Designing a Great Community

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Threadless: The Business of Community

Brian Kenny: If you’re wearing a t-shirt right now, you’re not alone. With over 2 billion units sold a year, t-shirts are the most popular apparel items in the world, racking up sales in excess of $40 billion a year in the U.S. alone, according to Wired Magazine. Today we’re talking to Professor Karim Lakhani about one t-shirt retailer who literally built their business around community engagement, in the case entitled, “Threadless, the Business of Community.” I’m your host, Brian Kenny and you’re listening to Cold Call.

Professor Lakhani specializes in the management of technological innovation and firms and communities, and he’s one of the leaders of our school’s Digital Initiative. Karim, thanks for being here.

KL: Great to be here, Brian.

BK: So I want you to start by setting up the case for us. What is Threadless about?

KL: I came across Threadless when I was a doctoral student, researching this phenomenon of communities. Being a graduate student, all you do is wear t-shirts. And I said, “Well this is interesting. This is a community based t-shirt company where all of the designs for the t-shirts come from the community. The community also votes and then they print the best ones.” They were making money really well. So I signed up to the website and I started to vote on t-shirt designs. When I moved over to HBS to become a professor, the case method was front and center. I thought this—focusing on this company and how this company works with their community to both innovate, to generate innovations, to select innovations, to now even fund innovations—was just a fascinating way for us to be able to explain my research to a general audience.

BK: You chose to do it in kind of a non-traditional way. This was a multimedia case.

KL: Yes, the case is a really fun multimedia case, where you get to sense the community, but also the company and how quirky the company is, how edgy the company is and how great the founders and the employees of the firm are as well.

BK: So this case takes place in 2007. That’s the point in time and the company has gone through rapid growth. Just talk a little bit about the context that they’re in when the case takes place?

KL: All of our cases have a managerial dilemma. This case has a dilemma around growing like crazy. They’re doing really well. And a large retailer, let’s call them Bull’s-eye Corporation, has shown up and said, “We want to take your shirts and make them available nationwide, through our retailer channels.” The case puts the students, the participants in our discussion to say, “How should you, as an owner of a company, think about this kind of an offer in front of you?”

BK: So how do they make money? What’s the business model? They have their community making the product and buying the product.

KL: Yes, it’s great. The simple thing about Threadless is that they have now more than 2 million members signed up. At the time of our case, they had about half a million members signed up. And these members would submit t-shirt designs on a daily basis. So every week they would get about 800 design submissions. Now if you start thinking about this—no company can, by themselves, absorb that many design submissions and be able to sort and select amongst them. So then what they do is they ask their community members to also vote on the design submissions. They get a good signal about what their current customers will want to buy. Every design goes up for voting for a week and then basically they take their top 100 designs. They curate a bit more themselves, and then they print seven new designs per week.

It’s quite amazing. It’s this rapid clip of new designs being submitted on a weekly basis by people around the world. People around the world then vote on those, and then they get to pick and choose the best ones to feature and then sell. And the way they make money is the winner of the design gets $2,500 in cash prizes, as well as other additional incentives. They give the rights of that t-shirt design to Threadless to then resell, and then Threadless makes money by selling them to everybody else.

BK: It sounds too good to be true. What is the downside to this?

KL: Well, I think there are many downsides. All of a sudden now, instead of having five designers working for you, you have a city submitting designs, a city voting on the designs. You have to be able to learn how to manage the community, learn how to grow it, how to manage it, how to sustain it, and to deal with a whole range of issues, from theft of designs to people getting nasty on the user forums.

BK: Can you talk about the leadership aspect, too?

KL: Yes. One of the questions that comes up when we do the case is: can anybody do this? In many ways, my research is trying to provide sort of the scaffolding for us to understand how these companies work, how these platforms work. But one of the things that is unique about Threadless is that the founders came from the community themselves. They, themselves, were designers. They were well known in the design circles in Chicago where this company was born out of, and so they understood what it would take.

We did this case in 2007, but the company was founded in 2001. So this is before Facebook, before Twitter, before we believed that this social web was going to take off. They had built, basically, a Facebook for designers. So I think, certainly at the time of the case, you had to have been from the community to be able to survive and do well.

BK: Yes, and they used social tools early on. They were blogging. They were using Flickr. They were allowing the community into their lives.

