“The Zappos Experience” Featuring Joseph Michelli

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Now for today’s guest. When it comes to companies that dominate the headlines as well as numerous lists of best companies and best companies to work for, there’s probably a few names that instantly come to mind. Obviously that one of the companies that you would think of would be Zappos. The online retailer provides a fascinating study of the power of great costumer service, outstanding workplace culture and a commitment to being great by doing good. Our guest today is here to explain how Zappos does it and how you can do it too. He’s the authors of bestsellers such as Prescription for Excellence and A Starbucks Experience. Soundview is very pleased to welcome the author of The Zappos Experience, Dr. Joseph A. Michelli. Joseph, welcome to Soundview live. Interviewee: Andrew, thanks for having me. This is wonderful. I’m excited to be here.

Interviewer: With that, we’ll let you begin your presentation.

Interviewee: All right. Well let’s imagine that about ten years ago someone came to you and said, “I got this great idea. If you’ll just put out a lot of money and what you can do is just you can put shoes online and we’ll sell them online to people and people are just going to love it. They’re going to love the idea that they can get a wide array of shoes, they don’t have to go to a shoe store with a limited number of sizes and they’re just going to trust you implicitly to send them the shoes that they want. They’re going to get the quality they want, the product they want. It’s going to be terrific.” I mean how many of you really would have invested money back in the day.

Surely, lots of people put money down on other products online. Let’s take pet food for example and Pets.com receives an incredible amount of money in its IPO and they had the soft profit and they were advertising during the Super Bowl and people knew intuitively that a product like kitty litter would be something people would trust to be sent to their door and how far wrong could you go unlike shoes.

Zappos really came from a very strange idea with good background at least from the standpoint of distribution of shoes but it was a brand that was destined to fail. As we look now ten years down the road and see where Zappos is and we realized that Pets.com blew up in the dot-gone era. Money and positioning wasn’t all there were. There were other things who were very important to success in the brand family and that included the service experience.

We’re going to talk today about five principles to really inspire, engage and allow your internal customers to bring their vendors along with you to be able to leverage all that so that the external customer is truly engaged and wowed by whatever it is you deliver and serve whether that’s kitty litter or shoes.

So with that said let’s take a look at why should we study Zappos. Obviously they had meteoric success despite the question of all value prepositions of online shoes. They were sold in case you didn’t know about a year and a half ago to Amazon.com for just over a billion dollars. Realize the start up came about for – you know it’s really been a lot of money over time but literally it was just a short amount of money that one individual had when he realized he couldn’t get the shoe he wanted after traveling all over a forayed day in San Francisco.

He got the idea, put together a little website, try to court some vendors and ultimately had not a lot of success until he attracted some venture capital money from Tony Hsieh and Alfred Lin. They have made some money in an entrepreneurial venture called LinkExchange which they sold to Amazon. Tony Hsieh was about 24 at the time and his little LinkExchange Company when it’s sold to Amazon netted about $265 million so he was using that money to capitalized a variety of different entities one of which we choose to get involve with was Zappos. As a result of his investments and a lot of hard work for a lot of people the brand was able to break the $1 billion mark for Amazon purchase.

In terms of best places to work, Zappos is in the top 10 of Fortune’s best places to work.

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It’s a list that many American companies have drooled over for a long time. Some companies have spent an incredible amount of money to be on that list at least in terms of enriching their workplace experience whether that’s the Googleplex and Lap pools and Doctors on Sight or a variety of other kind of amenity items that tend to help you get on that list along with other things. Zappos does not have that rich of a program of amenities. Most of the way in which figured unto the list is through their efforts with creating a family environment at Zappos and a very different kind of work place culture.

I think one of the reasons it’s worthy of study is because it has a different kind of culture. Everybody talks about culture like great service. I mean no CEO would step up and say we don’t want great service and we don’t want a great culture. But getting from that vision of what a great culture looks like to actually delivering it and delivering consistence service across your platform, that’s where Zappos has a lot to teach.

And then finally Zappos has done a fairly good job on the word of mouth side of the business. Very little of what they do is a result of advertising. They do some just-in-time advertising like having a shoe bins with their logo in it and some advertising in shoe bins at the airports and the security lines when you’re just in time thinking about shoe purchases or shoe related issues but they haven’t spent a lot in the traditional media. They’ve used social media very effectively particularly Twitter. That is their strong suit in terms of their responsiveness in communication.

They use their blogs very effectively and they use video blogging and they have incorporated a culture for grabbing a video camera to see the latest things going on from one department or another is just core to the way they think about business.

So with that said, we have a why for Zappos. We’re going to talk a little bit about the who of Zappos and the picture you see two of the who’s, two of the early framers of The Zappos Experience. That would be Tony Hsieh in the blonde hair and Alfred Lin, the original CFO in the more brunet shade. Also missing from this picture are Nick Swinmurn who is the guy who walked around San Francisco looking for his Chucker Boots and couldn’t find them and opened the early version of the Zappos Online before it was actually named Zappos with limited funding.

Tony Hsieh is actually just a venture capitalist who got involved in this. He’s really a serial entrepreneur to be honest and he is a venture capital then got embedded into the culture of Zappos and really brought it forward and is the current CEO. Alfred Lin was the original CFO and was a roommate of – was actually a good friend Tony’s in college and they worked together in making money in LinkExchange then ultimately through Zappos.

And then they brought Fred Mossler, who goes as just Fred, at Zappos along. In order for Tony and Alfred to get involved with Nick and bring this idea forward, they required Nick to have subject matter expert. Nick had to bring along Fred Mossler, who worked for Nordstrom, in the shoe department. So essentially, this group of people set the tone for the early culture. They needed to have somebody who knew the shoe business inside and out, they needed to have the money and they needed to have somebody to create an idea for an opportunity, which is what by the foundation the most great businesses in the end.

