509-046-1 ICMR Center for Management Research Zappos.com: Focus on Customer Service This case was written by V. Namratha Prasad, under the direction of S.S. George, ICMR Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. 2009 ICMR Center for Management Research ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India Email: [email protected]. www.icmrindia.org Distributed by ecch, UK and USA North America Rest of the world www.ecch.com t +1 781 239 5884 t +44 (0)1234 750903 ecch the case for learning All rights reserved f +1 781 239 5885 f +44 (0)1234 751125 Printed in UK and USA e [email protected] e [email protected] 509-046-1 Zappos.com: Focus on Customer Service “Our whole philosophy is rather than spend a whole lot of money in marketing let’s just put it back into the customer experience and let our customers generate that word of mouth and do the marketing for us.”1 - Fred Mossler, Director of Merchandising at Zappos in 2008. “Zappos has built a dot-com model specifically for dot-com and have invested a great deal of time, money and effort into combining superior shoe business knowledge with a great supply chain, business process, and retail policy.”2 - Gene Alvarez, Vice President of Research at Gartner in 2008. INTRODUCTION In January 2009, Zappos.com, Inc. (Zappos), the market leader in online shoe sales in the US, appeared for the first time on Fortune Magazine‘s ‗100 Best Companies to Work For‘ list, figuring at No. 23 in the list for 2009. Jeffrey M. O‘Brien, Senior Editor, Fortune Magazine, said, ―Zappos is adored by employees, providing a model of how to manicure culture and treat staffers like adults, while simultaneously reassuring them that sometimes it‘s okay to behave like children.‖3 Zappos was founded in 1999, at a time when there were few online shoe retailers. The company grew over the years, mainly by offering several customer-friendly services that other online shoe retailers did not provide such as free shipping and a generous return policy. Some of these services were offered at a considerable cost to the company. Moreover, Zappos ensured that customer service was ingrained in the company‘s culture. Strategic business decisions at the company, including the decisions to shift both its headquarters and warehouse to other locations, were always taken keeping in mind the objective of customer service. HR activities like hiring, firing, and performance evaluation were also carried out with a view to enhance its customer service. Zappos urged its customer service reps to be friendly and helpful to customers, even going to the extent of advising them to direct customers to competitors‘ websites if a particular product was not available with the company. Zappos claimed that it put in as much effort into customer service as other companies put into marketing. According to the company, it got most of its customers through word of mouth marketing, and its employees, who offered superior customer service, were the people most capable of creating a positive buzz about the company. Zappos even used media like blogs and social networking sites like Twitter to reach out to customers. In 2003, in addition to shoes, Zappos began selling handbags, watches, and apparel. During the period 1999-2008, it was one of the fastest growing online retailers in the world. The company‘s unique approach to selling shoes online resulted in its sales rising to US$ 1 billion in 2008, from almost nil in 1999. 1 Ann-Christine Diaz, ―2008 Creative Marketers: Zappos.com,‖ http://creativity-online.com, October 21, 2008. 2 Pam Baker, ―Zappos.com: These Boots Were Made for E-Commerce,‖ www.ecommercetimes.com, October 16, 2008. 3 Jeffrey M. O‘Brien, ―Zappos Knows How to Kick It,‖ http://bingjobs.blogs.fortune.cnn.com, January 22, 2009. 2 509-046-1 However, in November 2008, faced with the recession in the US, the company decided to lay-off of about 125 employees. The CEO of Zappos, Tony Hsieh (Hsieh), gave a long explanation for the lay-offs on the company blog and the social networking site Twitter. He said that it was a proactive step to keep the company‘s financial position sound, in light of the poor economic conditions in the US. BACKGROUND NOTE 1n 1999, Nick Swinmurn (Swinmurn), who was working as a webmaster for Silicon Graphics4, was disappointed and frustrated when he could not find a pair of Vans5 shoes in the style, color, and size that he was looking for, while out shopping at a mall in San Francisco,. He then unsuccessfully tried to buy the shoes online. However, he discovered that while there were a number of small stores selling shoes online, there were no major online shoe retailers. Swinmurn immediately saw the business opportunity in this. He said later, ―I‘d worn Van‘s my whole life and they just happened not to carry this certain style any more. And I started thinking that if what happened to me was a common experience, there might be a business in trying to solve it.