KL: Exactly. A big part of the case is: how do you manage your community, right? What we learned in our discussion is transparency matters. Transparency matters both ways. The community has to feel like you are being transparent about the ways in which you are operating the company, the ways in which you are shepherding the community itself. The way they were transparent is through blogging. They created a blogging platform for themselves, but also for the rest of the community. They were fast embracers of YouTube and of Flickr at the time to say, “This is who we are as a company, this is how we are part of you.” And there’s a telling line in the case, where one of the founders says that the community will outlast Threadless.

BK: Yes, it’s not about the t-shirts, in other words.

KL: That’s right, exactly. I have a lot of discussion in the classroom about what this company is. Is it a t-shirt company? And what people realize is no, the t-shirt is just a representation of the community. It’s the community and the platform that they have created for the community to interact which is the business. Value creation is happening through enabling the community transactions through design, through people learning about the designs, through collaborating on designs, through voting on the designs. Value capture happens through the transaction of somebody buying a t-shirt. So it’s very much a social company, a community company that tends to make money through t-shirts, but that’s almost a byproduct.

It’s a very flat, decentralized company. What you realize is that these were the prototypical Silicon Valley workers that we’ve now come to celebrate at Google and Facebook. But these guys were already living that part, where they said designers—the quintessential knowledge workers need to be able to have autonomy, self-expression. They would create those functionalities in their workspace and allow them to flourish. But then everybody, from warehouse workers to the designers they hired, to everybody else, would also participate with them in this way.

BK: So could this be replicated someplace else? It’s magic ingredients that are here?

KL: Yes. I think in many ways the most remarkable thing that’s happened in the last two decades has been that the world of software has changed completely, where now community-based software development has become one of the most established ways in which a company can create software. From Google, to Facebook, to even now Microsoft— they are all doing open-source software development. In the world of software and the world of content, if you think about Wikipedia—that also has become highly community-based. What we’re seeing now more and more of is other companies saying, “How do we take elements of communities and bring it into our own firms?” The big switch that we see happening is that even for physical products—we thought of physical products as being things that had to happen in the material world, but now we can replicate physical products in the digital world. So we’re seeing this kind of world take off now, where we can now take physical designs, represent them digitally. And then once you have that as a digital object, then you can unleash all of these community aspects there as well.

BK: And the competition is no small part of this, right? People kind of like that. It’s almost like game-ification?

KL: Yeah. So a big question that we often get asked is: why would anybody do this? Why would people spend time creating designs? And when we talked to the designers, on average they were spending between 25 to 40 hours coming up with a good design.

BK: Wow, that’s a lot of time.

KL: Which is a big investment, right? What we have discovered in our research has been that there are three categories of motivations that drive people to participate. Some people do it just for what we call extrinsic motives. They do it because they might win the cash prize, or they might get famous. Then there’s a set of people that basically do it because it’s so much fun, right? So intrinsic motives, and people just enjoy the fun, the benefits of doing the activity for itself, other than any other reward. And the third bucket of motives we’ve seen has been what we call pro-social motives, people who do it for the belonging, for the identity because they feel like I’m a designer. So these three buckets show us that this phenomenon is actually pretty robust because people can come in for whatever reason they have, intrinsic, extrinsic, pro-social, and the platforms enable that to happen, and then the work gets done.

BK: So let’s go back to the dramatic moment in the case, which is—really comes up when this offer is put on the table. And you’ve got some great video of the three principals talking about the pros and cons of doing this. There are some big decisions they have to make that have big implications for the brand.

KL: Yes. So I think—I’m not going to reveal what they did. But again, the question is: you are a half a million strong community platform. You are selling 1.5 million shirts a year, about $24 million in revenue, right? Big retailer shows up and says, “We can go national. We can have the t-shirts everywhere.” Do you take it or not? And the question for them is: when do you grow the community versus when do you just go for the sales? This becomes the dilemma in the case because on the one hand they could easily triple or quadruple their revenues by going to this large retailer. On the other hand, you have a hipster t-shirt that only a few people wear and know about. Do you really want it at every mall in America?

BK: Karim, thank you so much for being on the show.

KL: Thanks for having me.

BK: You can find the case, “Threadless: The Business of Community” in the HBS case collection at HBR.org. You can find more episodes of Cold Call on iTunesU or SoundCloud and you can follow us on Twitter at #Coldcall. I’m Brian Kenny. Thank you for listening to Cold Call, the official podcast of Harvard Business School.