So these four individuals worked together in the San Francisco Bay area. They attracted more and more people as they needed to. They lived in fairly small space for the most part. There was a lot of collective, collaborative, communal work going on there. There wasn’t a lot of demarcations between work and social life. They worked all the time and so it just kind of blended together and that culture was one of really affinity, a tight group of people and friends of friends were referred when work was needed.

As the brand grew and as they had more demand on them, they had to expand. They ultimately moved to Las Vegas area to Henderson, Nevada and they had to start finding people, who were like them to be successful in their culture, and that’s when the Zappos cultural identity starts to really take shape.

So we’re going talk about five key principles as they relate to the book and we’re going to hopefully connect them to you in some way or another just to kind of give you a little bit about the book. There is something that are somewhat different because this culture at Zappos is so rich with experiences. We’re the first that to my knowledge to use QR Codes throughout a book. So as you go through this book if you have QR technology on a smart phone you can just point your phone and literally take you to videos throughout the book. So some things I might reference today in our conversation are videos that are actually observable through the book.

So let’s take you to these five principles. Serve a perfect fit, make it effortlessly swift, step into the personal stretch and play to win. These principles should talk a little bit about culture, they should talk about service delivery, they should talk about growth aspect of the business and they should talk about a strategy of business that really hopefully will cause you to think about some other dichotomies we setup between work and play as we go through this conversation.

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So let’s start with Serve a Perfect Fit. You know one of the things that became clear to Zappos is when they started they did not have a perfect fit with their customers. So they did fit very well on the notion of we are going to be able to get a wide variety of products more than you could get in your average shoe store. They have that down. But in the early days, their vision was to be a dominant player with online shoe sales and they wanted to essentially replace the portion of shoe sales that was going to catalogues in the traditional catalogue world. So that was where they were starting and they didn’t really think that they had to do much more than collect the orders and have enough relationships with vendors that they could represents those vendors online and then they could let the vendors drop, ship the shoes to the customers. Well several problems. First up, the [inaudible][0:11:00] order – the distribution into the [inaudible][0:11:03] order channel was the way that most vendors should have thought about things.

We’re all that comfortable putting their products online and they didn’t know if online was just a discount model and they didn’t want to have shelf through to [inaudible][0:11:14] order stores at one price and then have their product represented in a significantly discounted price online and they – this is sweating a lot of infinity from vendors to this notion so they didn’t fit in vendor models very well. They didn’t fit customer mindset either because as much as I want the distribution I really don’t know if I can trust somebody to send me shoes and if I get them they’re going to fit me and what if they don’t fit.

It was really a challenge for them plus they had to rely on vendors to send the products out to the customers, which was a part of the distrust cycle when there was a third party needed to actually to be your service arm. Well all this said, Zappos had to really right fit itself to customers to vendors and the like. So from a vendor perspective they changed the relationship with vendors from what was traditionally going on. Traditionally, a shoe company will try to sell their shoes to the distributor and the distributor would try to have the advantage in negotiating price with the shoes provider.

Zappos said “We’re not doing that. We’re not going to negotiate and play games on pricing. If you win we win so let’s get transparent.” And they created a new website, opportunities for the vendors. Let’s say Clark Shoes or Nike, they provided opportunities for them to see the products sell through directly through their portal. So it wasn’t as I’m trying to hide from you how much of your units were selling and then every time we negotiate I’m trying to give the sense that “Uh, you’re killing me here.”

In truth, so they’re trying say, “Let’s win together, let’s succeed together.” So they gave them real access to data. The vendors became instrumental on helping position products for greater success from sale. Now from the standpoint of the consumer, they said we can’t rely on the vendor’s third party drop shipping. We need to but the inventory ourselves and we need to get that inventory to our consumers as soon as possible.

We need to set very generous return policies that will allow our customers to feel a fit with us in terms of the trust that we’ll expend to them. So that’s how Serve a Perfect Fit went in terms of Zappos’ business model but buy a warehouse in Kentucky next to the UPS hub. They are primed and ready to go. When they’re shipping products out very quickly, they’re innovating strategies to make sure that that’s the case.

All of that is going well, the business is growing, they’re needing more and more people and how are they going to find people like the group that was hanging together in San Francisco. That became a big challenge for the success of the business as it was growing. So to address that issue Tony Hsieh did what he really didn’t want to do. I mean he is an entrepreneur, not a corporate guy by nature so he didn’t want to go to some corporate retreat, he didn’t want to have a facilitator sitting there and trying to call out what are the core values that are going to be needed to be successful in Zappos.

But he knew that there was some need to identify and articulate the values of this business so that they could choose people that met them. So instead of using the facilitator retreat approach, he sent an email out, which is to show Zappos. He sent an email out to the existing employees at the time and he said you know we’re asking the headhunters to bring us employees and they’re just bringing us wrong fit. So how do we identify who we are so well that it really gives a template for picking people who are better candidates?

The email basically ask the employees one very simple question, which is what does it take to be successful at Zappos today and from that he got a flood of email responses. The CEO just sent an email out to all existing place asking and telling what they think is to be essential to being successful in the business. He took those ideas, they called them down, they came up with 10 core values.

[0:15:00] Now it’s one thing to have 10 core values and it’s another thing to live by 10 core values. So they took the 10 core values and they made a passionate commitment that these are exactly accurate to who we are and what it takes to be successful here so let’s filter all of our business processes to be. And when I talk all I’m talking all. I’m talking looking at every single touch point in the employee journey, every single touch point in the customer journey, looking at all your major business processes, looking at all new future business processes through the lens of 10 core values.

So let’s take a look what they look like on employee journey. So the employee journey starts before they show up, right? It starts well into the applicant phase or the prospect phase. So clearly the way the Zappos messages, they message about their core values all the time but if you were to try to find a job on the Zappos page you have to go to a page about the core values before you can get to the jobs listing. And essentially, the language of that page would say look, we know you’re going to want to act like you are all these things in a bag of chips, but the truth of the matter is if you aren’t these things this is not the essence of who you are, please do not try to find a job with us.

