Zappos

1. Zappos.com Kelly Thomas 05.20.2013 Bus 550 Case Study

2. ZAPPOS: The Beginning • Founded in 1999 by Nick Swinmurn • Frustrated with not being able to find shoes and tired of going store to store • Frustration = Friction (business opportunity) • Internet allows customer to comfortably sort by shoe style, color, size

3. ZAPPOS: Filtering Data

4. ZAPPOS: The Beginning • A year later, Harvard graduate, Tony Hsieh joined Zappos • Tony left Link Exchange after it was sold to Microsoft. The company grew and it wasn’t fun to go to work anymore • Wanted to build next retail powerhouse • Focus on culture and employee happiness

5. ZaPPOS: FAMILY Core Values* 1. Deliver WOW through service. 2. Embrace and drive change. 3. Create fun and a little weirdness 4. Be adventurous, creative and open-minded. 5. Pursue growth and learning. 6. Build open and honest relationships with communication. 7. Build a positive team and family spirit. 8. Do more with less. 9. Be passionate and determined. • Be humble. These create a framework for all of the companies actions. Values are the heart of their business model and culture. These core values were released back in February 2006 *Zappos: Delivering Happiness M-333, Stanford Graduate School of Business

6. ZaPPOS: Seven Ways to Achieve Exceptional Customer Service* • Make customer service a priority for the whole company. Its not just a department. - Free Shipping and 365 day return policy 2. Empower your customer service reps. Rarely should they have to escalate a customer’s issue to a supervisor. The Inverted Organizational Pyramid • Minder Chen 2009 3. Fire customers who abuse your employees. 4. Don’t measure call times, don’t up sell, and don’t use scripts. - 6 hour phone conversations *Zappos’s CEO on Going to Extremes for Customers, HBR

7. ZaPPOS: Seven Ways to Achieve Exceptional Customer Service* • Don’t hide your phone number. You want to talk to customers. • View the cost of handling customer’s calls as an investment in marketing, not an expense. THE SERVICE TRIANGLE WOM: WORD OF MOUTH Minder 2009 *Zappos’s CEO on Going to Extremes for Customers, HBR

8. ZaPPOS: Seven Ways to Achieve Exceptional Customer Service* 7. Celebrate great service by telling exceptional stories to the entire company. • A customer called in to return shoes and it had been over the return time (365 days). The customer explained that one of her family members recently passed away and she had meant to return the shoes but lost track of time. The Zappos employee took the shoes back and sent her flowers with a sympathy card. • A man called in to reorder a pair of shoes, since his shoes were lost with his luggage while traveling to his wedding destination. The groom was desperate to get shoes as soon as possible. A Zappos employee hand delivered the shoes to the groom to make sure he got them in time for his wedding. PEC (Personal Emotional Connection) with each customer • If done right, the customer will remember the phone conversation for a long time and will refer friends *Zappos’s CEO on Going to Extremes for Customers, HBR

9. CUSTOMER RETENTION Customer Loyalty • Repeat customers drive Zappos success • Don’t spend a ton of money of marketing • Repeat customers order 2.5 more than new customers • 75% of sales is from repeat customers From why satisfied customers defect. By Jones, T. D. & Sasser Jr., W. E. Harvard business Review, (November–December), 1995 p. 91. Minder Chen, 2009

10. Happy Employees = Happy Customers Service Profit Chain* *Source: Putting the Service-Profit Chain to Work (HBR Classic) Minder Chen 2009

11. ZaPPOS: Unique Work Environment • Relaxed and wacky atmosphere • Nerf ball wars, donut eating contests, ugly sweater day. • Employee nap room, wellness center, free lunches and snacks. • According to Zappos, “When you combine a little weirdness with making sure everyone is also having fun at work, it ends up being a win-win for everyone: Employees are more engaged in the work that they do, and the company as a whole becomes more innovative.”* *Zappos: Delivering Happiness to Stakeholders

12. ZaPPOS: Benefits • Extensive health plan-100% coverage • Dental, vision, and life insurance • Flexible spending account, pre-paid legal services, 40% employee discount, car pool program, life coaching • Compensation model for call reps • Pay starts at $11 / hr, then after 90 days increases to $13 / hr. • For additional pay increases, employees must show growth and complete additional courses • Encourages employee development • Empowers employees • Zappos is able to underpay employees because of the relaxed environment and other perks

13. ZaPPOS: Hiring and Training • Only hire people they like; not always the smartest and most talented • Sense of humor, weird, happy, go lucky • Happy Hour • Odd Interview process • Screened for happiness (cant have happy customers without happy employees) • “On a scale of 1 to 10, how lucky are you?” (people who perceive themselves as lucky are more likely to pick up on clues and solve a task) • Training Classes • All new employees, spend 2 weeks on customer service calls • “Science of Happiness 101” & “Delivering Happiness” • After training is completed, they offer $2000 to leave company • Less than 1% take deal • Want employees to be committed

