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Case study: Zappos

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By Winter Nie and Beverley Lennox

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Since the online shoe retailer was founded in 1999, the Zappos brand has extolled its “wow” customer service positioning and a distinct corporate culture.

The challenge.

Tony Hsieh, the chief executive, became a multimillionaire at 24 when he sold a start-up he had co-founded to Microsoft for $265m. After joining Zappos as an adviser and investor, he eventually became chief executive. When Mr Hsieh got involved in 1999, annual gross sales were $1.6m. He had two goals for the first 10 years: reach $1bn in annual sales and get on the list of best companies to work for.

Culture rules.

For Mr Hsieh, company culture came first in order to maintain passion and excitement.

The Zappos culture was shaped by 10 core values on which it hired and fired. While Zappos had a playful side, with values such as “create fun and a little weirdness”, it pushed performance just as hard with values such as “do more with less”, and “deliver ‘wow’ through service”.

Zappos also had an unusual recruitment process involving two interviews – one to assess fit with the job and another to assess cultural fit with the company.

All successful recruits had the same five-week training, including two weeks on the phones in the call-centre. Topics included the emphasis on customer service and the philosophy behind company culture. Everyone was offered $2,000 to quit as a test of enthusiasm.

Clear communications.

Transparency in dealing with employees, suppliers, investors and customers was a central tenet. In late 2008, Zappos shed 8 per cent of its workforce. Rather than spinning it as strategic, Mr Hsieh sent a detailed e-mail to staff on what was happening and why. He also put the e-mail on his blog so even outsiders had access to the details at the same time.

Mr Hsieh viewed culture- building as an investment. The values, benefits and freedom that went with it had resulted in a high-energy workplace. Customer service calls could take an hour, but that was considered as a marketing expense because customers who had a good experience would tell friends.

Adapting the service model.

Customer service was a core element of the culture. Its free-call number, free shipping and returns, 365-day return policy and 24/7 availability also set it apart. Zappos employees had no scripts or call-time metrics, and were empowered to take action to make customers happy.

Initially, Zappos relied on a “drop-ship” model, whereby the supplier sent the shoes to the customer directly on receipt of information from Zappos, but orders were too often delayed or lost. So Mr Hsieh switched to an inventory model and invested in a distribution facility, which greatly helped Zappos deliver on its brand promise.

Another success factor was its relationships with vendors. Zappos built collaborative partnerships and shared information with vendors in an open and transparent way. They were able to see inventory levels, sales and profitability, and they helped Zappos plan its business and made sure they had the right product at the right time.

The results.

By 2008, the company hit its goal of $1bn in gross sales and in 2009 Fortune magazine ranked Zappos 23rd on its list of the best companies to work for. Zappos expanded into clothes and other categories where customer service could be a differentiator.

Then Zappos was sold to Amazon in late 2009 for $1.2bn. Mr Hsieh reassured employees and others that it would be business as usual. Today, Zappos still operates as an independent entity with its brand and culture intact.

The lessons.

The combination of corporate culture, customer service and supply chain make Zappos stand apart.

The organisation lives and breathes customer service, which stems from its unique corporate culture.

Zappos understands it must recruit people who can deliver customer service. As well taking care to hire the right employees, it provides every recruit with the same basic training.

It not only focuses on customer experience at the front end, but delivers its promise from the back end. It changed its business model from asset-light to fixed-asset investment to deliver its promised “wow” experience.

The writers are, respectively, professor of operations and service management and a researcher at IMD