Zappos and the Wizard of Oz: A relentless customer success story everyone should learn

Summary

1. Zappos yet again proves, get to the product market fit before expanding operations. Read more about Wizard of Oz method later in the blog
2. Zappos has always focused on WOWing its customers either by implementing a free 365 day returns policy or delighting customers by emotionally connecting with them
3. As unsexy and low-tech as it may sound, the telephone is one of the best branding devices out there
4. The future of online market is to be more experience based rather than transactional

Nikhil Varshney

March 20, 2022

Zappos will take an order as late as midnight and deliver it to the customer’s doorstep before breakfast. It has the world’s largest selection of shoes, and its service includes free returns. If it doesn’t have the shoe you want in stock or in your size, a Zappos call center employee will go to three competitors’ sites to try to help you locate what you want to buy. Seventy-five percent of its business comes from repeat customers, even though its prices are far from the lowest.

Zappos is the story of how relentless customer service can be. They take pride in helping customers, understanding their needs, and offering them solutions as if they are in an actual store buying shoes. Customers don’t go to Zappos to buy shoes they go there to experience. At Zappos, they do not hold customer service representatives accountable for call times. Their longest phone call is six hours with a customer who wanted a rep’s help while the customer looked at around a thousand pairs of shoes.

When one of Zappos’s rep found out that because of a death in the family, a loyal customer had forgotten to mail back a pair of shoes she’d planned to return, the rep sent her flowers; now she’s a customer for life.

TONY HSIEH – CEO ZAPPOS

History

The Beginning – 1999

Nick Swinmurn the silent leader that founded Zappos. Nick Swinmurn wanted a pair of Airwalk Desert Chuka boots. He looked high and low for the size and color he wanted and came up empty-handed. It should not be so hard to find a pair of shoes, right? Swinmurn reasoned that plenty of people shopped for clothing and shoes from catalogs, so why not an online footwear showcase, complete with photos and sizing charts? Nick had founded “Shoesite“.

List your riskiest assumption: What is the riskiest assumption about our offering and the business model we follow? Zappos needed to test whether or not people would actually buy shoes on the internet

Tony Hsieh (pronounced as Shay) recalls thinking that selling shoes online sounded like a poster child for bad internet ideas. But Nick explained the value proposition saying that shoes were a $40 billion market in the U.S. and that 5% of them were already sold by mail order.

Swinmurn met with Fred Mossler, a men’s shoe buyer at Nordstrom, and asked him to join his start-up. Mossler, however, wanted Nick to have more capital before he committed. Nick then met with Venture Frogs, Tony Hsieh’s investment company. Seeing the vision and potential, Hsieh bought into the idea and eventually became co-CEO with Swinmurn. Venture Frogs invested $1.1M in Zappos.

Searching for a more unique name soon thereafter, Shoesite became Zappos, an adaptation of Zapatos, the Spanish word for shoes.

Building the brand – 2000 to 2003

Soon after Nick secured funding from Venture frogs, Fred Mossler joined Zappos as senior vice president. By this time Zappos was luring buyers to its site through several innovations including more famous brands, contests and giveaways, and an agreement with the West Coast’s Shoe Pavilion to run its e-commerce site (shoepavilion.com) and showcase its footwear. Footwear News (May 15, 2000) called the partnership “another marriage of bricks and clicks,” which seemed to benefit both traditional retailers and their online counterparts. Zappos had grown to 30 employees, offered customers more than 150 different brands of shoes, and reached sales of $1.6M for 2000.

While analysts still considered selling shoes online as a difficult trade, with customers not getting the in-store benefits of trying the shoes before buying, photos not being accurate, etc. – Zappos’s no-fuss money-back guarantee was changing the market dynamics and they reached $8.6M in sales in 2001. Two key elements set Zappos apart from its rivals, according to Swinmurn: “The best strategy is selection and service,” he told Footwear News (February 26, 2001). “If customers can find what they’re looking for and have a great experience doing so, they’ll be back

In 2002, Zappos formed a partnership with UPS to expedite the delivery of footwear. The 825,000-square-foot warehouse was located 17 miles from the UPS Worldport, their global air-freight hub at the Louisville, Kentucky airport. At the time, approximately 40,000 units were processed per shift using the largest carousel system in the United States. It held a staggering 1.5 million pieces of merchandise.

