As an online retailer, Zappos brings the in-store shopping experience to customers in their homes, initially with shoes, and now with a wide array of other products as well. The business model of Zappos is built on providing an exceptional customer experience, and in doing so, building customer loyalty and driving word-of-mouth marketing.
A few key components of this customer promise include:
- Free shipping and returns on all orders, regardless of order size, enabling customers to order multiple items to try on in the comfort of their own home
- 365 Day Return Policy
- 24/7 Customer Service
While delivering happiness may be a competitive advantage, the cost of doing so is high. In 2008, 37% of purchases were returned ($379 million worth of goods) as a result of the lenient return policy. While some might balk at this number, Zappos views this expense as an investment in marketing, believing that happy customers are the best marketing channel. Indeed, Zappos has found success with this model, reaching over $1.1 billion in gross revenue by 2009, at which point it was acquired by Amazon. Today, Zappos has annual revenue of well over $2 billion.
The success of this business model is the result of an effective alignment with its underlying operating model. The unwavering focus on service that we see in the business model is also the driving force behind many key operating decisions.
Inventory and Warehousing
When founded in 1999, Zappos was originally designed as a “middleman,” operating based on the “drop ship” model. It held no inventory and simply connected customer orders with manufacturers who filled the orders. In 2003, however, with many e-commerce companies going bust in the dot-com crash, Zappos decided to differentiate itself through providing exceptional customer service. This was not possible under the drop ship model, as Zappos had no control over the delivery times of manufacturers and never had perfect visibility into their inventory. As a result, Zappos terminated its drop ship business and began buying inventory and storing it within their own warehouses. By moving the fulfillment of orders in-house, they could own the entire customer experience.,
Call Center Operations
Relocation from SF to Vegas
Zappos understood that call center interactions were a critical part of customer service. However, when headquartered in San Francisco, it was difficult to find the right type of committed, service-oriented people with whom to staff its call centers. With its high cost of living and tech-heavy culture, the Bay Area was not a place where call center jobs were taken seriously. As a result, many of the call center employees were temps who did not deliver the desired level of quality.
To address this issue, Zappos moved its headquarters to Las Vegas. In addition to its lower cost of living, Vegas was also chosen for its unique culture. As a city with a heavy emphasis on hospitality, its citizens were more likely to view a customer service job as a way to start a legitimate career. Furthermore, with the city’s pervasive “all-night” culture, people were more willing to work odd hours, enabling Zappos to provide a 24/7 customer service line.
Emphasis on Quality Interactions
While other companies focus on reducing the issue resolution time on customer calls, Zappos does not limit the amount of time that customer representatives spend on the phone with each customer. Instead, Zappos encourages its employees to spend as much time as needed to really understand the customer’s issues and go above and beyond in helping the customer. To this end, Zappos also does not have a script for its call center reps, and encourages them to be authentic and build a personal emotional connection (PEC) with each customer.
Looking Forward: Holacracy
As Zappos grows, it continues to look for new ways to stay innovative in optimizing the customer experience. Lately, this has taken the form of holacracy, a new organizational structure which eliminates bosses and comprises of many self-managed “circles.” The idea is to prevent the bottlenecks that come with bureaucracy and to structure Zappos more like an incubator in an attempt to attract talented employees with an entrepreneurial bent., Furthermore, as part of the holacracy structure, when a customer issue arises repeatedly, a different team is assigned to address it each time, resulting in the generation of many different innovative ideas for solving the problem. These ideas are then reviewed to develop a sustainable solution. In doing this, Zappos widens the ideation phase of the design funnel in order to stay innovative in maximizing customer happiness.
Holacracy is a radical approach that isn’t for everyone though. Since its implementation last year, 14% of Zappos employees have already left as a result. However, the long-term financial and cultural impact remain to be seen. For now, the one thing we do know is that Zappos remains as steadfast as ever in its commitment to delivering customer happiness.
 “Zappos and the Connection Between Structure and Strategy.” Harvard Business Review, June 3, 2015. <https://hbr.org/2015/06/zappos-and-the-connection-between-structure-and-strategy>
 Zappos website. Accessed Dec 9, 2015. <www.zappos.com>
 “Tony Hsieh: Redefining Zappos’ Business Model.” Bloomberg Business, May 27, 2010. <http://www.bloomberg.com/bw/magazine/content/10_23/b4181088591033.htm>
 “How I Did It: Zappos’s CEO on Going to Extremes for Customers.” Harvard Business Review, Jul-Aug 2010 issue. <https://hbr.org/2010/07/how-i-did-it-zapposs-ceo-on-going-to-extremes-for-customers>
 “Tony Hsieh got rid of bosses at Zappos – and that’s not even his biggest idea.” Washington Post, Dec 1, 2015. <https://www.washingtonpost.com/news/on-leadership/wp/2015/12/01/tony-hsieh-got-rid-of-bosses-at-zappos-and-thats-not-even-his-biggest-idea/>
 “Zappos and the search for a better way to run a business.” Fortune, Jan 29, 2014. <http://fortune.com/2014/01/29/zappos-and-the-search-for-a-better-way-to-run-a-business/>