Zappos case study questions and answers

Zappos: Delivering Customer Satisfaction *

INTRODUCTION

Can a company focused on happiness be successful? Zappos, an online retailer, is proving it can. The company’s revenue grew from $ 1.6 million in 2000 to $ 1.64 billion a decade later. Tony Hsieh, Zappos’ CEO says, “It’s a brand about happiness, whether to customers or employees or even vendors.” Zappos’ zany corporate culture and focus on customer satisfaction has made it both successful and a model for other companies.

This case examines how Zappos’ focus on stakeholder happiness contributed to its success. First, we examine the history of Zappos, its core values, and unique business model. Next, we analyze the company’s corporate culture and how it influences its relationships with employees, customers, the environment, and communities. We then look at some of the challenges the company faced and how it plans to move into the future.

HISTORY

Nick Swinmurn founded Zappos in 1999 after a fruitless day spent shopping for shoes in San Francisco. After looking online, Swinmurn decided to quit his job and start a shoe website that offered the best selection and best service. Originally called ShoeSite.com , the company started as a middleman, transferring orders between customers and suppliers but not holding any inventory (a “drop ship” strategy). The website was soon renamed Zappos, after the Spanish word for shoes (zapatos).

In 2000, entrepreneur Tony Hsieh became the company’s CEO. Hsieh, 26 at the time, was an early investor in Zappos, having made $ 265 million selling his startup company to Microsoft in 1998. Hsieh was not initially sold on the idea of an Internet shoe store, but he could not help but become involved. After becoming CEO, Hsieh made an unconventional decision to keep Zappos going, even selling his San Francisco loft to pay for a new warehouse and once setting his salary at just $ 24.

Zappos struggled for its first few years, making sales but not generating a profit. The dotcom crash forced Zappos to lay off half its staff, but the company recovered. By the end of 2002, Zappos had sales of $ 32 million but was still not profitable. In 2003, the company decided in order to offer the best customer service, it had to control the whole value chain—from order to fulfillment to delivery—and began holding its entire inventory. Zappos moved to Las Vegas in 2004 to take advantage of a larger pool of experienced call center employees. The company generated its first profit in 2007 after reaching $ 840 million in annual sales. Zappos started to be recognized for its unique work environment and approach to customer service.

In 2010, Amazon bought the company for $ 1.2 billion. Although Hsieh rejected an offer from Amazon in 2005, he believed this buyout would be better for the company than management from the current board of directors or an outside investor. Amazon agreed to let Zappos operate independently and keep Hsieh as CEO (at his current $ 36,000 annual salary). Hsieh made $ 214 million from the acquisition, and Amazon set aside $ 40 million for distribution to Zappos employees. After the acquisition, the company restructured into 10 separate companies organized under the Zappos Family.

CORE VALUES

Zappos has ten core values that guide every activity at the company and form the heart of the company’s business model and culture.

•Deliver WOW through service.

•Embrace and drive change.

•Create fun and a little weirdness.

•Be adventurous, creative and open-minded.

•Pursue growth and learning.

•Build open and honest relationships with communication.

•Build a positive team and family spirit.

•Do more with less.

•Be passionate and determined.

•Be humble. 1

Zappos’ core values differ from those of other companies in several ways. In addition to being untraditional, the core values create a framework for the company’s actions. This is exemplified in the company’s commitment to their customers’ and employees’ well-being and satisfaction.

ZAPPOS’ CUSTOMER-FOCUSED BUSINESS MODEL

The Zappos business model is built around developing long-term customer relationships. Zappos does not compete on price because it believes customers want to buy from the store with the best service and selection. The company strives to create a unique and addicting shopping experience, offering a wide selection of shoes, apparel, accessories, and home products, free shipping to the customer, free shipping and full refunds on returns, and great customer service.