Zappos turned four years old and WOWed its customers by implementing a free 60-day returns policy. This no-hassle approach allowed customers to purchase several pairs of shoes in various sizes, returning those that didn’t fit at no cost. “Buying shoes online can initially be a scary process for people,” Hsieh says. “But Zappos has withstood when other dot-coms have failed because we provide the best customer experience, such as free shipping both ways. Even though free shipping of both orders and returns has cost us more, it has enabled us to keep our customers longer.” By year’s end, Zappos decided to give customers 365 days to return the shoes, as long as they were in “like new” condition and in the original box.

“Buying shoes online can initially be a scary process for people,” Hsieh says. “But Zappos has withstood when other dot-coms have failed because we provide the best customer experience, such as free shipping both ways. Even though free shipping of both orders and returns has cost us more, it has enabled us to keep our customers longer.”

TONY HEISH – CEO ZAPPOS

One Stop Shop – 2004 to 2009

Zappos is known for its customer service and it was hard to find people in the bay area who want to make customer service a career. Customer service is not Silicon Valley’s mentality. The cost of living in California is high and it’s hard to make a living on a customer rep’s salary in California. This led to moving the headquarters from Bay Area to Henderson, Nevada. (More about Zappos customer service in later section “relentless customer service”). Such was a working culture that 70 out of 90 employees agreed to move with Zappos. Being in an unfamiliar town with unfamiliar people, Zapponians would hang out with each other outside the office. Culture in the workplace becomes a top priority — even more important than customer service. “We thought that if we got the culture right, then building our brand to be about the very best customer service would happen naturally on its own,” said Hsieh

Moving the headquarters, helped cut costs across the board, which helped Zappos make a case to Sequoia Capitals for a $20M investment and also increased the line of credit with Wells Fargo to $40M. By this time the Zappos site was as much about style and content as sales. The online e-tailer’s production staff had grown to ten employees whose mission was to provide each major shoe brand its own “boutique” or page, with merchandise shot from multiple angles for viewing from the top, side, and even 360 degrees. Zappos offered its shoppers over 200 brands of shoes for men, women, and children, including Adidas, Airwalks, Birkenstock, Dr. Martens, Nike, Skechers, Timberland, Vans, and designer labels including Steven Madden, Charles David, Kenneth Cole, Isaac Mizrahi, Michael Kors, and Calvin Klein.

From 2003 to 2004 Zappos had more than doubled its inventory from over $5 million to $13 million according to Footwear News (April 12, 2004) and had plans to double its warehouse space as well. By the end of 2004, Zappos outperformed both analysts’ and its management’s projections, finishing the year with sales exceeding $180 million.

By 2005 designers and customers alike flocked to Zappos, which had proven itself as the Internet’s leading shoe source as brick-and-mortar retailers suffered flat sales. To stay ahead of its growing competition Zappos continued to add to its lineup—which now topped 500 brands, nearly 60,000 styles, and more than a million pairs of shoes—including luxe offerings from Donna Karan, Pucci, Marc Jacobs, and even celebrity designs from Carlos Santana and Jennifer Lopez. Additionally, Zappos had expanded its accessories line to include socks, wallets, belts, and diaper bags, while Zappos Couture debuted with its own web address (couture.zappos.com). For those against the use of leather, Zappos even had “vegetarian” footwear. To support its rapid expansion the e-tailer’s workforce had grown to more than 400 employees. Sales for the year were projected to reach as high as $300 million, and even higher for 2006

Amazon buys Zappos – 2009

Zappos had outside-the-box plans to succeed and make money. Their idea was to build a company culture and keep employees happy by paying for 100% of health care premiums, spending heavily on personal development, and giving customer service reps more freedom than at a typical call center– Zappos was able to offer better service than their competitors. Better service would bring repeat customers and they would be able to reduce the spend on sales and marketing allowing them to focus on long-term profits. By 2005, Zappos had almost $370M in sales and were almost at break-even if not profitable. They were on target to reach $1B in sales by 2010 and then the plan was to go public.