And even if you could sneak through all of our filters, which would be very, very difficult you would be miserable so save yourselves some heartburn and time and don’t click here. So that said, assuming you think you are the values of the Zappos and then you want to click through, you click through, you look at the jobs and now you can send your resume and a job that’s related to your skill set but you have to send that resume attached to a video cover letter.

I’ve posted some of those video cover letters in the book through the QR technology and URL, but essentially you can see some amazing cover letters of people that have been presented to Zappos that will help them screen toward or against some of the core values, which I’ll present to you in just a minute. So assuming we screened, this new based screen somebody out because essentially they are way extreme on one of the core values so they don’t seem to demonstrate a sufficient amount of them then you’re gone.

But if you’re still in the running you go through gauntlet of selections stages and those selection stages include multiple interviews, the input of the person who picked you up at the airport because that Zapponian, that Zappos employee who picked you up in the airport is obligated to defend the culture so they had to give input on hiring. They’re going to look for whether or not you’d suit some of the core values like being humble for example or you’re talking all about of yourself on the ride over or do you have a sense of otherness about you.

Because if not, then, you know if you’re all about yourself, then you’re going to be given input from the driver who picked you up toward the hiring crew that might be a strike against you. So if I should say all these people giving you input, you do all these interviews, you probably go to a happy hour because they want to see if they’d like to be with you socially and if you really are somebody they’d like to be with a lot of the time. And through all that you get selected and you have obviously demonstrated your work regarding a culture fit and you probably have the right skill set or at least you could be trained to the right skill set.

Now you’re on boarding and this is where it gets really strange. Right? Because the average on boarding and I’ve been involved in organizations with all [inaudible][0:18:22] time. Then we’re talking normally about a week, a day of orientation, half day of orientation, may be a few days of kind of on boarding at most brands. This is crazy nuts. It’s a total month, a total month of orientation on boarding and in that month you’re going to be exposed to every single one of these core values, people are going to come in from all from all kinds of departments, they’re going to talk values, values, values.

You’re going to be told you are to create a project by the completion of this month that enhances the core values of a company you’re just getting on board with and you’re also going to be told you are going to serve people by getting on the phone line in our customer loyalty call center and you’re going to answer calls in real time. Now you’re saying well, that could be okay for somebody who’s going to in that career track but this is for everybody.

This is for the CFO who’s currently at Zappos, who came over from Amazon. It’s a month of him sitting alongside of a new hire who’s going to be taking their job on them at a call center and humbly, as for their core values, engaging in that entire process equally and fully and serving customers as part of the journey because if you want to serve a perfect fit you have to make sure that you’re every single person in your organization understands the importance of service.

All right. To all that said you get through the process, you’ve done your month-long training and you are now given the offer. Now a lot of people talked about the offer in articles but unless you put it all in this context the offer can sound just like a bad idea. The offer at the end of the four weeks of training you are told, “Look, we’ve evaluated you carefully against our core values, we think you fit.

[0:20:00]

“We put you through all of this in the last month in terms of being exposed to our core values, we think you fit. But you’ve experienced us now for a month, do you fit? And if you don’t, please take $4,000, which is the number currently being used because of the economy and wanting to make sure there’s enough money there to actually get people to leave if they’re not a right fit.” They’ll offer you $4,000 to leave. No prejudice. You will not come back here and work but we’re not going to have a prejudice or referral to the next employer.

If you don’t fit at Zappos take the $4,000, it’ll get you to your next job and please don’t contaminate our culture if it’s not a right fit. That’s bold and it’s crazy. Now less than 1% of the people whoever go through this entire journey ever take it but think about what it does symbolically. It says to all the existing employees that my company is willing to put its money where its mouth is when it comes to the importance of culture.

And number two, if I pass up $4,000 to say, I am working here, it’s pretty much a personal commitment to the fact that I am making a choice, a willful choice to be employed from this corner of the world trying to affect this kind of positive impact on society. So that’s the Serve a Perfect Fit concept. As for Zappos, it’s a lot about understanding the core values of some of which I’ve listed here so my favorite aspects of them to deliver WOW through service, to create fun and a little weirdness. A kind of an interesting value, not the kind of thing you normally see when people go out to retreats. Do More With Less and Be Humble, some of the aspects that are keys as well as Build a Positive Team and Family Spirit at Zappos. With that said, let’s move to the second of the five principles of The Zappos Experience book. It is Make it Effortlessly Swift. It is about the realization that in every way you can in business, if you can take it a high ground and reduced the amount of effort that your customer has to go through, your employee has to go through, your vendor has to go through, if you can decrease effort you succeed at building loyalty.

Now what you’re seeing on the screen is a graph that actually had been part of an article on a Harvard Business Review last year, which was entitled Stop Trying to Delight Your Customers and Dixon, Freeman and Toman did the research behind it and essentially they said if you want win loyalty you can’t think about all the bells and whistle, you just have to solve people’s problem and you have solve them as easily as possible for the person who brings the problem to you.

They went on in the article for those of you who are into the metric side of this to compare something called the Net Promoter Score, which as many we know is a question of regarding how likely are you to refer this business to a friend or an associate and that question, which is on the 0 to 10 scale, and people can – anybody who gets 9 or 10 is considered an advocate and people in the 6 and below are considered detractors and subtract your detractors from your advocates and you end up with a Net Promoter Score.

Well that score is pretty robust at predicting loyalty and likelihood of repurchase. Now that is a benchmark number. This particular article used a metric called the Customer Effort Score and they articulate that it performs as well as not better than the Net Promoter Score and certainly way better than just asking your customers if they’re satisfied in terms of predicting whether or not consumers are going to purchase from you or spend more from you in the future.

Now all that said, and all this academic stuff behind us from a Zappos perspective, before you worry about anything else in business you should worry about effortlessness and just making it swift. So I’ve turned that service velocity in the book and I used this term because service speed just seems wrong to me and you can send stuff really fast to somebody or serve somebody really fast and it can be the wrong thing. And so serving fast when you’re serving wrong is not really good, but serving in a trajectory that you want to serve rapidly is a goal and Zappos has committed itself to do that through website loading speed.

