Putting the customer in charge
Clever startups aren't just listening to their customers - they're letting them run the store.
By Om Malik, Business 2.0 Magazine senior writer

SAN FRANCISCO (Business 2.0 Magazine) - Every company claims it listens to feedback from customers. But some startups are turning their customers' ideas into the basis of their business.

At the online T-shirt emporium Threadless, shoppers suggest, rate, and buy T-shirt designs from other users. Online retailer Etsy provides a platform for users sell their handicrafts on its website, and lets customers vote on which products should be featured on its homepage. And electronics maker Slim Devices plans to let customers sell their own open-source software and even add-on accessories for its digital music gear.

By definition, these companies are selling precisely what consumers want. "It's the open-source software concept applied to product marketing," says Georg von Krogh, a professor of management at Switzerland's University of St. Gallen.

But where open-source programmers donate code for fame rather than fortune, these companies often reward customers with cash for contributing ideas.

Grassroots product development

"I think the reason we are seeing this approach to business bubbling up is because technologies are now allowing people to create things for themselves very cheaply," says von Krogh. "And the Internet is allowing people to connect. Smaller companies are leading the way."

On some level, Brooklyn-based Etsy works like eBay (Research); the Website allows sellers to list their wares and takes a 3.4 percent cut in return. But it relies on users' votes, rather than the choices of an eBay category manager, to determine how products get displayed.

In less than a year, the company has attracted 10,000 sellers and about 40,000 buyers - growth that was impressive enough for Etsy to attract a round of seed funding last week from Flickr co-founders Caterina Fake and Stewart Butterfield, Del.icio.us founder Joshua Schachter, and Union Square Ventures.

The startup which may have truly mastered the art of putting customers in charge, however, is Threadless parent SkinnyCorp, which was founded in 2000 by Web designers Jacob Dehart and Jake Nickell. Dehart and Nickell have launched the T-shirt shop Threadless and a series of similar websites like Naked & Angry, which solicits fabric designs for ties; 15 Megs of Fame, an online music store; and Extra Tasty, which lets customers rate drink recipes.

Threadless is the template for SkinnyCorp's sell-it-yourself websites. A daily T-shirt design contest offers $750 in cash plus $250 in gift certificates for the winner. The winning design then gets printed up - typically in a run of 600 shirts - and is marketed for $15 a shirt to the Threadless customers who voted for it. If Threadless sells a complete print run, the company takes in about $9,000 a design, paying out $1,000 of that to the designer.

That may sound like small potatoes, but according to co-founder Nickell, revenue at Threadless hit $6.5 million last year, up from a mere $20,000 in 2000. And at least one winner has profited in other ways: Nickell hired Ross Zeitez, a prolific Threadless contest winner, as a full-time designer for the company.

"Our users have the ability to change the company whenever they want, because they make all decisions, from what we sell, and how much we sell," says Nickell. "We just shepherd the decisions of the community."

Slim Devices, a Berkeley, Calif.-based company that makes digital music gear, is learning that the customer-creator is always right, too.

Executives at Slim knew that its users were doing everything from tinkering with its products' open-source software to hiring themselves out as consultants to integrate Slim products into entertainment systems.

The company is planning an e-commerce site where coders can sell software add-ons, consultants can market their services, and hardware makers can sell accessories. Slim, meanwhile, will market these products and services and take a tiny slice of every sale.

Slim chief technology officer Dean Blackketter believes getting customers involved will eventually increase sales of Slim's own products. "The more we open up to our community," he says, "the more it helps us."

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.