The reason I am telling this story is, Jeff Bezos made a buy offer in 2005 which Zappos declined stating that selling to Amazon would mean merging into Amazon’s operations. Their name and culture would just disappear. So they declined the offer stating that we will not sell at any price.

Four years later, Amazon came calling again and this time as well Tony’s instinct was to say no. But the board of directors from Sequoia Capital suggested Zappos should sell. Remember the mindset coming out of the financial crisis was different. Had 2008 been different Zappos may have gone the IPO path couple of years down the line. It might have been happy to wait a few more years if the economy had been thriving, but the recession and the credit crisis had put Zappos and its investors in a very precarious position.

Another situation coming out of the 2008 crisis was to get big credit lines from banks. At the time, Zappos relied on a revolving line of credit of $100 million to buy inventory. But their lending agreements required them to hit projected revenue and profitability targets each month. If the numbers were missed even by a small amount, the banks had the right to walk away from the loans, creating a possible cash-flow crisis that might theoretically bankrupt Zappos. In early 2009, there weren’t a lot of banks eager to give out $100 million to a business. Further, the asset line of Zappos was asset-backed, meaning that could borrow between 50% and 60% of the value of its inventory. But the value of the inventory wasn’t based on what was paid. It was based on the amount of money they could reasonably collect if the company was liquidated. As the economy deteriorated, the appraised value of Zappos inventory began to fall, which meant that even if they hit their numbers, they might eventually find themselves without enough cash to buy inventory.

Amazon had approached Zappos CFO Alfred Lin about buying Zappos outright. Amazon would allow Zappos to operate independently and keep the culture that it has been imbuing in its people.

November 2009: Amazon buys Zappos for $1.2 billion. Hsieh stays on as CEO at his current salary of $36,000 per year.

Since Amazon – 2009 to Present

While many market watchers celebrated the union, they also speculated that the new parent could impose its own culture on the new division. But true to the initial agreement, Zappos has continued to operate separately from Amazon, maintaining its own leadership team and unique character. (The one area of overlap is fulfillment, as Amazon took over Zappos’ warehouse operations in 2012.)

2015 – Holacracy

Zappos prides itself on its innovative and quirky culture. Hsieh believed Holacracy, a complete system of self-organization, to be the correct course of action because of a nagging feeling that Zappos’ growing size was threatening what made it exceptional.

Leading the Holacracy transition at Zappos, John Bunch said, “In its highest-functioning form, the system is politics-free, quickly evolving to define and operate the purpose of the organization, responding to market and real-world conditions in real-time. It’s creating a structure in which people have the flexibility to pursue what they’re passionate about.”

As part of that move, at least 18% of employees opted to take a buyout package. Among the departures was Mossler, who left to focus on other businesses, including the Downtown Project, a local development enterprise that he and Hsieh created.

Those who remained have helped to form a flat system that structures employees into circles. Currently, the company consists of more than 300 such circles, directed by “lead-links” who provide goals and priorities to members

Product Market Fit

The short answer to finding the product-market fit is – You Try Stuff and figure out what works. There is no clear way to find what makes your customers happy. Zappos did the same thing, Nick had the idea of selling shoes online. He knew Shoes was a $40B business in the US and only 5% of it happened over the internet. All he wanted was to test the idea. Here is when comes the Wizard of Oz.

So what is the Wizard of Oz MVP? The essence of this type of MVP lies in creating an illusion of an actual intended product. The entrepreneur who creates this type of MVP relies on servicing customers manually and, in some cases, also relies on services such as Amazon’s Mechanical Turk. Moreover, the Wizard of Oz MVP does the job in such a way that end-users are not aware that humans are working behind the scenes. What’s the point of this? The Wizard of Oz MVP provides a unique opportunity to verify the demand for a product that, so far, exists only in the entrepreneur’s mind!