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Threadless: The Business of Community

Brian Kenny: If you’re wearing a t-shirt right now, you’re not alone. With over 2 billion units sold a year, t-shirts are the most popular apparel items in the world, racking up sales in excess of $40 billion a year in the U.S. alone, according to Wired Magazine. Today we’re talking to Professor Karim Lakhani about one t-shirt retailer who literally built their business around community engagement, in the case entitled, “Threadless, the Business of Community.” I’m your host, Brian Kenny and you’re listening to Cold Call.

Professor Lakhani specializes in the management of technological innovation and firms and communities, and he’s one of the leaders of our school’s Digital Initiative. Karim, thanks for being here.

KL: Great to be here, Brian.

BK: So I want you to start by setting up the case for us. What is Threadless about?

KL: I came across Threadless when I was a doctoral student, researching this phenomenon of communities. Being a graduate student, all you do is wear t-shirts. And I said, “Well this is interesting. This is a community based t-shirt company where all of the designs for the t-shirts come from the community. The community also votes and then they print the best ones.” They were making money really well. So I signed up to the website and I started to vote on t-shirt designs. When I moved over to HBS to become a professor, the case method was front and center. I thought this—focusing on this company and how this company works with their community to both innovate, to generate innovations, to select innovations, to now even fund innovations—was just a fascinating way for us to be able to explain my research to a general audience.

BK: You chose to do it in kind of a non-traditional way. This was a multimedia case.

KL: Yes, the case is a really fun multimedia case, where you get to sense the community, but also the company and how quirky the company is, how edgy the company is and how great the founders and the employees of the firm are as well.

BK: So this case takes place in 2007. That’s the point in time and the company has gone through rapid growth. Just talk a little bit about the context that they’re in when the case takes place?

KL: All of our cases have a managerial dilemma. This case has a dilemma around growing like crazy. They’re doing really well. And a large retailer, let’s call them Bull’s-eye Corporation, has shown up and said, “We want to take your shirts and make them available nationwide, through our retailer channels.” The case puts the students, the participants in our discussion to say, “How should you, as an owner of a company, think about this kind of an offer in front of you?”

BK: So how do they make money? What’s the business model? They have their community making the product and buying the product.

KL: Yes, it’s great. The simple thing about Threadless is that they have now more than 2 million members signed up. At the time of our case, they had about half a million members signed up. And these members would submit t-shirt designs on a daily basis. So every week they would get about 800 design submissions. Now if you start thinking about this—no company can, by themselves, absorb that many design submissions and be able to sort and select amongst them. So then what they do is they ask their community members to also vote on the design submissions. They get a good signal about what their current customers will want to buy. Every design goes up for voting for a week and then basically they take their top 100 designs. They curate a bit more themselves, and then they print seven new designs per week.

It’s quite amazing. It’s this rapid clip of new designs being submitted on a weekly basis by people around the world. People around the world then vote on those, and then they get to pick and choose the best ones to feature and then sell. And the way they make money is the winner of the design gets $2,500 in cash prizes, as well as other additional incentives. They give the rights of that t-shirt design to Threadless to then resell, and then Threadless makes money by selling them to everybody else.

BK: It sounds too good to be true. What is the downside to this?

KL: Well, I think there are many downsides. All of a sudden now, instead of having five designers working for you, you have a city submitting designs, a city voting on the designs. You have to be able to learn how to manage the community, learn how to grow it, how to manage it, how to sustain it, and to deal with a whole range of issues, from theft of designs to people getting nasty on the user forums.

BK: Can you talk about the leadership aspect, too?

KL: Yes. One of the questions that comes up when we do the case is: can anybody do this? In many ways, my research is trying to provide sort of the scaffolding for us to understand how these companies work, how these platforms work. But one of the things that is unique about Threadless is that the founders came from the community themselves. They, themselves, were designers. They were well known in the design circles in Chicago where this company was born out of, and so they understood what it would take.

We did this case in 2007, but the company was founded in 2001. So this is before Facebook, before Twitter, before we believed that this social web was going to take off. They had built, basically, a Facebook for designers. So I think, certainly at the time of the case, you had to have been from the community to be able to survive and do well.

BK: Yes, and they used social tools early on. They were blogging. They were using Flickr. They were allowing the community into their lives.

