The Weird World Of Economics

Weird T-Shirt Economics

By Steve Johnson, Chicago Tribune

Sep. 10--We'll start with a simple premise. Ninety-five percent of adults have all the printed T-shirts they will ever need.

Yet a Chicago company is selling tees out of a Northwest Side building at a rate that would make an MBA's head spin.

Last year, Threadless, by its own account, sold $6.2 million worth of these wardrobe add-ons, its fourth year in a row of, roughly, quadrupling sales. This year, the three twentysomethings who run the company expect to at least triple last year's numbers, pushing stylized, often ironic, one-of-a-kind designs with names like "Rainbow Worrier" and "Hypotamoose."

They're moving in September into their third new headquarters in as many years, a journey up and down Ravenswood Avenue that has seen their space grow from an apartment desktop to their current 8,000 square feet to the new office's 25,000. Most of that is for the stacks of shelves lined with T-shirts, but there's also room for a pool table, a ping-pong table, a podcast booth, video-game consoles and other employee perks.

They've been featured in national magazines and their T-shirts worn by both indie rock bands and actor Zach Braff in an episode of NBC's "Scrubs."

They've done it with only a couple of minor forays into conventional advertising and none into mainstream selling channels, although both Target and Urban Outfitters have come calling, they say, and were sent away without any Threadless tees.

When you consider that a quality T-shirt costs about $4 to print and that Threadless is selling them for $15, that's when the MBA serving as a junior brand manager at a cereal company starts to wonder about her career path.

That doubt only increases when she learns the guys behind Threadless-Jake Nickell, Jacob DeHart and Jeffrey Kalmikoff-aren't MBAs. They're all college dropouts from the suburbs-Kalmikoff is the oldest at 27-who used the connective power of the Web, their design and programming experience and an innate sense of what their peers like to turn a good idea into a great business.

That idea: Conduct a running on-line T-shirt design competition. Take the winning designs and print them on a limited number of shirts, as many as six new designs every week. Sell the shirts to the people who voted (and anyone else on the mailing list or who visits the site). It's virtually no risk and, if you can build a community of users as large and loyal as Threadless', very high reward.

Yet they sound, still, a little surprised at how the business has taken off. "It's gonna sound weird, but I never really felt like what we were doing was a legitimate business," says Kalmikoff, a Buffalo Grove High School graduate in aggressive, clear-frame glasses, whose duties in the trio tend toward design, marketing and, especially, talking. "We were just doing what we thought made sense and what we were comfortable doing.

"I certainly don't look at us and think we're business gurus or anything like that. I just think that we were, like, champions of common sense."

But probe a little deeper and you find they have this innate understanding that what they are really selling isn't a T-shirt so much as the tale of how it came to be, a narrative that involves an artist, a community and a company that sets itself among, rather than above, that community.

"I always compare it to an art gallery," says Nickell, who's 26 and holds the title of president because, in addition to programming the site with DeHart and doing designs of his own, he deals with the lawyers and accountants and landlords. "You have people who come in and look at the art, people who made the art, people who are buying the art."

They've got some 300,000 mailing-list members, a healthy proportion of whom are active participants in the conversation and the voting on the Web site. Companies seeking the youth market come courting, and sometimes Threadless agrees to play with them in an ongoing cross-promotional campaign called "Threadless (heart)s" a new movie or a band.

They fly around the country and the world, speaking at conferences on Web business and Web design, so much so that they decided to scale back because they were spending too much time talking about what they do and not enough actually doing it.

At the South-by-Southwest Interactive festival this spring, an adjunct of the famous Austin, Texas, music festival, they were rock stars in their own right, nearly filling a large conference room for their presentation.

In some ways, the Threadless success is a story about the current cultural moment. Microbrands like theirs are everywhere, catering to a youth culture that shudders at being marketed to and collectively threatening the dominance of the major players. In the computing world, the open-source movement-allowing users to modify and improve upon the software and Web sites they use-has put a scare into the likes of Microsoft.

