Zappos | Financial markets homework help

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Case Study

If the Shoe Fits (and even if It doesn’t):

customer Service at Zappos

One day in 1999, at the height of the dot-com boom, Nick Swinmurn went shopping for shoes in San Francisco. Despite spending hours going from store to store, he couldn’t find the shoes he wanted. after returning home empty-handed, Swinmurn tried shopping online but found himself defeated there as well. Online stores of every type were springing up, but none was devoted to a huge selection of shoes. Swinmurn saw a market opportunity from his personal need and knew that the investment environment at that time made substantial growth possible.

although potential investors were initially skeptical that anyone would buy online something as individual and difficult-to-fit as a pair of shoes, Swinmurn had research showing that 5 percent of shoes were already being sold through mail-order catalogs, and that shoes were a huge market. he received a $500,000 investment, and he and his investors—one of whom, tony hsieh, would later become co-CeO—changed the name of the company from to Zappos—reminiscent of the Spanish word for shoes, “zapatos.”

Swinmurn’s original idea was to offer the absolute best selection in shoes. Selection would be the company’s competitive advan- tage. But when Zappos couldn’t get a number of shoe brands to participate, the company realized it had to differentiate, based on customer service. From the beginning Zappos offered free shipping. When someone ordered ground shipping, Zappos sent it overnight instead, amazing the recipient. the company also offered free return shipping—and accepted returns up to a year after purchase. the goal was to surprise and wow customers…and to get them talking about Zappos.

Yet all this was costly. Shipping is extremely expensive, and two- way shipping significantly reduces profit margins. Zappos believed in delivering purchases quickly, which is also expensive. One way Zappos reduced its cost was to use “drop-shipping.” In other words, the manufacturers (or their distributors) sent orders directly to the customers from their own warehouses rather than from Zappos’. the advantage, of course, was that Zappos could maintain far lower inventory levels—thereby reducing costs. But it also had far less con- trol over the customers’ experience. Shipments would come from different sources; they could be slow, lost, or just plain wrong.

o in 2002, Zappos built its own centralized distribution warehouse next to a UpS facility in Kentucky. that meant that orders could often be shipped out the same day they were received. and the next year, the company discontinued the practice altogether of drop-shipping from other companies.

Zappos also realized it needed to make sure its customer service representatives were well trained, highly customer motivated, and passionate about the company. the com- pany instituted above-industry salaries, extensive training, and lots of extra perks for employees. New Zappos hires are put through a five-week training course (extraordinarily long by industry standards) to ensure that they are fully immersed in corporate culture, customer service, and distribution skills. then, at the end of their training, they’re offered $2,000 to leave. anyone not completely enamored of the company is encouraged to take the money and go. Few do. (In 2011 Forbes ranked Zappos 15th on its list of the 100 best companies to work for.)

another way that Zappos differed from the industry was in how it treated call center workers. Unlike in other call centers, calls to Zappos are not timed, nor do the call center workers have to meet minimum sales goals. In the end, all of this paid off. With lower turnover—the company’s call center turnover is under 7 percent, compared to 150 percent industrywide—Zappos saves considerable dollars in recruiting, hiring, and training costs.

another way Zappos keeps costs down is by eliminating errors. employees are rewarded when spotting potential mistakes in ship- ping or warehousing. Without the need to correct costly mistakes after the fact, operational expenses are also kept in line.

Zappos considers customer service an investment, not a cost cen- ter. although returns amount to approximately 35 percent of overall revenues, 75 percent of orders come from repeat customers, who typically buy, on average, 21⁄2 times within a year, spending more each time.

By depending on happy customers to spread news of the com- pany through word-of-mouth marketing, Zappos also keeps its advertising budget low. a full 43 percent of new customers come from word of mouth.

Zappos was first profitable in 2006, and since then has had an unbroken record of profitability. It was acquired by amazon in 2009 (a short 10 years after its founding) for about $1.2 billion, and is operated as a wholly owned subsidiary.

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