Thinking Outside the Shoebox

In less then a decade Tony Hsieh transformed quirky online shoe retailer Zappos into a multimillion-dollar empire. How? By focusing relentlessly on customer service and building a company culture based firmly on fun. Adam Burns caught up with the CEO to find out what’s next on his agenda.

“We are of the philosophy that you can do a lot more if you get the culture right, and then most of the other stuff will take care of itself”
-Tony Hsieh, CEO of Zappos

Rocketing to success as an online shoe retailer Zappos is famed for it’s legendary customer service that has not only won the praise of Fortune, Forbes and Fast Company, but has led the company to regularly share its ethos with Fortune 500 companies. So what’s behind Tony Hsieh’s passion for service?

In 1998, fresh out of college and aged just 24, Hsieh sold his first business, the ad company LinkExchange, to Microsoft for $265 million. Why? Mainly because the company got big pretty quickly and as he soon learned, while he hired the right people in terms of skill set, he hadn’t built a company culture. “When it was just five or 10 people, it was a lot of fun, but by the time employees reached 100 or so, I dreaded going to the office,” says Hsieh.

A year later he invested in an idea nobody else would touch, selling shoes on the internet. “I got involved around two months after the company started. I started off as an investor and part-time advisor, and was actually involved in 20 or so different internet companies at the time. Over time it became clear that Zappos was both the most fun and the most interesting so within a year I ended up joining full time,” explains Hsieh.

And since he joined Zappos as CEO in 2000, the entrepreneur has taken the company from $1.6 million in annual turnover to over $1 billion in less than a decade. All by focusing on great customer experience.

While any firm is reliant on its staff in order to produce superb customer experience a company becomes even more dependent on their employees, so how does Hsieh ensure that his new hires are the right cultural fit for Zappos? Well, he only hires people who are passionate about what Zappos is passionate about, namely, that great service. Anyone who comes into the company, be it an accountant, lawyer or call center rep is put through two sets of interviews. The first set is through the hiring manager and his or her team, to make sure that the individual fits within the team, has the correct technical ability and the relevant experience.

Then the HR department does a separate set of interviews, purely for culture fit, which consists of some wacky interview questions (including, on a scale of 1 to 10, how weird are you? And, what’s your theme song?) in order to filter out egomaniacs as well as wallflowers. The individual has to pass both in order be hired. “We’ve actually passed on a lot of experienced and talented people that we know can make an immediate impact on our bottom line, but if they’re not a culture fit, then we won’t hire them. And one of the things that we’re looking for is people that are actually passionate about the company visions, which is to be about the very best customer service,” says Hsieh.

However, while ensuring that he has the right employees is crucial to the business, it also means that the company goes through a lot potential employees. When the company hold a job fair for the call center for example, around 200 people will show up, but only around 20 will be offered a place after the initial interviews. After that there are four weeks of training, beginning everyday at 7am, to learn about the company culture and how to use customer service tools. New recruits are even offered $2000 to leave the company during training, in order to weed out the half-hearted. And to keep his employees happy once they are hired, Hsieh throws a weekly costume party at the main office.

Zappos employees, or Zapponians as they are known to those in the know, are required to be just a little bit crazy, but mainly open minded and creative when dealing with customers. Rather than using a script each consumer is treated as an individual case, and will be encouraged to order multiple pairs of shoes to ensure they find the right pair as well as take advantage of the free shipping in both directions. And, if Zappos runs out of a particular style call reps will actively point out competitors who will have the style in stock. There are many stories about the customer-service reps going beyond the normal boundaries of customer service representatives, for example, a recently widowed woman called to see if it would be possible to return some shoes that had been ordered for her husband, who died a short time after receiving them. The rep accepted the shoes and sent the customer some flowers.

In fact, a large part of Zappos’ appeal is the hassle-free returns policy, free shipping both ways and the fact that 90 percent of orders arrive the following business day. In order to accommodate the high volume return rate it was imperative that warehouse and customer service operations are able to handle that. “Our return rate can be anywhere from 20 to 40 percent depending on the brand, so we had to ensure that we would expect this level of return, and also encourage it,” says Hsieh. Having a warehouse with around four million pairs of shoes is just part of the business for Hsieh, but while there are costs associated with that and extra steps around making sure they haven’t been worn and so on, it is all part of the service. “While there is more labor involved, it’s what makes people keep coming back to us – because it’s so easy to return items to us.”

Tough decisions
In a tight economy companies across all verticals have to make tough decisions. And in October 2008, when Hsieh himself announced a number of layoffs, he was widely praised for the way in which he handled them. “The economy definitely affected our original growth plans,” explains Hsieh. “All of hiring and expense structure was based on us hitting the £1.1 billion mark in 2008, but we ended up doing a little over $1 billion.” Hsieh decided that Zappos should start 2009 in as healthy a position as possible, and so when he knew the figures were going to fall short, he knew he would have to lay off about eight percent of employees. “It was a tough decision but at the same time we wanted to be proactive about the situation and not wait until we had no choice.”