But the Threadless success is also a story about the Internet, which links people not by geography or ethnicity but by common interest, in their case an interest in T-shirts and designs so passionate that 150 new submissions are e-mailed in daily. It's a more specialized version of the same phenomenon that has seen YouTube and MySpace, sites that also rely on user-created content, grow into two of the Web giants in recent months.

"We could go buzzword crazy and talk about the wisdom of crowds and all that sort of thing," says Jim Coudal, whose Chicago firm Coudal Partners evolved, like Threadless, from a traditional Web design company. "They're not building something and selling it to an audience. They're building an audience and selling them what they say they want."

Coudal boils the Threadless idea down to a slogan that might work on a T-shirt: "If they come, we will build it."

The Internet has also helped Threadless find and take advantage of the world's "distributed creativity," in the words of economics professor Frank Piller. Just as there are great writers who now have an outlet via blogging, there are great designers who have an outlet via things like the Threadless competition.

Distributed creativity "is a very difficult thing to get," says Piller, who studied Threadless and last fall brought the trio in as headliners at an MIT Sloan School of Management conference. "In a normal company, you identify the coolest artist and commission him or hire him. What they do is they broadcast their problem: Who makes me the best T-shirt? From an economic point of view, you don't have to know who is the best person. You let them self select.

Of course, it only worked because, in their case, they have a lot of desperate artists out there. You have a lot of unemployed graphic design graduates. And they somehow exploited this, but to mutual benefit."

There's a business theory for this, of course, or a combination of theories. Piller, a German on leave from his Munich university to work at Sloan, describes it in his blog as "Threadless.com-when mass customization meets user innovation meets on-line communities."

Their chosen canvas, the T-shirt, is also key, says Patric King, a prominent Chicago designer whose firm, House of Pretty, designed the Gawker Media blogs (Gawker, Defamer, Wonkette and others).

"T-shirts are such a fantastic medium," King says. "They're this instant sort of disposable notion of your own identity and you can change it at any moment.

"What [Threadless is] doing is just sort of building the wearable equivalent of the pop song," King says. "They throw it up and see what climbs up the Top 40. I've run across a couple of other companies trying to do the same thing, but the work's just not as good. For some reason they just get prettier stuff. Their community has just sort of trained themselves that that's their standard."

Threadless doesn't have a store, just a digital storefront supported by a weekly e-mail. And on the Web a 16-year-old wannabe designer from Tokyo is on equal footing with a disenchanted ad-agency artist from New York City. Either one has an equal chance to win. Either one gets the $2,000 Threadless is currently paying its winners, $1,500 of it in cash (a fair price for freelance work, King says, especially for the younger designers who gravitate to Threadless).

Talk to even some Chicago Threadless devotees and they don't realize where the business is located. Kalmikoff himself didn't realize it, he says, until he tried to return an item, back before he joined the company. He assumed it was a California outfit.

When the company turned down the bricks-and-mortar stores a couple of years back, it was partly because they thought it would ruin their credibility with their young, verging-on-hipster audience.

"Certainly, if we're the company created by the MBAs and if you're straight business-oriented and your idea is money, then there's your goal. There's your brass ring," Kalmikoff says. "Target wants us. High five. Let's go out and buy our house. Like, we're done. But it does nothing for the longevity of the brand.

"If we worked with Target, I would give us an 18-month lifespan. Target would become our biggest customer. They would buy, like, 1,800 gajillion shirts and then we would be looked on as a Target brand, and all that story of how the designs got to the T-shirts, nobody would care about it."

That's the noble version of the story. Another version has something to do with the amount of paperwork working with a big chain requires and the fact that Threadless, then, was still a side project in a parent company, skinnyCorp, that designed and built Web sites for outside clients.

"It certainly doesn't hurt our PR when we go to speak and stuff like that to say, 'Yeah, we turned down Target. We turned down Urban,' " Kalmikoff says. "But honestly, a little bit of it was laziness. We were like, 'Well, who's gonna fill out all this paperwork? I'm not doing it. Are you gonna do it?' It just sat for like two weeks. Then we're like, 'Just tell 'em no.' We couldn't take the time away from our client work for our side project to be filling out the paperwork to get into Target."