They’re among the fastest loading website in the industry and there are plenty comparatives and we talked about that – I talked about that term in the book. They also do it by really looking at where the user experience breaks down on the online journey so in a quantitative sense you’re obviously studying pages and seeing where people are traveling and where they’re not going and where they go from one place to the next and all that from a web analytics perspective but they do some really qualitative deep dive.

They’re looking at recorded sessions and mouse click movement on the recorded session so while they’re not voyeuristically looking at your session per se and identifying if you, they are able to understand qualitatively how people move through the pages, where they get stuck, where their mouse seems to drift away from the experience.

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All of that said, they clearly are looking for ways to make user experience as fast as possible, as easy as possible. They’ve done things it their warehousing in terms of how they pick inventory, select inventory and accurately make sure the inventory is in a box to you at a level of redundancy that is extraordinary for the industry and there’s plenty of descriptions about that. They’ve done much to expedite the delivery to the customer and reward customer loyalty to even increase expediency so VIP status and guaranteed overnight shipping is a fairly easy thing to achieve if you’re a loyal customer.

They removed all of the other pain points that they can find in the experience. They removed obstacles like requiring customers to ship the product back on their own dime if they didn’t like the product. So long ago in the early generations of Zappos they decided that we’re going to pay shipping to and from if there’s a problem with the product. And they do things to make it easier for the customer like let’s say you get your pair of shoes, they aren’t the size, you call the customer loyalty team members, you say, “Well this size is too small.” They’ll say, “Please put them on the box to get them back to us but we will send you out the size larger while we’re waiting.” They haven’t even received the return merchandise and they’re willing to leverage trust to send you out your shoes and clearly they managed against the people who abused that over time but fundamentally they don’t hold the process up to make it more difficult on customers because of an attitude of distrust. Because they effectively execute on the operational platform of efficient and the easy product experience they are now allowed to play in the more enriched space of customer experience, which is personalizing the experience for the customer but you really can’t do that until you’re operationally solid on service transaction.

So I don’t want to jump to the notion that you can step into the personal, which is the third principle of the book until you have made it effortlessly swift. So now we’re in the world of personal connections and the Zappos brand is built around something called the PAC, the Personal Emotional Connection. That’s very different, let’s say I called up to order shoes and I’m in an airport. A Personal Emotional Connection for me maybe that the call center person says, “Hi, this so and so at Zappos” and I say, “Wow, I need to get these shoes and I’m about to jump on a plane so can you help me do it quickly?” And they go, “Yes, let us do it. Let us get these shoes for you and let’s make sure we get it before the plane goes off.” So what do I need? And they’re in the space of joining you, connecting with you around your sense of urgency and time pressure.

In another instance, a Personal Emotional Connection might be where I call the call center and I am just so excited about the fact that I’m going to a reunion in the next couple of days and I really want to wear some retro of Converse All-stars in a particular color that means something to me. Wow, this kind of listening to my story and it’s saying yes, let’s get those shoes for you for that event. And maybe it turns out that as the call center person or customer loyalty team member is trying to find those shoes, they can’t find that shoe size in that color for you.

Now a lot of brands, that’s where it just breaks down and they just say, “Well, let me just get the order anyway and we’ll get them to you as soon as we can.” There’s really no care about the personal impact of not having the shoes in a timely way. So at Zappos the alternative is going to be something probably like this. A Personal Emotional Connection would mean “Bummer, we do not have your shoes. I am sorry that should have not happen to you. I’m going to help you try to find it. I’m going to go the Shoes.com, let’s see if we can find this thing.”

They’re going to search for those shoes for you and if they find them on Shoes.com they’ll send you a link potentially that says, “Here, here are those shoes.” They want to make it easy for you to get those shoes because you know what you need those shoes for that event and they might even send a service recovery discount coupon, which will be very likely redeemed because customers appreciate those who care not only for them through efficient service delivery, but who care about them and the personal realities of their lives.

So Zappos is built around that to deliver what they call WOW but they really say, “Deliver WOW through service or deliver happiness,” so I kind of merged it together and I call it “delivering WOW full happiness.” To deliver that WOW Full Happiness they do some strange extreme things too. They are called the call center that have lasted eight hours and I’ve talked to the customer loyalty team member who took the call and she said “My battery pack on my headset died several times during the call, I had to take some bio breaks, but in the end of the call we just stayed on. I talked to this older lady for a long period of time and she’s kind of like my grandmother and we ended up talking about all kind of things and how services change.”

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It turns out the lady never bought anything. Now there’s plenty of people would say that’s a stupid decision in business to let your call center people to do that and I will not debate whether it’s a lie to be on the call for eight hours or not but what I can tell that creates legendary stories and legendary stories attract people to your brand. It decreases the strain of acquisition of new customers when people are out there talking about the amazing kinds of service experience that they’ve had.

Zappos employees would send flowers to customers when they found out something, they’re tragic or untoward has happened in the family. They’d send out flowers fully authorized by the brand. There are videos that encourage the call center folks to do video thank you and their handwritten thank you notes at each cubicle so when there’s time to write a thank you note or something stands out they can do that and to make unusual personal connections and they even do all kinds of other surprise at the live events like sending flip flops in the boxes of Zappos’ product that you get just free ones in partnership with the learning channel or sending red balls inside of your package so when you open the box they didn’t just deliver shoes, they delivered a surprise, which can bring a moment of happiness in your day. They recently paid tolls on the Massachusetts’ turnpike for customers. Just courtesy of Zappos. There you go.

The fourth principle in the book is called Stretch and Stretch bottom line is all about the ways in which Zappos has been permitted to extend their brand and how Zappos is committed to one of its core values about driving growth and learning that because of that core value they have really mastered something I think that a lot of business resource is struggling, which is how do we develop our talent and how to we really do effective session planning.