Nick did the same, he goes to the nearest shoe stores, photographs the shoe from different angles, and paste these photos online for users to select and buy from. If a user purchases the shoe, Nick would run to the nearest store and buy that pair and ship it to the customers. This would allow Nick to validate his hypothesis – that customers are willing to buy shoes online. The customer had no idea that Nick did not have a single pair of shoes or that all orders were processed manually. The idea turned out to be successful, and business quickly gained momentum. This was how Zappos tested the idea without actually investing in the idea.

I would argue that this was the AHA! moment and the product-market fit for Zappos. Founder Nick Swinmurn, Tony Heish, and his team spent weeks running out to shoe stores and buying shoes that users ordered on their website in person to validate that users really would buy shoes online before taking the costly step of investing a ton of time and money into building the infrastructure to support it.

Relentless Customer Service

I personally feel the X-factor for Zappos is their customer service. The company culture enables employees to be empathetic with customers, has played a huge role in Zappos’ success. The idea of gaining repeat customers by putting them first, listening to them, and prioritizing their needs over companies is not a culture I have seen in practice at a lot of places. Amazon – the earth’s most customer-centric company probably found an equivalent when it comes to customer service.

It was 2003 when Zappos started looking to explore customer service options. Remember, this is before the headquarters was moved to Henderson, Nevada. Zappos at one point was considering outsourcing the customer service to India or the Philippines. I remember reading an article from Tony, where he says while considering Indian companies for call centers he had listened to the call center employees and the accent was definitely a match. The problem was people outside America did not understand the American culture. How would they be able to help a customer who asked, say, for shoes like the ones Julia Roberts wears in Eat, Pray, Love? After much deliberation, Tony realized call center will be a central part of Zappos’s business. It just does not make sense to move it outside states.

Also, Zappos had learned their lesson in the past when they had outsourced their warehouses to a local company in Kentucky. Zappos does not make their shoes, they are dependent on manufacturers to showcase their inventory which they can use and publish on their website. But manufacturers were never able to showcase a clear picture of what was happening. Hence Zappos decided to stop drop shipping and instead build their own inventory for which they had outsourced the warehouse to a vendor in Kentucky. That didn’t work well. As an e-commerce company, Zappos considered warehousing to be one of its core competencies from the beginning. Trusting that a third party would care about their customers as much as they did was one of their biggest mistakes. If they hadn’t reacted quickly by starting their own warehouse operation, that mistake would eventually have destroyed Zappos.

It’s not surprising, then, that managers from other companies, including many from service and quality leaders like Southwest and Toyota–make regular pilgrimages to Zappos facilities to learn how the company pulls it off. Everyone wants to know what the heck is going on. A quick look around reveals that part of its success is the company’s IT strategy, including a real-time inventory management system that is 99 percent accurate, compared with accuracy rates as low as 40 percent in other areas of retail. But what gets visitors every time are the clues to Zappos’s true competitive advantage: its culture. And no one inside the company is surprised. Some other key features about Zappos customer service:

• Customer service is apparent on their website. On many websites, contact links are hidden five pages down and that too mostly is in the form of an email. Zappos does exact opposite, they put their phone number (800-927-7671) on every single page of their website. You can see customer service button on the top left, click contact and the entire page opens up with phone number, chat options etc.
• Most call centers measure their employees’ performance on the basis of what’s known in the industry as “average handle time,” which focuses on how many phone calls each rep can take in a day. This translates into reps’ worrying about how quickly they can get a customer off the phone—which according to Zappos is not delivering great customer service. Most call centers also have scripts and force their reps to try upselling to generate additional revenue. At Zappos they don’t hold reps accountable for call times. Zappos reps don’t have scripts which allows the reps to develop personal emotion connection with the customer. Zappos has clear instruction to reps – do not upsell.

One thing that is clear about “integration marketing” which everyone talks about and looking at Zappos we can state that as unsexy and low-tech as it may sound, the telephone is one of the best branding devices out there. You have the customer’s undivided attention for five or 10 minutes, and if you get the interaction right, the customer remembers the experience for a very long time and tells his or her friends about it.