Threadless was born when DeHart, a Maine West graduate who was attending Purdue University, and Nickell, who went to high school in Crown Point, met in an on-line design community called Dreamless.

They became friends and, when Dreamless held a competition within the community to create a T-shirt for an upcoming event, Nickell and DeHart submitted a design. It won, and although Nickell never got a copy of the T-shirt that was printed, it did spark an idea.

He was working for a company building very expensive E-commerce Web sites and thinking he could do the same for himself. "I just needed to come up with something to sell," he recalls. He had long been into both computers and design, putting up colorful, and illicit, graffiti flourishes on walls around Crown Point.

"I was so into Dreamless," Nickell says. "And winning that competition, I learned that artwork can be put on a T-shirt very easily. It seemed to me like something that never really goes out of style. Everyone has T-shirts in their wardrobe."

So first on Dreamless, then, beginning in November 2000 on their own site, they started soliciting designs. They took $500 each of their own money and printed up a first batch of shirts, sold them, plowed the money back into the next batch, and so on.

Meanwhile, Nickell started his own company and DeHart, now 25, quit college to, soon after, join him. The real business, they thought, was the Web design firm, tagged skinnyCorp because Nickell is not a behemoth.

Threadless "was just gonna be a hobby. We thought it would be self-sustaining" and bring in a little extra money, DeHart says.

They met Kalmikoff a couple of years later. After attending both New Trier and Buffalo Grove, he had dropped out of Arizona State University to come back to Chicago and become a night club deejay. While pursuing that, he found he could get bookings if he made the fliers for events, and soon his fliers got him noticed.

He got design jobs in Chicago, got laid off, went freelance, and joined Threadless/skinnyCorp after sharing office space with the Jakes. (For all practical purposes, the three seem to function as a partnership, but Nickell and DeHart retain ownership.)

It wasn't until 2004 that they realized Threadless had become the engine, and they dumped the idea of doing client work, turning, essentially, the Threadless community into their client.

"I would love to say we were smart enough to mastermind what was going on with the community," Kalmikoff says. "It happened on its own. Then we saw it happening and we made sure we were nurturing it. A lot of things we do isn't so much about innovation as just, like, awareness and support."

That's not easy to do, says Patric King: "I've seen communities go down in flames because the owners wanted one thing while the audience became another. It's like hosting an open party with no real control over who shows up."

They found, though, that a lot of it was just about being themselves and communicating that to their site users. "They couldn't be more unassuming, couldn't be nicer guys," Coudal says, "and they really understand, I think, the sort of vibe of community-based businesses. There's no secrets in what they do. That sort of transparency, the conversational voice, is a big part of their success. Plus they have great taste."

Piller, the economics professor, studied Threadless over a period of a year. What convinced him they were for real, he says, was a moment at the MIT conference: "At 9 p.m., they said, 'We have to go.' " They had posted that they would be at a local pub to meet with their customers.

"This is why they are also successful," Piller says. "This community is the only asset of this company."

Experts like Piller and Coudal and the Threadless principals think there's plenty of room for the T-shirt company to keep growing, and all agree they've done themselves a favor by keeping the Threadless logo low-key, on the inside label only, to avoid oversaturation.

Certainly there are millions of people out there who would like the products but don't know about them yet, and at its current scale, Threadless seems to have gotten past early logistical hurdles, like getting orders out quickly and efficiently. It now ships about 1,500 shirts a day-more than 60,000 in a typical, pre-holiday month-with a total staff of 20.

But there are also questions about how much growth a community can endure before it stops feeling like a community. Right now the site is a free-flowing and very entertaining mix of design submissions, which registered users grade on a scale of one to five, blog postings about the designs, links back to other projects and, of course, the store. In a recent week, Nickell says, they had almost 10 million page views from just 500,000 unique visitors.

Users get credit toward T-shirts if they send in photos of themselves wearing the shirts.

But already, some longtime site users grumble that as the group has grown, the designs have moved away from their artsy roots and become too cutesy, too clever or too pop.