‖6 In 1999, the footwear industry was worth around US$ 40 billion, and about 5% of the sales were through mail order catalogs. Swinmurn estimated that the online shoe business would be worth more than US$ 2 billion. He decided to quit his day job7 and start an online shoe retailing business. By June 1999, he managed to raise US$ 150,000 in initial capital from friends and family. In July 1999, the website shoesite.com was launched. Swinmurn entered into a tie-up with a few small shoe stores in his neighborhood to provide him with the shoes to sell online. In an effort to expand the business, Swinmurn decided to seek venture capital funding. However, he was turned down by most of the venture capital (VC) firms that he approached, because conventional wisdom had it that shoes could not be sold online, as no one would buy shoes without trying them on first. Finally, Swinmurn managed to get the attention of Venture Frogs, a VC firm founded by Hsieh and Alfred Lin (Lin). Hsieh had earlier set up a company called LinkExchange,8 which was sold to Microsoft Corp.9 for US$ 265 million in 1998. Lin used to work as the finance head at LinkExchange. In 2000, Venture Frogs invested US$ 1.1 million in the business. In addition, Hsieh joined as co- CEO of the company, while Lin joined as CFO. The company was later renamed as Zappos.com, Inc. The name was loosely based on zapatos, the Spanish word for shoes. Later, Hsieh invested some of his own personal funds in the company, and the company managed to gain access to credit from banks, which helped fund its expansion plans. 4 Silicon Graphics, founded in 1982 by Jim Clark and Abbey Silverstone, is a company providing a range of computing solutions for data storage and security. 5 Vans, founded in 1966, is a manufacturer of shoes and is based in California, US. It makes shoes mostly for surfing, skating, and trekking. 6 ―Focusing on Service — Nick Swinmurn‘s Key Move,‖ www.startupnation.com, 2004. 7 Swinmurn graduated from college in 1996. Then he worked as a group-ticket salesperson for the San Diego Padres of Major League Baseball. In 1997, he was working as a sales manager for a successful online automotive retailer called autoweb.com. In 1998, he joined Silicon Graphics and worked as a webmaster. 8 LinkExchange was formed in 1996, by Harvard graduates Tony Hsieh and Sanjay Madan. It was a web based advertising co-operative, wherein members displayed ads on other member‘s website through links. It was acquired by Microsoft in 1998. 9 Microsoft is the world‘s largest software company based on software sales revenues. It also has a presence in the fields of computer hardware development and video games. 3 509-046-1 In 2003, in addition to shoes, Zappos also began selling handbags, clothing items, and other accessories. In October 2004, Sequoia Capital (Sequoia)10 made an initial investment of US$ 20 million in Zappos. In June 2005, Sequoia invested a further US$ 15 million in the business. In 2006, Swinmurn left the company to form STAGR, a website dedicated to selling customized apparel. Zappos began to turn a profit from 2006. Lin said, ―After breaking even during its first six years, [Zappos] did post profits in 2006 and 2007.‖11 During the period 2001-2008, Zappos became one of the fastest growing online shopping sites and enjoyed an astonishing growth in sales year-by- year (See Exhibit I for Sales Figures of Zappos). As of 2008, Zappos was the largest online shoe retailer in the world, offering over 1,000 brands of shoes in over 150,000 styles. THE IMPORTANCE OF CUSTOMER SERVICE According to Swinmurn and Hsieh, the Zappos website was originally conceived as a site that offered a large selection of shoes in terms of brands, styles, colors, sizes, and widths. However, they discovered soon enough that providing a large selection was not easy, as most shoe manufacturers were reluctant to work with a small company that sold shoes online, due in part to concerns about the effect of such an association on their brand image. Swinmurn and Hsieh realized that it would take them a long time to build a reputation, attract shoe manufacturers, secure inventory, and build up a large selection.