It started out as a hilarious prank at a stag-do and has morphed into a million-pound fancy-dress phenomenon. Tom Lamont meets the three Scotsmen who have given the world the mighty morphsuit

Not long ago, three friends from Scotland went out for drinks wearing brightly coloured costumes from Japan. It would prove a pivotal night of fancy dress.

The trio – brothers Ali and Fraser Smeaton, and their friend from Edinburgh University, Gregor Lawson – were skiing in Canada. They decided to hit the local bars wearing "zentai suits" – skin-tight Japanese leotards that covered them from head to toe. It was an idea Gregor had pinched from a stag weekend, where one of the attendees, newly back from Asia, had shown up in a vivid blue zentai. "Everyone wanted to buy him a drink," recalls Gregor. "I'd never seen anything like it."

In Canada, dressed up in zentai suits of their own, the trio were likewise admired. "The resort shut down, people were stopping us in the street," says Ali Smeaton. The friends wondered if they'd stumbled on a way to make some cash – perhaps fund next year's ski trip. "A bit of pocket money," says Ali. "We'd take something that existed, give it a name, change certain physical elements, bring it to the masses." One modification they decided on right away was that their version would be made of something more see-through. They'd been walking around virtually blind.

That was in early 2009. Today, the morphsuit (as the trio boozily agreed to name their product) is a multimillion-pound concern. A zip-up costume made of polyester and Lycra, all-enveloping so that the wearer looks like a featureless mannequin, the morphsuit has become commonplace at sporting events and stag nights, festivals and parties. It has also made unusual incursions into the world beyond. The day after bin Laden was killed, in 2011, Al Jazeera carried a photograph of an anonymous American celebrating outside the White House in a morphsuit patterned with stars and stripes.

The Smeatons and Gregor hear of barely credible use of their creation almost every day. In the first week of July there were morphsuits spotted at the European Championships in Kiev (where three Italian football fans in the red, white and green of il tricolore watched their team lose) and at the Olympic torch relay in Warwick (a lone man in an all-body union flag watching the flame pass). Police in Gloucestershire warned of a man acting suspiciously in a morphsuit in the Forest of Dean. At the same time, Ali, Fraser and Gregor – now in their early 30s, together known as AFG Media – made national news when they secured £4.2m in funding to expand their business. It already had a projected annual turnover of £11m.

I meet Ali and Gregor at the end of this busy summer week as they spend some downtime at the T in the Park festival in Kinross. They're here with a gang that includes Gregor's sister, Lindsay, and six mates. Despite heavy rain, all are loyally outfitted in morphsuits. Gregor is in the colours of the Scottish flag, his sister in zebra skin, while Ali sports a new model, black with fluoro hearts stamped in brassy places.

"It's liberating!" shouts Leila, one of the gang, dancing in one of the festival tents. She's never worn a morphsuit before today and pronounces herself thrilled. Richard, another morphsuit newbie and today in a dinner jacket-patterned variety, says: "No restrictions. If you like prancing around like a tit – ideal." Lindsay says that at last year's festival she kissed someone in her costume, "and for all he knew I could have been a boy".

They dance in a cluster. One of the girls – Renee, in leopard skin – drinks a beer through her mask. (The creators discovered by accident that the material was porous enough to drink through – "a really nice product benefit".) Another, Becky, in zebra stripes, explains that inside the suit "you feel magnified", also "like you're in your own little bubble". The contradiction probably explains something of the costume's peculiar appeal. Unidentifiable in all-covering Lycra, the wearer feels less accountable for what they do under the looks of others. And it makes a hell of a lot of people look.

A young woman in specs bounds over to ask where she can get a suit. Gregor has a spare, and sells it to her for a tenner. Online it would cost about £35, but the founders worked out long ago that a morphsuit on the dancefloor sells itself better than any advert could. Ali used to go out clubbing in costume with a bin-bag full of products to flog. They gave freebies to friends – branding stamped across the suit's buttocks, directing the curious where to buy.

Ten months after the launch, with the morphsuit selling well in Europe, America and Australia, the trio quit their day jobs. Two worked in marketing – Fraser for BT Broadband and Gregor for the Pringles crisp division at Procter & Gamble. (Gregor's brother is rugby union player Rory Lawson, his father is former Scotland scrum-half Alan Lawson.) Ali worked for Barclays in Dublin. "It was certainly interesting," says Ali, "resigning by saying: 'I'm off to sell one-piece Lycra.'" No doubt a timely move. Not long before, a mix-up involving an automated out-of-office email resulted in the head of Barclays Ireland being bombarded with morphsuit orders.

