
Management Review 47 (Winter 2006): 65-72.
F. Piller and C. Ihl, "Open Innovation with Customers," (Raleigh, NC / New York: Lulu.com,
2010).

Electronic copy available at: https://ssrn.com/abstract=1688018

F. Piller and D. Walcher, "Toolkits for Idea Competitions: A Novel Method to Integrate Users
in New Product Development," R&D Management 36, no. 3 (March 2006): 307-318.
A. Rindfleisch and M. O’Hern, “Customer Co-Creation: A Typology and Research Agenda,”
(University of Wisconsin Working Paper, 2008).
J. Poolton and I. Barclay, “New Product Development from Past Research to Future
Applications,” Industrial Marketing Management 27, no. 3 (1998): 197-212.
W.H. Redmond, “An Ecological Perspective on New Product Failure: The effects of
Competitive Overcrowding,” Journal of Product Innovation Management 12 (June 1995):
200-213.
S. Saadi, "T-Shirts are just the start for Threadless," Bloomberg Businessweek, Sept 20, 2010
Issue: 24-26.
F. Salvador, M. de Holan and F. Piller, "Cracking the Code of Mass Customization, " MIT
Sloan Management Review, 50, no. 3 (Spring 2009): 70-79.
M Sawhney, E. Prandelli and G. Verona, “The Power of Innomediation”, Sloan Management
Review 44 (Winter 2003): 77-82.
M. Sawhney, G. Verona and E. Prandelli, "Collaborating to create: The internet as a platform
for customer engagement in product innovation," Journal of Interactive Marketing 19, no. 4
(April 2005): 4-17.
R.K. Teas, “Expectations as a Comparison Standard in Measuring Service Quality: An
Assessment of a Reassessment,” Journal of Marketing 58 (January 1994): 132-139.
K. Tollin, “Customization as a Business Strategy: A Barrier to Customer Integration in
Product Development,” Total Quality Management 13 (July 2002): 427-439.
M. Tseng, T. Kjellberg and S. Lu, "Design in the new e-commerce era," Annals of the CIRP
52, no. 2 (2003): 509-519.
G. Urban and J. Hauser, “Design and marketing of new products,” 2nd edition (Englewood
Cliffs: Prentice Hall, 1993).
E. von Hippel, “Democratizing Innovation” (Cambridge: The MIT Press, 2005).
E. von Hippel, “Economics of product development by users: The impact of `sticky' local
information,” Management Science 44 (May 1998): 629-644.

10

Electronic copy available at: https://ssrn.com/abstract=1688018