9.41 Zappos.Com

Zappos.com is an online shoe and apparel shop. Founded in 1999, it grew to be the world's largest online shoe store, and was acquired ten years later by Amazon.com in an all-in deal worth around $1.2 billion.

Some 80% of Zappos sales comes from shoes: in 50,000 varieties (i.e. the long tail), including well-known brands, hard-to-find sizes, American-made and vegan shoes. A high-end line of shoes called Zappos Couture was launched in 2004.

Company Development

Zappos is often seen as the model online business: a novel concept, a fulfillment center built from scratch, a US online business that focused foremost on customers, giving them quality, choice and free shipping, and then expansion of the business through the latest in manufacturing and supply management.

From a quiet start, Zappos grew rapidly.

1999. The company was founded by Nick Swinmurn. Tony Hsieh and Alfred Lin then put in $500,000 from their investment firm Venture Frogs. The company launched in June 1999 as ShoeSite.com, changed a few months later to Zappos so that other goods could be sold. The result was minimal sales, however.

2000. More investment from Venture Frogs, who also provided office space. Sales were US$ 1.6 million.

2001. Zappos opened their own fulfillment center in Kentucky. Hsieh and Zappos executives set long-term goals for 2010: $1 billion in sales and inclusion on Fortune's list of The Best Companies to Work For. Sales quadrupled to US$ 8.6 million.

2003. Zappos abandoned drop shipping (accounting for 25% of revenues) to have more control over the customer's experience. Sales were US$ 70 million.

2004. Zappos received $35 million dollar investment from Sequoia Capital, and a $40 million credit line from Wells Fargo Bank. Sales were US$185 million.

2007. Merchandise was expanded to include handbags, eyewear, clothing, watches, and kids' items. Sales in 2007 were US$ 840 million.

2008. Zappos sales were US$ 1 billion.

2009. Zappos was listed at No. 23 on Fortune's Top 100 Companies to Work For. By mutual consent, Zappos was acquired by Amazon. Zappos share-holders received 10 million Amazon.com shares and $ 940 million for their Zappos shares; the employees a separate $40 million in cash: a deal of around $1.2 billion in all. Amazon acquired a company with better (though still slim) operating margins {13}; Zappos got funds and technology for expansion while retaining full control of its brand. {11}

2010. Zappos continued to expand with brand name unchanged {14}, and announced a move to new headquarters.

2011. Zappos were to hire 2,000 employees (seasonal and full-time), up from 2,800 currently employed.{21}

2012. Tony Hsieh diversifies into urban regeneration. {22} {23}

2013. Moves to $350 million-regenerated downtown Las Vegas site. {24}

Business Model

Zappos have been successful by:

1. Knowing their customers and fulfilling their needs. 75% are repeat buyers.
2. Providing value for money: not necessarily the cheapest, but quality brands backed by excellent service.
3. Concentrating on high-ticket items with good margins. Average order on Zappos is around $100 and gross margins on shoes are about 50%. {2}
4. Offering free shipping, even for returns (return rate may be 30%) {7}
5. Developing a strong online brand.
6. Maintaining a friendly, caring appearance, through training at all levels and a presence on Twitter, Facebook and YouTube. {9} Usual advertising spend was invested in stellar customer service.

Employees are chosen carefully, for aptitude and personality. Zappos publishes an annual 480-page Culture Book, comprising unedited 2-3 paragraph entries from employees describing their understanding of the Zappos culture. All undergo call-center and loyalty training courses, and are later tested by being offered $2,000 to quit: only 3% accept the offer. {5}

Employees enjoy free lunches, no-charge vending machines, a company library, a nap room, and free health care. They are encouraged to personally decorate their offices and to take part in office get-togethers. Managers must spend 10-20% of their hours 'goofing off' with employees outside the office.

Zappos has grown by search engine marketing {1} and word-of-mouth recommendation. It has spent little on advertising otherwise, but did acquire 6pm.com, a company selling bargain shoes, clothing, and accessories in 2007.

Zappos also runs Zappos Insights, which helps business people refine their company culture and customer service with videos and a two-day bootcamp where participants visit the headquarters and meet with Zappos executives.

Points to Note

1. A traditional, service-focused online company of the outside-in pattern.
2. Progressive, successful company, but margins remain thin. {7} {12}

Questions

1. What was the Zappos business model?
2. How did Zappos grow its business?
3. Why was Zappos sold to Amazon? What did each party get from the sale?

Sources and Further Reading

1. Why shoes are great for e-commerce . . . yes, really —a Zappos case study by Nisan Gabbay. Startup Review. September 2006.
2. How I Did It by Tony Hsieh. Inc. 2006.
3. Zappos New Business Model: Have Insight, will Respond by Gord. OutOfMyGord. December 2008.
4. Zappos wants you to return those shoes by Seth Godin. Seth Godin. April 2008.
5. Why Zappos Pays New Employees to Quit—And You Should Too by Bill Taylor. HBR. May 2008.
6. Zappos Core Values. Zappos. 2009.
7. Kevin Hillstrom's Comments on Zappos P&L Statement. MinethatData. 2009.
8. When you buy Zappos, what do you buy? Seth Godin. July 2009.
9. The new social engagement by Soren Gordhamer. Mashable. April 2009.
10. Zappos CEO Tony Hsieh: Customer Focus Key to Record Sales During Retail Slump. W P Carey. January 2009.
11. Zappos CEO's Letter to Staff. WSJ. July 2009. Tony Hsieh's letter after the shoe retailer agreed to be acquired by Amazon.com.
12. Why Zappos Shouldn't Be Your Business Model by Ari Ozick SEO Contrarian. November 2009.
13. The Details behind Amazon's valuation of Zappos. Development Corporate. July 2009.
14. Zappos to Hire 2,000 People in 2011 by Ben Parr. Mashable. November 2010.
15. Zappos. TopTenReview. 2011.
16. Why Is This Man Smiling? by Motoko Rich. NYT. April 2011.
17. Case study: Zappos by Winter Nie and Beverley Lennox. FT. February 2011.
18. A New Sales Model: Employees by Sarah Nassauer. WSJ. March 2011. Zappos' use of videos.
19. Zappos. Wikipedia.
20. Zappos. Company home site
21. Zappos to Hire 2,000 People in 2011 by Ben Parr. Mashable Business. November 2010.
22. The Zappos CEO is trading shoes for urban planning — and spending big bucks to rebuild downtown Las Vegas by Leigh Gallagher. CNNMoney. January 2012.
23. Zappos CEO buys motel, strikes deal to bring young talent downtown by Joe Schoenmann. Las Vegas Sun. March 2012.
24. Zappos.com makes Fortune’s list of best places to work by Richard N. Velotta. Vegas Inc. January 2013.