When Nick Swinmurn and his co-partner cum investor Tony Hsiesh founded Zappos.com they were turned away by almost all venture capitalists because no one believed that shoes were a good product to sell online. Afterall, who would buy shoes without being able to try them on first? However,they stuck to thier guns, backed by the fact that shoes are a $40B market in the US with $2B sold via mail order catalogs. So how did Zapppos make it?
Both Nick and Tony attribute the Zappos.com success to the company’s near maniacal focus on customer service. Great customer service is what helped the company build a loyal customer base. Approximately 50% of Zappos.com orders are from existing customers, and an additional 20% are from new customers that were referred by existing customers.
So what did Zappos.com do to keep customers coming back? The key policy was nearly automatic upgraded shipping to next day air. Sounds kind of simple, but it was based on an astute observation. Zappos.com realized that they were competing with offline shoe retailers and not just online shoe retailers. So while the competition was sending shoes 5-7 day ground, Zappos.com decided to do it far better – next day air for free. Zappos.com was also clever in how they rolled out this policy. They semi-randomly upgrade orders for most of their repeat customers, . So when a customer thought their shoes would be coming in 3-7 days, they got an e-mail that said they’d been upgraded to overnight air because they were a valued customer which is certainly a small gesture that really makes an impression on the consumer. There are a few that get next day air, and many get 2nd day air. This one shipping policy strongly impacted return purchases.
The other key policy Zappos.com implemented was their returns policy. Zappos.com helped ease consumer apprehension around buying shoes online by offering free return shipping and a 365-day free return policy.
The toughest decision that Zappos.com had to make around customer service was eliminating drop shipping of shoes. Around 2003, Zappos.com reduced the amount of drop shipping of shoes from nearly 25% down to zero, risking a substantial portion of their revenue base. The company went through the extra expense of warehousing all their shoes themselves to better control the fulfillment process, thereby improving customer service.
In Tony’s words, customer service is all about to what extent you are willing to please the customer. If Zappos has run out of inventory on a particular shoe, the customer service rep is encouraged to provide the customer with links to purchase the shoe from other online retailers. While many customer call centers measure customer call durations, Zappos scores all calls on how helpful the customer service rep was in servicing the customer.
Another thing we found interesting about the Zappos.com story was how they adapted their strategy and brand the more they learned about their business. Many times we think people fall in love with their initial strategy and don’t properly read the clues the market provides them. When Zappos.com got started they thought they would win based on providing the greatest selection of shoes. The company initially launched as ShoeSite.com – a good name to fit that strategy. However, Nick and Tony found that it was actually really hard to provide a large selection of shoes. Not all shoe manufacturers wanted to work with a small company selling online, so it was going to take years to build a large selection and secure inventory. That is when the team decided to focus their efforts on providing the consumer with the best possible customer service. As such, they focused the company’s strategy and culture around service and re-launched as Zappos.com. This was a risky move considering Zappos was a two syllable word with no meaning to people, but one that would allow them to extend their brand into other product categories and build an independent brand around service. This decision would become an important factor in the Zappos.com success.
Zappos.com did a fair amount of offline advertising in its early days to help establish its brand with shoe manufacturers. Shoe manufacturers were apprehensive to work with a young company like Zappos.com and were concerned about how their brand would be perceived via the online channel. Thus, Zappos.com’s initial marketing investment was only partially aimed at consumers; it was more to impress suppliers. Once Zappos.com had secured some shoes to sell, they could use cost effective online marketing to attract consumers. Philosophically, Zappos.com chose to invest in superior customer service rather than marketing. Something like 15% of their revenue is spent on customer service and another 15% spent on marketing. For most e-commerce companies, this ratio is skewed significantly towards marketing.
Amazon purchased Zappos.com for a sum of $ 1 billion in late 2009 and the company continues to set trends and is on track to a great financial year for this year as well.