Our succession planning is composed of – succession planning, succession planning. I don’t think anyone just want to plan to not be around. The bottom line of a Zappos experience is that they understood that their people were the long term future of the brand, their people’s ability to deliver this incredible personalized service experience. So they wanted to make sure that they develop a talent full of people who could move the brand forward in generations to come. So if you were to go to Zappos you would see something they call the Pipeline I refer to as Zappos University.

The Pipeline is basically a team that has helped develop curriculum that very much looks like a university. They have core classes. They have specific classes for various departments throughout Zappos. So let’s say I get hired on to Zappos and I want to be a lead buyer for the company. I might have to take a bunch of core courses. Let’s say I come in through another department, I take a base bunch of core courses some of which include things like how to set up a Twitter account. And why would your company want to teach you how to set up a Twitter account? Well if they treat you real well, guess what. What are you going to talk about a lot? Probably your company.

So there’s a lot of tweeting going on. There’s a lot of that but so one of the courses might be how to set up a Twitter account, another course might be have business writing, some basic courses. There’s a core curriculum. Then I would take many of those courses and then I would also want to start taking buyer specific courses so I would learn things about the supply chain, I’d learn things about certain product areas.

In addition to those courses about being a buyer, all of which would have been staged up to move my way to senior buyer, I also have other related parts of my curriculum so I might have to shadow a buyer, I might have embed in a vendor’s shop for a while, I might have to involve myself in certain community activities that are going to support my functions as a buyer.

All of this curriculum was basically designed by asking the question of senior leaders in various departments. What happen if you weren’t here? What if the entire senior leadership got wiped out tomorrow? What would you need to have happened so that the brand will be successful in years to come? And so they looked at all of the skill sets implicit and explicit that were needed to be unpacked to bring someone on board to that level and then they developed the curriculums to be in the Pipeline department.

And often it’s a matter of saying, “We really want to help our managers better understand how take people from a level of just doing a job to really realizing their calling and so they might read a book like Chip Conley’s Peak and they would then take the contents of that book, modify it and use it as a direct application within the Zappos experience through Zappos University or as they refer to it, the Pipeline.

Well just so they’ve expanded their offerings in growth of people they’ve also expanded their commitment to growing the products and the community around them. It’s certainly worthwhile if you have an interest to seeing the kind of level of involvement that Tony Hsieh and Zappos is taking in trying to revitalize downtown Las Vegas. Now they’re trying to create a more wired dynamic area around city hall where Zappos will create its future headquarters.

[0:35:00]

So they’re really trying to stretch the community and stretch brand to help the community in which they live and then finally in terms of product customers are basically asking them to stretch. We love the shoes, we love the service, could you run an airline? We love the shoes, we love the service, can we get some pants too so we could look at our pants and wardrobe with our shoes. They haven’t got into the airline yet but they certainly have gotten collateral clothing products and you’re seeing a lot of other product offerings well beyond clothing and well beyond jewelry into household items and a variety of sports equipment. There’s a broadening of the platform of influence at Zappos as being allowed by the customers.

The final principle of the book is called Play to Win, and Play to Win is really not play to play. It is play to win. Zappos is not the soft, gentle “We don’t really want to succeed, we’re just all having a good time out here.” This is a very, very numbers metric-driven organization. These people are proud. They are winners and want to stay winners and they do it in a very playful way though. The reason to play is to either increase the sense of connection to family or to play to increase productivity. That’s the bottom line.

And so most of the play you see there might be slight little snippets of reenergizing, opportunities for us to connect together with some affinity or as a reward for productivity. So the example I like to use a lot is this guy who’s kind of short and so his team when he was rallying them to get this production number done said to him of all the – because you’re basically asking “What are you going to want in order to achieve this incredible big area [inaudible][0:36:55]?”

And they said, “Well, because the culture is set up around this,” they said, “Why don’t you dress up like a garden gnome if we hit this number and come around spend the day with us in your garden gnome outfit, go see all your peers in your garden gnome outfit, have the videographer from Zappos follow you around in your garden gnome outfit.” And without a heartbeat he said, “yes.” Now, that’s being humble as a leader. It’s inspiring this team and family spirit and it’s playing to win. It’s being willing to be vulnerable to be in a state of play to suspend the purpose just because it connects with people and it allows them to be rewarded for their efforts.

And so that’s the story of Zappos. In fact the first line of the book is a tweet where one of the Zappos family members said, “I saw Winnie the Pooh running through the parking lot. Yes, I work at Zappos.” And it’s not unusual for this culture to be weird and playful but there’s normally a back story behind it, a back story about productivity. The brand does a lot of things that are unusual in a play state the recreation space, the reenergizing space gives all employees the authority to decorate their boardrooms. So you see [inaudible][0:38:09] boardroom or see a boardroom theme like the movie Up with the tennis balls on the bottom of all the tables and chairs. It’s an amazingly playful spirit but it does it with a purpose. So they use evidence-based research and they’ve got nap rooms to show that power naps really do increase productivity and they then afford people the opportunity to power napping. It is a Play to Win culture along with all the other aspects covered.

In the end I would suggest to you that Zappos exceed because it has a strong commitment that I would call love for customers, love for team members, love for Zapponians and Zappos family members. It’s authentically commitment to the growth and development of the people that work there. It’s authentically to the growth and development of the brand and the growth and development of the customer experience. In the words of Peter Senge Love is nothing more than a commitment to someone else with growth and development at least as it applies to the world of work.

Beyond that Zappos drive a lot of benefits. It makes it easy for people to work there, it makes it engaging emotionally and it creates employee advocates to the brand as well as customers who experience ease, emotional engagement and advocacy as well. And then again, they not only give the confidence to the customer, the integrity, the pride of the customer, a little [inaudible][0:39:32] passion from the customer as well. Customers aren’t just satisfied with Zappos. They feel that Zappos live their values.