KL: Exactly. A big part of the case is: how do you manage your community, right? What we learned in our discussion is transparency matters. Transparency matters both ways. The community has to feel like you are being transparent about the ways in which you are operating the company, the ways in which you are shepherding the community itself. The way they were transparent is through blogging. They created a blogging platform for themselves, but also for the rest of the community. They were fast embracers of YouTube and of Flickr at the time to say, “This is who we are as a company, this is how we are part of you.” And there’s a telling line in the case, where one of the founders says that the community will outlast Threadless.

BK: Yes, it’s not about the t-shirts, in other words.

KL: That’s right, exactly. I have a lot of discussion in the classroom about what this company is. Is it a t-shirt company? And what people realize is no, the t-shirt is just a representation of the community. It’s the community and the platform that they have created for the community to interact which is the business. Value creation is happening through enabling the community transactions through design, through people learning about the designs, through collaborating on designs, through voting on the designs. Value capture happens through the transaction of somebody buying a t-shirt. So it’s very much a social company, a community company that tends to make money through t-shirts, but that’s almost a byproduct.

It’s a very flat, decentralized company. What you realize is that these were the prototypical Silicon Valley workers that we’ve now come to celebrate at Google and Facebook. But these guys were already living that part, where they said designers—the quintessential knowledge workers need to be able to have autonomy, self-expression. They would create those functionalities in their workspace and allow them to flourish. But then everybody, from warehouse workers to the designers they hired, to everybody else, would also participate with them in this way.

BK: So could this be replicated someplace else? It’s magic ingredients that are here?

KL: Yes. I think in many ways the most remarkable thing that’s happened in the last two decades has been that the world of software has changed completely, where now community-based software development has become one of the most established ways in which a company can create software. From Google, to Facebook, to even now Microsoft— they are all doing open-source software development. In the world of software and the world of content, if you think about Wikipedia—that also has become highly community-based. What we’re seeing now more and more of is other companies saying, “How do we take elements of communities and bring it into our own firms?” The big switch that we see happening is that even for physical products—we thought of physical products as being things that had to happen in the material world, but now we can replicate physical products in the digital world. So we’re seeing this kind of world take off now, where we can now take physical designs, represent them digitally. And then once you have that as a digital object, then you can unleash all of these community aspects there as well.

BK: And the competition is no small part of this, right? People kind of like that. It’s almost like game-ification?

KL: Yeah. So a big question that we often get asked is: why would anybody do this? Why would people spend time creating designs? And when we talked to the designers, on average they were spending between 25 to 40 hours coming up with a good design.

BK: Wow, that’s a lot of time.

KL: Which is a big investment, right? What we have discovered in our research has been that there are three categories of motivations that drive people to participate. Some people do it just for what we call extrinsic motives. They do it because they might win the cash prize, or they might get famous. Then there’s a set of people that basically do it because it’s so much fun, right? So intrinsic motives, and people just enjoy the fun, the benefits of doing the activity for itself, other than any other reward. And the third bucket of motives we’ve seen has been what we call pro-social motives, people who do it for the belonging, for the identity because they feel like I’m a designer. So these three buckets show us that this phenomenon is actually pretty robust because people can come in for whatever reason they have, intrinsic, extrinsic, pro-social, and the platforms enable that to happen, and then the work gets done.

BK: So let’s go back to the dramatic moment in the case, which is—really comes up when this offer is put on the table. And you’ve got some great video of the three principals talking about the pros and cons of doing this. There are some big decisions they have to make that have big implications for the brand.

KL: Yes. So I think—I’m not going to reveal what they did. But again, the question is: you are a half a million strong community platform. You are selling 1.5 million shirts a year, about $24 million in revenue, right? Big retailer shows up and says, “We can go national. We can have the t-shirts everywhere.” Do you take it or not? And the question for them is: when do you grow the community versus when do you just go for the sales? This becomes the dilemma in the case because on the one hand they could easily triple or quadruple their revenues by going to this large retailer. On the other hand, you have a hipster t-shirt that only a few people wear and know about. Do you really want it at every mall in America?

BK: Karim, thank you so much for being on the show.

KL: Thanks for having me.

BK: You can find the case, “Threadless: The Business of Community” in the HBS case collection at HBR.org. You can find more episodes of Cold Call on iTunesU or SoundCloud and you can follow us on Twitter at #Coldcall. I’m Brian Kenny. Thank you for listening to Cold Call, the official podcast of Harvard Business School.

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