As unsexy and low-tech as it may sound, the telephone is one of the best branding devices out there

If you need to learn more about Zappos customer culture, you need to read this blog published by Zappos highlighting “10 Things To Know About Zappos Customer Service“

Here are some great stories as heard from Zappos – They will make your day.

I do want to publish a story from CEO Tony Heish,

Once, at a shoe sales conference in Santa Monica, after a long night of barhopping, a small group of us headed up to someone’s hotel room to order food, but room service had closed at 11. When we couldn’t find a place that delivered food after midnight, a couple of us cajoled a woman (who didn’t work at Zappos) into calling a Zappos rep for help while we listened in on speakerphone. The rep was a bit confused by the request, but she quickly recovered and put us on hold. Two minutes later she told us the five closest places in Santa Monica that were still open and delivering pizzas

Conclusion

Covid has impacted most businesses one way or another. Zappos has not escaped the wound either. While Zappos did not have to struggle with the drop-off at physical stores that so many other retailers did, it did take a hit early on in the pandemic as shoes and clothing became an afterthought; few people were buying high heels last March. Sales have recovered since, fueled by demand in the so-called performance and home categories — think running and hiking shoes, pajamas, athleisure, and slippers. Zappos has introduced and expanded ways to smooth out the kinks of online shopping during the pandemic, like allowing some customers to make returns through UPS home pickups, and making it easier to exchange items. It also observed that the average length of calls with customer service representatives had increased as people had more time in a closed-off world. They also left more detailed reviews on products.

One of the company’s biggest goals, and a top priority for Zappos in coming years, is figuring out how to make online shopping less transactional and more like the browsing experiences that people seek out in malls and department stores. That includes developing new digital magazinelike “verticals” — much like what media companies create — such as “The Ones,” which is tailored for female sneakerheads and advertised as “powered by Zappos.”

What online fails to deliver, which physical delivers today, is around these different experiences. Until you actually go and deliver on these experiences, people will go back to the physical, in my opinion, and they will stay online for only transactional experiences

KEDAR DESHPANDE, FORMER CEO ZAPPOS

“Experience commerce,” is the future of e-commerce and will be driving the majority of sales and investment from companies. Outside of prompting consumers to explore more, Zappos is also trying to make online shopping more cohesive — all with the aim of getting consumers to spend more money over time. One of the challenges will be when somebody walks into an ‘online store’ looking for a jacket, for example, the current online experience shows them inventory next to each other — like a $30 jacket, $50, $100, $300. This is a very disorienting experience for the user. This is what will need to be changed with experience commerce.

Challenges will be there and great organizations will keep covering them. What stands out for me is how Zappos set new standards for the industry as a whole with customer service. The biggest lesson for me personally after reading Zappos’s success story and how relentless they are in their customer service is maybe there is a better way of capturing the customer lifetime value (CLTV). In most organizations, CLTV is a fixed amount that a customer will probably spend on their channel over a given period. But it is something that can grow if we can create positive emotional associations with our brand. Most of the efforts at customer service actually happen after-sales. For example, for most of your loyal repeat customers, you can surprise the customer with overnight shipping, even when they have chosen the free ground-shipping option. Most of the warehouses are open around the clock every day, which is costly. The most efficient way to run a warehouse is to let the orders pile up so that when a worker walks around picking up orders, the picking density is higher and the worker has less distance to walk. But in this case, you are not trying to maximize picking efficiency. You are trying to maximize the customer experience, which in e-commerce involves getting orders out to customers as quickly as possible.

While we all mourn the demise of Tony and his legacy will surely be missed. Zappos continues on the path to success. Amazon has shared no specific plans for Zappos. The future of Zappos without its former leaders will be challenging but I am confident the company culture created by its former leaders will lead it towards success. If not this would be a good case study for the future – How long can company culture remain after the leader departs. Well, that is a discussion for another time. For now,

Cheers, and stay safe!