Tony Hsieh makes $36,000 a year though he’s a billionaire as a result of his investments but as the CEO he draws a salary of $36,000. To be humble is part of the family spirit. He’s available and accessible. He doesn’t have a open door policy as a no door policy. He lives in a cubicle at work right at the center at the heart of the action and he’s usually accessible in that cubicle area called The Jungle. People are proud to be associated with the brand and they have a passion for the brand. There’s a lot of I love Zappos stuff that goes on in the brand family.

So to close, I’ll always to say to you ultimately Zappos figured out that services as flawless product as you can have, and your operational excellence delivered exactly as clients want with great efficiency of ease and then also providing an environment of caring. That’s also a way they treat their employees and the way they treat their vendors. As a result of all of that they derive from great benefits from serving well.

Serving well is something that they’re grateful for the opportunity to make a difference in the lives of those they serve. They’re proud of what they do. They believe that they’re starting a movement to change the way the world works. They believe they’re setting a higher standard for service delivery online and elsewhere, and they’re committed to transforming the service experience as well as the happiness delivery experience at work and beyond.

Through all of that the service that they give to others has served them well even when there has been data compromise issue that they faced the commitment of loyalty through that challenge of being hacked was quite unlike a lot of the brand equity that other brands lost in relation to similar problems that they’ve encountered in a world where you’re either been hacked or you haven’t been hacked yet sort of thing.

So if I was to say the Zappos experience is really about the five principles we’ve talked about but it’s really about a lot of people forging forward with a goal of delivering WOW full happiness in an engaged environment that serves a perfect fit. Thanks for your time and attention today. I think I’m ready to take a few questions.

Interviewer: If you have questions for Joseph Michelli, the author of The Zappos Experience, you can ask him by going to the chat function on your player. It should be on the lower left hand corner of your screen. If you click private and select leaders and assistants you can type your question for us as several of you already have, and you click the arrow to send us your question.

Joseph, I think one theme that I’m seeing from a lot of members of our audience today and I should remind we have a global audience that’s tuning in with us, the applicability of some of the principles of Zappos to other industries, other types of companies, non- profit, can you talk a little bit about how to take some of the essence of what Zappos does and how it then applies to other industries beyond online consumer goods? Interviewee: Oh, absolutely, and you know and just so people know about my background, I’ve worked in a lot of different sectors in the industries and written books about companies as widespread as Pike Place Fish Market in Seattle, Washington and Ritz-Carlton Hotel Company and Starbucks and a variety of others. These principles do translate beyond the online world and they certainly translate beyond geographic boundaries so this says a global reach application. Now let me tell you what that application is centrally.

First and foremost, I do believe culture eat strategy for lunch and breakfast and dinner meaning that you can take a strategic position and say we want to increase our customer service by some metric and we want to bring a team in to help us with customer service and I’ll tell you that those initiatives are short-lived that they – you might get some bump and some bounce on the metric but to really sustain a culture of customer service you have to start inside out.

It is not an outside in sort of strategy and so the inside out is who are we? I mean at a fundamental level, what is it that we bring to the table that differentiates it, that’s credible, that’s relevant, that’s unique, that’s durable? What is it that we bring to the table? And what causes somebody to fit here and not fit somewhere else? I mean it is really kind of getting to the core of can you take just anybody with the right skill set and make them successful in your business. And if your answer is yes, then your business doesn’t have a culture.

You really should be selecting for people who fit the cultural dynamic and the only way to know that is if you spent some time really doing your introspection in what it is. You may not like what you see and so there can be some aspirational opportunities to move yourself into a different needle, but the more aspirational it gets, the less likely you really are the thing you want to be and the harder it’s going to be to leverage your way over there.

Zappos is really a story about figuring out who you are first, and then being very disciplined in your willingness to not let people in who aren’t right, who aren’t right culturally for what it is that you need to do. Now some people would argue you need a lot of cultural diversity and surely I’m not talking about cultural diversity in terms of that ethnicity. I’m talking about not diversity around core values of what it takes to be successful in your industry. And you will not need a lot of diversity of thought and I can tell you Zappos is a very diverse group of people but from a values perspective they are very [inaudible][0:45:06].

[0:45:00]

Interviewer: We’re receiving a lot of questions from listeners about the hiring process, the on boarding process so let’s go into that a little deeper with a couple of questions from the audience, one of which is who is the person at Zappos who originated the idea of the $4000 buyout. Would you mind repeating the percentage of people that have actually taken it?

Interviewee: Sure, less than 1% and the buyout has grown up over the years and I think Tony started it at probably – we have to remember back it was at $500 or something. I think he really was worried that one of the biggest mistakes that they were making is still letting people in who were still not right for the company and I think he was trying to impress upon people that he was 100% behind the notion of people not getting in the door if they weren’t right.

And the way he could symbolize that at some level was to say, “Look, I’m willing to put my money up here and if – I’m willing to ask the person who’s made it through the hiring process if they would leave us if I gave them money if they personally knew that they were a charlatan to this cultural values.” And it’s grown up overtime so the mount’s going up and it’s changed based on the economy and that’s why that’s $4000 right now because given the unemployment rates people might be more willing to stay in the job they successfully navigated their way to even though they know in their heart that this is not – that they’re going to be a bad apple in the organization.

Interviewer: And I’d assume the on boarding process also evolved as the company grew. At what point, how many employees, someone is asking, were with the company at the point when they went to a four-week on boarding process?

Interviewee: I would have to go back and look at my timeline so I’m not giving an accurate answer here. I’m going to hedge the answer by saying I don’t want to give you misinformation. What I can tell you is that it was a manner of hundreds of employees that were coming over into the environment in San Francisco and they were not at a four-week on boarding at that point in time. It was as they scaled up fairly quickly that they saw their deficits in both the inability to identify their right employee and they built that on boarding and accculturation process on right about the same time.