14. ZaPPOS: RELOCATION Relocation • Moved from San Francisco to Las Vegas in 2004 • Relocated to build a call center “Customer Loyalty Team” • Did not want temps; wanted to find people who would be happy making a career out of customer service • City’s economy is focused on hospitality • All night city and overnight shifts needed in call center • Employees there are used to treating customers as guest

15. ZaPPOS: Logistics • Initially used drop shipments • Carried no inventory and depended on manufacturers to ship products to customers. • Inefficient due to inaccurate records of manufactures inventory and unpredictable delivery times because of several manufacturer locations. • Now they have their own warehouse operation • Allows them to deliver faster and with fewer defects; providing better service to their customers.

16. ZaPPOS: Logistics • Live inventory system on web • Zappos’ website only shows in stock merchandise online • Reduces customer frustration • Central database is constantly updated with inventory and shipping activity • IT system was developed in house to ensure customization for Zappos

17. ZaPPOS: Leveraging Twitter to Strengthen Company Culture • Hsich originally joined Twitter to stay connected with friends • Transparency • Consistent with Zappos core value #6 “Build open and honest relationships with communication” • Connected with customers and employees • Tweeting the good and the bad

18. ZaPPOS: Leveraging Twitter to Strengthen Company Culture • Encouraged Employees to tweet daily, to bring the employee closer to the customer. • Tweeting helped promote culture and encouraged employee socializing outside of work • Customers tweeting about products too

19. ZaPPOS: Challenges • Recession and credit crisis of 2008 put Zappos and their investors in a bad position • Banks required them to hit projected revenue and profitability every month. If these targets were not met, the bank could walk away from the loan, which could cause bankruptcy. • Relied on line of credit, which was “asset backed”. Meaning, they could only borrow around 50% of their current inventories value. The bad economy was pushing the value down. This was making it difficult to be approved to borrow funds to buy more inventory • Disagreements between board of directors • Start focusing on making money and less on employee happiness

20. ZaPPOS: Increasing Revenue, yet Small Profits

21. ZaPPOS: Merger with Amazon • Acquired by Amazon in 2009 • Similarities between companies • Both want to do what is best for customers, but had different philosophies • Amazon provides low prices and tries to reduce customer calls. Assuming a call means confusion or a problem for the customer • Zappos encourages phone calls yet charges higher prices. • Formal document promising Zappos unique culture will be protected • Agreed to let Zappos operate independently • Zappos will be able to do new things quicker with Amazon’s financial and technical support

22. ZaPPOS: Today • #1 Online shoe retailer • Business grew because of WOM • Expected to make1 Billion is gross sales this year • Core focus is still happy employees lead to happy customers, which leads to good business. • Advice to other companies is to not focus on separating work from personal life. Socialization between employees and managers increase trust and communication which leads to increased efficiency from 20% to 100%

23. ZaPPOS: Questions 1. Why did the CEO, Heisch promote using Twitter for Zappos? A. Transparency B. Cost C. Amazon used it D. Privacy 2. At Zappos, customer service phone calls are viewed as • An expense • Marketing • Wasted time • Unnecessary 3. What qualities does Zappos look for in a new hire? • Happy • Go Lucky • Sense of humor • All of the above

25. ZaPPOS: References • “Zappos: Happiness in a Box”. Stanford Graduate School of Business. August 23 2010, Case: M-333 http://faculty-gsb.stanford.edu/aaker/pages/documents/100823zappos.pdf • Hsieh, Tony. “Zappos’s CEO on Going to Extremes for Customers”. Harvard Business Review. July-August 2010 http://www.tmi.dk/files/pdf/HBR_-_Zappo.pdf • “Why I sold Zappos.” Inc. Magazine. June1 2010 http://www.inc.com/welcome.html?destination=http://www.inc.com/magazine/20100601/why-i-sold-zappos.html • “Zappos: Delivering Happiness to Stakeholders”. Daniel Fund Ethics Initiative, University of New Mexico. 2012 http://danielsethics.mgt.unm.edu/pdf/Zappos%20Case.pdf • Fisher, Brenna. “How I Do It, The Customer Service King.” Success Magazine, What Achievers Read. June 2013. http://www.success.com/articles/391-how-i-do-it-tony-hsieh-zappos-com • Heskett, James. “Putting the Service Profit Chain to Work”. Harvard Business Review. March – April 2004.http://www3.nd.edu/~lkrajews/mgt60700/pdfs/Putting%20the%20Service%20Profit%20Chain.pdf