The all-time best-selling Threadless shirt certainly isn't cute. Called "Flowers in the Attic," it depicts a svelte young woman shooting herself in the head, causing birds to fly out. The company has sold 30,000 already, compared to a typical first printing of 1,200 shirts, and is printing another 10,000 for the holiday sales rush.

When it showed up on the site recently, reprinted again, there was some grumbling on the Threadless blogs. But it was nothing compared to the controversy that came with the introduction of type tees-essentially slogans, such as "HONK if you are about to run me over."

"A lot of people will complain there's too many shirts that are food with faces on it or puns or '80s pop-culture references," says Cody Petruk, a graphic designer for a Canadian software company who owns "about 60" Threadless tees and has seen three of the 13 designs he's submitted get printed.

He's not among the grumblers: "Honestly, I'd prefer if they didn't print six amazing shirts every week, or I'd be broke. They print ones that teenagers and emo kids and scene kids like. So they throw a bone to everyone, which is cool."

Petruk also runs threadies.org, an independent site offering tips to designers on how to win the Threadless contest. He credits the company with trying to retain credibility with the design community by starting the Select line, $25 T-shirts that use a better shirt stock, more elaborate printing and designs from people who've been invited because they won the regular contest four or more times.

"Those are really design-heavy," says Petruk, 29.

There's also a new kids' tee line, but what the troika seems most excited about is Naked & Angry, a different kind of design competition that will result in a line of more upscale products. Designers submit patterns to a competition, and the winners will be printed on, essentially, whatever the company feels like making out of them.

First was a run of $125 neckties and the second product, a series of five wallpapers, just went up for sale. Furniture, tote bags, dresses or even T-shirts with a complicated, all-over print might follow.

"I'm really into just patterns," says Nickell. "Imagine going into a Dunkin' Donuts and getting a doughnut frosted with our pattern."

"I like to think of it as catering to the bling desires of our demographic," says Kalmikoff. "I would never look at our audience and say they only like T-shirts. People have to get dressed up sometimes. They like to have nice houses. It's still high-quality designer items that are based on the same model as Threadless.

"We're not sure what's going on with Naked & Angry yet but we know it has the potential to be really big. So right now we're just taking it slow . . . Threadless is essentially like our internal little venture money, because it, like, pays for everything."

Also on the skinnyCorp list of sites are 15 Megs of Fame, which applies the Threadless model to rock bands but does not seem to have caught fire so far, and Extra Tasty, which is trying to build a community based on cocktails.

There's even IParkLikeanIdiot.com, which grew out of their frustration with people who do just that. Users buy a pack of bumper stickers (easy-peel, to be sure) that they can affix to offending cars, then send in the photos to the Web site.

The partnership seems to function smoothly and Kalmikoff says he considers Nickell and DeHart his best friends. He tells a story of being at a Copenhagen business conference with them that, perhaps, illustrates why they've made a go of things. "This is like the ultimate nerd story," he says. "This is our second-to-last night in Copenhagen and the three nerds decide to order a bottle of Jack Daniel's and teach me how to program rather than going out. We're sitting in this super-nice hotel, this suite, this gigantic room overlooking Copenhagen. It's beautiful and what do we decide to do? It's like, kill a bottle of Jack Daniel's and write code."

But change is also afoot. DeHart is getting married next year and moving to an Oak Park house he and his future wife are redoing. Nickell, who is already married (his wife, Shondi, runs the Threadless back room, where orders are filled), has property near Boulder, Colo., and is designing a house there. He plans to move in a couple of years when the house is ready and telecommute. Considering that DeHart calls him "definitely the president," holding it together at a distance could be a challenge.

But they are moving to bring in some professional help, one of the first jobs for which they probably won't hire old high-school buddies or people from the community of users and designers.

They expect to advertise soon for a chief operating officer. The standing joke is that the one job requirement will be "No T-shirts." The winning candidate will have to wear a suit so that he or she will be, literally, "the suit."

How to Print T-Shirts for Fun and Profit!

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Copyright (c) 2006, Chicago Tribune

posted by UncommonBusiness @ 9:36 AM