So, again, I can’t tell you when they went to four weeks but I can tell you that when they faced the issue of we’re not getting the right talent coming at the door, they had already started to do some extended on boarding and they were realizing that the on boarding couldn’t turn the wrong people into the right culture. So what they had to do is first fix the way in which people showed up and then they had to make sure that they fit them in a cultural tradition and then after that they could really make a meaningful offer because I could offer you that money the day you walked in the door and you couldn’t really appraise whether or not this is right for you or not.

And one last point on that, they’ve recently changed the offer. In the old days, the offer was good for you to say that right at the end of the on boarding. Now, they allow you to extend the offer for the first month on your job. So not only you have gone through the month of on boarding now and you got a feel for it and you’ve been given the offer. You don’t have to actually accept or reject the offer until a month into your actual job position which realized you haven’t been on the job in your division or department during that first month.

Interviewer: And we’ll do one more question on this subject and I will move on but it’s amazing the number of people that really want specific details about the on boarding and the retention. That’s what will end it for this section is the retention rate at Zappos from an employee’s standpoint how – I don’t know if the data’s available but a lot of people are asking how long do the average employee stay and what are the retention rates like?

Interviewee: Well I could tell you that in general a call center environment retention rates are not very good. And in Las Vegas call center environments, they’re not very good because the community itself is a little on the transient side as compared to other communities and that’s not saying anything about Las Vegas in terms of the work force. So those qualifiers in place, Zappos is substantially below the industry averages in turnovers from both call center and in that regional issue. The exact number has changed and so we in the book we talked about the number of applicants relative to positions and that is gone. Even more applicants have gone up since Tony has written his book. I mean these numbers are so dynamic.

What I can tell you to give you an answer that’s helpful, in the book we give people an opportunity to be a part of something called Zappos Insights for a month and Zappos Insights is another stretched thing that happens to Zappos. Because of all the success, they’ve developed a training department that helped other businesses succeed and take some of these principles and applications and that’s called Zappos Insight.

[0:50:00]

And so in the book, we give people the opportunities for a one-month free membership to Zappos Insight and a lot of these tools and data are in that compendium at Zappos Insights.

I would strongly suggest if you have about the book to at least check out Zappos Insight and consider being a part of that community for a month or so to learn of the specifics. Also you can travel to Henderson, Nevada if you are so inclined, do the tour free of charge to Zappos. And you can also do some additional extended times at Zappos thanks to Zappos Insights where you’re meeting directly with the HR department and asking specific questions like the ones you’re asking or maybe they’re interested in merchandising or whatever. There are opportunities to drill down deeper with the subject matter expert exactly in Zappos they give you current numbers on those issues.

Interviewer: We only got 10 minutes remaining with Joseph Michelli, the author of The Zappos Experience. If you have a question for Joseph, you can submit it to us by using the chat function on your player. You can go to private, then click leaders and assistants. Type your question into the box then you can click the arrow to send it to us. And again, we are getting a lot of technical questions from the audience but I think there are ways that we can answer these that will be beneficial to everyone.

One of which is about Zappos’s decision to maintain a domestic call center versus outsourcing. The way I think this question is phrased is pretty interesting. Do people feel more comfortable about a longer wait time if they get a chance to talk to a domestic call center operator?

Interviewee: Well, yeah, I mean it’s high empirical question and needs to be answered by somebody much smarter than me but let me answer it at least in this way. Zappos’s commitment was to always keep the call center locally for reasons I think that meant more about connecting. I think it was that they could control the cultural experience. They could on board like they’re doing and if you do a lot of this as a farmed out sort of thing you’re at the mercy of the culture of the company that does it and you’re just another product in their tool kits. So I think the bigger issues were those.

Now, there’s a great deal of emphasis placed on a couple of metrics in the call center that I think are important. One is wait time. They definitely are making sure that people are not waiting very long whether that’s because of local or otherwise so they are very committed to wait times and they have very strong metrics and go over objectives and they nail them. Now, I’m not sure how they do it given that they don’t measure call length time. So this is one of those complexities of algorithms.

I mean it’s a resourcing challenge to realize if I am the CFO and I’ve been trained on how to do call center stuff, I mean I have everybody who’s now cross-trained in the organization who’s capable and I’ll tell you, they scale up that way in a big way come crunch times around the peak times in online purchasing. So they do some interesting things but they keep the culture relevant as a living. So you got wait times and they don’t measure call length times.

They do measure how quickly you get back on call and they also measure how customers experienced the call and there are some very specific metrics that promote a score “Would you hire the person who served you today if you ran a service business?” kind of questions. There’s a lot of richness to how they maintain a quality assurance of a product that delivers a personal experience. I don’t they could get all that on an agent feed that’s outside of the house.

Interviewer: Just following up on that idea. Someone brought up a point that I think is relevant to the conversation when it came time for Amazon to acquire Zappos, was there a debate about that, about keeping that domestic call center? Was that a major factor in let’s say, was that a sticking point for Zappos if that was a must keep for it to deal with Amazon?

Interviewee: Yeah, who knows exactly what’s going on in that room. I can just see Bezos and Hsieh and all those people together, but I think in the end what’s true was that Amazon knew what it got was Zappos. It got this different product. It’s not a commodity product. It’s not a discount product. It is a high-quality full service product. Zappos has a sister product called 6pm that is more on the discount side, not all those service bells and whistles. So they knew that. To get that out would be really wrong.

Now what could they do? They could interconnect Zappos to Amazon products and they could do some things that leverage the warehouse’s efficiency. They could make Zappos better in some ways probably but they didn’t want to make it worse and dumb it down. And I think the risk they would have is that they could go in and say, “We just want to take all of the richness of the cultural experience here and we want to try to get it down, squeeze down to the lowest call center number.” I don’t think the call center is a call center at Zapppos. But certainly, actually it’s not making money probably in the end but in a way, it’s the customer loyalty arm of the brand and that’s being thought of differently.

[0:55:00]

It’s reducing their cost as it relates to advertising in a variety of other consideration.