Shopping and Shipping

Zappos strives to make the shopping experience enjoyable. The website is streamlined for an easy shopping experience. Products are grouped in specialized segments, with some (like outdoor products) on their own mini-sites. Customers view each product from multiple angles thanks to photographs taken at the company’s studio, and Zappos employees make short videos highlighting the product’s features. Zappos analyzes how customers navigate the site to improve features, adapt search results, and plan inventory.

The spirit of simplicity, innovation, and great service extends to Zappos’ inventory and distribution systems as well. Zappos has one of the few live inventory systems on the Web. If the Zappos website displays an item, it is in stock. Once the company sells out of an item, the listing is removed from the website. This reduces customer frustration. Its inventory and shipping systems are linked directly to the website via a central database, and all its information systems are developed in-house and customized to the company’s needs. Their warehouses operate around the clock, which allows them to get a product to the customer faster. Fast shipping creates an instant gratification similar to shopping in a physical store.

Most companies have a negative view toward returns, but Zappos’ mentality is the complete opposite. It sees returns as the ability to maintain customer relationships and to increase its profits. Zappos offers a 100 % Satisfaction Guaranteed Return Policy. If customers are not satisfied with a purchase, they can return it within 365 days for a full refund. The customer prints a pre-paid shipping label that allows all domestic customers to return the product for free. This return policy encourages customers to order several styles or different sizes and return the items that do not work out.

While this strategy seems expensive, it actually works to Zappos’ advantage. The average industry merchandise return rate is 35 percent, but Zappos’ most profitable customers tend to return 50 percent of what they purchase. The customers who have the higher return percentages are the most profitable because they experienced Zappos’ customer service and return policy, which create loyalty to the company. These customers are likely to make purchases more often and to spend more on each purchase. Craig Adkins, vice president of services and operations, believes this is exactly what makes Zappos so successful.

Customer Service

What makes the Zappos business model unique is the company’s focus on customer service. The company established a method of serving customers and handling their issues distinctive from the rest of the industry. Zappos believes great customer service is an opportunity to make the customer happy.

Customers are encouraged to call Zappos with any questions. The number is displayed on every page of the website. According to Hsieh, Zappos encourages people to call the company because more interaction with customers increases their personal connections with the organization. Customer service representatives actively use social media sites such as Facebook and Twitter to respond to customer issues.

Another key aspect of Zappos’ customer service model is that nothing is scripted. Employees have free reign in their decision-making and are expected to spend as much time as they need to “wow” customers. They help customers shop, even on their competitors’ websites, encourage them to buy multiple sizes or colors to try (since return shipping is free), and do anything it takes to make the shopping experience memorable.

Zappos’ customer service representatives develop relationships with their customers and make them happy. Stories about great customer service include customer support calls that last for hours, sending flowers to customers on their birthdays, and surprise upgrades to faster shipping. Some extreme cases included Zappos hand-delivering shoes to customers who lost luggage and to a groom who forgot the shoes for his wedding. Zappos has even sent pizzas to the homes of customers who tweeted to the company about being hungry.

Zappos believes great customer experiences encourage customers to use the store again. In addition, Zappos’ long-term strategy is based on the idea that great customer service will help them expand into other categories. While around 80 percent of Zappos’ orders come from shoes, the markets for housewares and apparel are much larger. The company says it will expand into any area it is passionate about and meets their customers’ needs.

The company considers word-of-mouth marketing to be the best way to reach new customers. With over 75 percent of purchases made by repeat customers, it is evident Zappos’ mission to “provide the best customer service possible” works well for the company.

TRANSPARENCY

Transparency is a critical part of the Zappos model. Employees receive detailed information about the company’s performance and are encouraged to share information about the company. Zappos believes employees should develop open and honest relationships with all stakeholders in the hope this will assist in maintaining the company’s reputation. Hsieh uses Facebook and Twitter to share information with employees and customers (he has 2.7 million followers on Twitter). When Zappos laid off 124 employees in 2008, Hsieh announced the decision via Twitter and later blogged about it. Although some companies hesitate to open themselves to public criticism, Zappos feels it has nothing to hide. In fact, most of the public posts on Zappos’ social media sites are praise from customers.