The trio had tried to launch a few online businesses before (a sports discussion forum was one), but this was the first to take off. A deal with American fancy-dress chain Party City pushed their revenue past £10m in 2011. They recently moved operations from the front room of Gregor's flat to a dedicated office in Edinburgh.

Growing profitability might explain their slight squeamishness about the product's name: nobody wants a lawsuit. I'd assumed morphsuits referenced the monochrome character in 1980s plasticine animation Morph. One of the gang on the dancefloor notes similarities to the outfits in 90s TV show Mighty Morphin Power Rangers. But "people morph into a more fun, outgoing version of themselves" is the official line.

Facebook has been key, the founders say. Fans upload pictures of themselves in morphsuits – competing for a spurious award Gregor cooked up called a "morph first". The reward for doing something innovative is a free suit, and in pursuit of this somebody toured the Galapagos Islands in the costume, another journeyed to Antarctica. The company currently has more than 1m Facebook fans.

Men, mostly. The gender ratio of their customers was something like 80:20 in 2010, prompting the founders to make efforts to widen their appeal. The morphsuit that Gregor has sold the girl on the festival dancefloor is pink. It has a tutu-like frill. The buyer is Kerry, 26, from Falkirk, and she decides she'll change into it right away. Ringed by the gang, she strips down to her underwear and steps into the suit. Kerry's friend Francesca, also 26, from Glasgow, watches. "I don't have the hips for it," she decides.

Kerry is trying to balance her glasses on her newly earless head. I shout above the music: what is it about the morphsuit that appeals? The anonymity, the thrill of looking distinct? "I'm smashed!" Kerry shouts back. She tries to put her shorts on over the costume and everyone shouts: "No, no!" So she leaves them off, and the morphsuit gang gather round for photographs. They've spawned.

The biggest-selling morphsuit, by a distance, is the black one. Gregor hopes customers opt for this colour because "it's the most slimming", or because they're going to parties dressed as ninjas. Nothing, he prays, more sinister. Though a person in a giant body sock will always be conspicuous, complete anonymity is provided by the face-covering mask. "We've had lots of people say, 'This is perfect for robbing a bank in,'" he admits. "Clearly that is something that I hope and pray will never happen."

That police alert about the troublemaker in the Forest of Dean was unintentionally amusing in its phrasing (the wanted man was officially said to resemble a Smurf), but there was something sinister about the sound of him "waving at women… running up to them" in cloaking blue. The morphsuit, its creators keep telling me, reduces personal inhibition. And if the anonymity it provides can make the shy dance, the wallflower open up, then perhaps it might tease out other suppressed behaviour.

So far, nothing serious. Mall cops in America have made shoppers take them off. European customers worried, apparently, when legislation targeting face-covering veils was introduced in France in 2011 (though the morphsuit, says Ali, was "clearly not what the French government were angling at").

I first heard about morphsuits when a young relative told me of the traditional end-of-term riot at his school. He and his friends had worn morphsuits in matching brown, an unidentifiable mass, before tearing around locking teachers in cupboards and throwing water balloons.

In all probability the biggest threat to the trade in morphsuits is not the product aiding post-exam wreckings in British schools, or even featuring in some daredevil bank robbery – but simply the novelty wearing off. It is getting harder for devotees to achieve one of those Facebook "firsts". Recently, a man posted a picture of himself in a morphsuit, sitting with a beer in the back of a caravan. Something about his body language told that even as he asked for a free suit he knew it was a bad claim.

"A lot of people say: 'This is a fad, it will pass,'" says Ali. He gives the example of the "mankini", popularised by Sacha Baron Cohen in his 2006 film Borat – yesterday's unitard. "We're not anywhere near that. America is a country of 400m people. Only 10% of our target demographic know what a morphsuit is."

The morning after T in the Park, I catch up with the gang as they breakfast at Gregor's family home. In the hall there's a box of stock – a new morphsuit design in white and red, also a witch and an alien. Gregor's mum, Linda, shows me a photograph of the time she was persuaded into a black morphsuit, for a hen party.

Richard, reviewing his first outing in the costume, says he got lots of positive comments, but that trips to the urinals were daunting. (It is not easy getting out of a suit without help unzipping.) Gregor shows me a photograph of a new innovation: a blow-up morphsuit, fitted with a small fan at the back so that it inflates to make the wearer look enormously fat. Earlier he'd told me about plans for Republican and Democrat morphsuits, on sale in time for the American elections. "We've so many ideas to come. It's our job to keep the buzz going."

Everybody eats, and Gregor's mum comes in with an armful of muddy morphsuits. Any more for the pile? She's going to wash them, ready for the gang's next night out.