Interviewer: We have a few listeners that are curious about the notion that obviously no organization is perfect. Even Zappos has to make mistakes on the service side occasionally. A couple of people have asked, can you give an example of something where they necessarily didn’t meet a customer’s expectations and how they’re then recovered from that.

Interviewee: Absolutely. One lady ordered this blue pumps and she kept getting black pumps – three times. She tried to get this right and she got black pump. Ultimately, it got picked up to Alfred Lin, the CFO, and now he did all the things and the customer is really nice about it. She ultimately said, “Look, I know you’re probably a credible organization not trying to rip me off but you’re just not getting your act together and this is ridiculous and I’m never going to do business with you again.” So as far as the customer is concerned she pretty much shut off the final – shut over about and Alfred did all the classic things, refunded the stuff and done that probably even before that but ultimately they researched it, they found the company, they found that the shoes didn’t – there is short period run where they’re wearing that color but they hadn’t been in a long time. They tracked down a pair in that color and that size thanks to their vendor relationship and they sent it to her knowing full well along with the refund that the refund would have been sufficient. The extra mile service was not necessary and that she may never buy from them again. But they do that a lot.

Another quick one and this is on the 6pm side. They had an accidental computer glitch that said all pricing was fixed at no more than let us say, $39 so people were buying things for about six hours and nothing was more than $39 no matter how expensive it was and rather than just saying, “Woops, we glitched it. Sorry. Here’s a coupon for your next purchase. We canceled all those orders.” Zappos stood behind it and they said, “We’re going to honor the pricing because it was our error and not yours and we’ll take a big hit,” and they did.

Interviewer: There are a couple of questions from the audience about the ways in which some of the principles with Zappos can be implemented in organizations that have an established structure because I think some of the sentiment that seems to be coming through in the questions I’m receiving are about the fact that Zappos’s leadership knew what they wanted and had this commitment from the beginning. What about if you’re, for a lack of a better term trying to reverse engineer some of the successes that Zappos has, how do you go about approaching leadership in your own organization that maybe isn’t quite receptive to some of the ideas? How do you help make that connection?

Interviewee: Oh, this is just totally awesome question because you know I’ve been in this world too of working a corporate structure that I felt like “Wow! We’re never going to turn this ship.” And it’s a bigger, wider turn. It takes a lot more effort but it’s still the same core, which is at some fundamental level you have to deliver results for the organization. And if you figure out ways to deliver results and then try to change the way things get done, people listen to you. If all you do is try to change the way things get done and you’re not actually making the needle move on the result side, you get discounted. So I’d say, create a big area audacious goals for the organization that are relevant to your leaders and as you go about executing those goals and you’re really delivering against them, increase the amount of fun you have along the way, create opportunities to deliver those results in a more fun, playful community of light-minded people. And by that I really mean when you set a goal, go after the goal but let the process that you used as you go after the goal reflect more of your play to win mindset.

And that then becomes the ability for them to tolerate this a little bit more playfulness if you will because they’re seeing a deliverable on the backside. I think sending people copies of books, leaders I’ve definitely dropped books off, the leaders of mine who I just said. I read this and then something to me. I’m wondering if we could talk about some of these ideas that how we might implement them here. The book is rich with lots and lots of let’s look at it. Let’s assess ourselves versus what Zappos does. Let’s figure what’s relevant for us and what’s not and if we could change just a couple of things a little bit what would be the things we would change and how could we effectively assure that that change takes place?

So there is a technology strategy inside of the book that helps you get there but I think in the end, you have to start with what do we want to achieve for the company and how do we want to push the envelope a little bit as we go there.

Interviewer: We’re running short on time so I think we’ll take one last question and Joseph, if you wouldn’t mind, a few people have asked this. Do you think you could close words there by giving us, from your experience with the company, one defining moment that to you typifies what Zappos is and what it means from your own personal experience?

Interviewee: Yeah, I think I was at a vendor event that Tony Hsieh had and the vendors came into town. It was vendor appreciation and Tony Hsieh was out front in this thing.

[1:00:00]

And then you realize this guy is a billionaire. You’d think there’d be a security entourage around him at this particular moment but there wasn’t. He was just there with the vendors. He greeted them personally as they came in. He was wearing I think a carnival outfit because the event was themed in a kind of carnival theme and he was just there and present with people thanking them for being a vendor.

You can say, “Well my senior leaders aren’t so inclined,” so this obviously will not apply to me, but are you doing that? Are you inspiring that kind of behavior in leading up? There are very few people that will demonstrate that level of humility, that level of graciousness and that can WOW you by their heart of service like someone like Tony Hsieh and most of the people I’ve met at Zappos.

Interviewer: That was to provide quite an incredible example of what a company can do when it’s committed to being great by doing good. If you listened to us throughout the course of this event, you’ll know that it can be done and it can be done in your own organization. Joseph, thank you so much for being with us today.

Interviewee: It’s an honor, Andrew, thank you.

Interviewee: We thank Joseph Michelli for appearing today on Soundview Live. We’d also like to thank all of you in our audience for submitting such great questions today. Special thanks go to Ursula Sharp, the executive producer of Soundview Live. Don’t forget to look for your follow up email in three to five business days. It will have a link to a replay of this event as well as a link to download the slides and some additional content.

Join us next week on Thursday, February 23rd at noon eastern for the next installment of our series. The toughest part of business isn’t achieving success. It’s sustaining success. I guess next week we’ll help your company break free from the pull of a toned past. We’ll be joined by Geoffrey Moore, the author of Escape Velocity. This is going to be a great event for your company’s senior management team. Make sure you get signed up soon.

Remember, if you’re a Soundview subscriber you can attend Soundview Live for free. For subscription information to sign up and look through our online catalogue of archived events is at Soundview’s website Summary.com. Soundview Live is a production of Soundview Executive Book Summaries, a division of Concentrated Knowledge Corporation. This program is copyrighted 2012 Concentrated Knowledge Corporation. This is Soundview Executive Book Summaries, my name is Andrew Clancy. Thank you and have a good day.

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