Every laid off employee was given at least two months severance, and if they had been with the company for three or more years received one month per year that they had worked. On top of that Hsieh offered to reimburse them for up to six months of COBRA payments so that they were taken care of on the medical side as well. “It was definitely a tough thing to do but we were very open and honest in terms of the business reasons for doing it,” says Hsieh. “We sent an email to all employees explaining why we had to do it and why it was the best choice for the company given the economy. And then we posted that same letter on our blogs and announced it through Twitter. It wasn’t something unique to the layoffs, rather part of our culture – being open, honest and transparent.”

However, this wasn’t the first time that Hsieh had to make layoffs. The first time around it was during the first couple of years of the company and while it involved fewer people, percentage-wise it was actually a much greater portion of the company. “Looking back it was a blessing in disguise that we had to lay people off in the early days, as it forced us to focus on the customer experience. In fact, if we hadn’t gone through that we wouldn’t be who we are today. So we do see it as an opportunity for us to make our culture stronger and more tightly knit, as well as make the company more efficient.”
  
Feedback
In order to manage touch points and behavior of his employees Hsieh uses net promoter score but on the whole he prefers to inspire them rather than try to manage them. “We are of the philosophy that you can do a lot more if you get the culture right, and then most of the other stuff will take care of itself in terms of great customer service,” he explains. “We’re extreme in trying to inspire people through the larger vision and living the core values.”

With 75 percent of sales from repeat customers Hsieh is keen to highlight that good customer experience not only generates repeat sales but those customers become promoters, recommending the brand to others. ‘We’ve grown from basically no sales in 1999 to a little over $1 billion in gross merchandise sales in 2009. The number one driver of that is repeat customers and word of mouth – promoters have become an extremely important thing for us.”

In fact, these promoters have meant that Hsieh has spent less on paid advertising than they otherwise would, and in turn that money has been spent on the customer experience. So, for example, the free shipping both ways, 365-day return policy and 24-hour call center are all huge expenses for the company, but by viewing these as marketing outgoings makes it much easier to see the benefits. “Any costs that we’ve put into investing in the customer experience ends up driving that repeat customer behavior and word of mouth so it is very much an indirect marketing cost,” explains Hsieh. 

He goes on to explain that he is very much aware of the importance of letting your employees here the applause of the consumers. “A lot of it for us is instant,” says Hsieh. “The customer will be on the phone and when you wow them you can really hear the feedback instantly from the customer themselves.” A weekly newsletter also goes out to the whole company for whenever someone emails or calls to tell the company about a great experience. “At Zappos we really believe in the importance of forming a personal and emotional connection with as many customers as possible. That’s why we put our 1-800 number on the top of every page of our website, because we actually want to talk to our customers,” explains Hsieh.

Future focus
Having previously described Zappos as a service company that just happens to sell shoes it is unsurprising perhaps that Hsieh is planning to get into other industries this year. “We’re already making a big push in new ranges of clothing in 2009 – we actually already sell clothing, as well as electronics and houseware, but really 10 years from now Zappos doesn’t even have to be an online business.

“We really just want to be about the very best customer service. We’ve had customers email us and ask if we would start an airline – so a Zappos airline would just be about the very best customer service. You know, one brand that we look toward for inspiration is Virgin – it does airlines, music and a whole other bunch of businesses, but their overarching brand is about being cool. We want to become an overarching brand around the very best customer service and customer experience.”

With the core competencies – namely that great customer service – entirely transferable and already in place, it seems that Zappos has the edge over its competitors and is already well on the way to building a lasting advantage through customer and corporate culture, providing first-class customer experience to the masses.

Zappos 10 core commandments
1. Deliver WOW through service – do something beyond what’s expected
2. Embrace and drive change – in order to stay ahead of your competition
3. Create fun and a little weirdness – one of the side effects is innovation
4. Be adventurous, creative and open-minded – develop and improve decision-making skills
5. Pursue growth and learning – stretch yourself
6. Build open and honest relationships – communication is key
7. Build a positive team and family spirit – go beyond the typical ‘co-worker’ relationship
8. Do more with less – constantly raise the bar
9. Be passionate and determined – have a positive but realistic attitude
10. Be humble – treat others how you wish to be treated yourself

Let there be shoes
In 1999, founder Nick Swinmurn was walking around a mall in San Francisco, looking for a pair of shoes. One store had the right style, but not the right color. Another store had the right color, but not the right size. Nick spent the next hour in the mall, walking from store to store, and finally went home empty-handed and frustrated.

At home, Nick tried looking for his shoes online and was again unsuccessful. Although there were a lot of stores selling shoes online, there was no major online retailer that specialized in shoes. So, since it was 1999 and anything seemed possible at the time, Nick decided to quit his day job and start an online shoe retailer...and Zappos.com was born!

The original idea was to create a website that offered the absolute best selection in shoes in terms of brands, styles, colors, sizes and widths. Over the past decade, the Zappos.com brand and aspirations have evolved, and in addition to offering the best selection, the company want to provide the absolute best service online – not just in shoes, but in any category.