20_Zappos

Zappos has made a habit of going to extremes. The online shoe seller gives free shipping on all purchases--both ways. It has a 365-day return policy, and new employees are actually offered a $2,000 bonus to quit after a four-week paid training program. "It's best to know early on if an employee doesn't buy into the vision or the culture," says CEO Tony Hsieh. "It just makes economic sense."

That counterintuitive human resource strategy and a hyper attention to customer service have helped Zappos grow into a billion-dollar-a-year retailer in less than ten years and, in the process, cultivate a cult following. In addition to an inventory of millions of shoes, the company has expanded its offerings to include handbags, apparel, sunglasses, watches, even electronics.

Shortly after moving to Las Vegas from San Francisco in 2004, Zappos received a call from the FBI's local field office. "They were asking us if they could access our photo archive," says development director Brent Cromley. Turned out the online shoe retailer obsessively shoots each model it sells from seven vantage points, resulting in the largest image database of shoe soles on earth--an invaluable tool, as any CSI fan knows, for Feds tracking criminals. "So we actually built a site for them called Sole Search," Cromley says. "It allows them to look at all the different bottoms of shoes."

It also allowed Zappos to do what it does best: combine far-reaching service and the focused application of technology to win another happy customer.

In less than 10 years, Hsieh (pronounced shay) has grown Zappos into a billion-dollar-a-year retailer. The company's offerings now include handbags, apparel, sunglasses, watches, even electronics, and along the way, it has built a cult following through its meticulous attention to each sale. "In March of 2003, we made a decision to be about customer service," says Hsieh, from the company's Vegas headquarters. "We view any expense that enhances the customer experience as a marketing cost because it generates more repeat customers through word of mouth." Indeed, Zappos spends a tiny percentage of its budget on advertising--around $18 million last year--and instead relies on repeat sales for around 75% of its revenues. "Not any one thing makes the difference," says Hsieh. "But the combo of free shipping both ways, surprise upgrades to overnight service, the 365-day return policy, staffing our call center 24/7: The whole package is what builds our reputation and brand."

Hsieh, a 35-year-old Harvard grad, came up during the height of the first Internet era, selling his Web-advertising company, LinkExchange, to Microsoft for $265 million in 1998. Today, technology expertise--including a sophisticated computer management system built in-house--allows Zappos to live up to its customer-centric standards. "From a tech standpoint, we have a warehouse management system, an inventory system, an e-commerce system," says Cromley. "But they don't get differentiated. It's just one big Genghis."

Genghis, as in Khan, operates in the background as a sort of all-knowing Borg. "If something gets returned four years later--and it happens--we can scan it in and know who bought it and if it was returned three times before," says Cromley. "The whole history of the item is kept in the system." Genghis is largely built on free open-source Linux operating systems and would require millions of dollars to re-create. It tracks inventory to such a degree that users can see when there are only, say, three pairs of size-12 Clarks Desert Boots available in the color sand. For employees, it automatically sends daily email reminders to call a customer back, coordinates the warehouse robot system, and produces reports that can specifically assess the impact on margins of putting a particular item on sale.

Like any good nerd, Hsieh is quick to embrace new media. Last year, he started using Twitter, and he encourages his staff to do the same (more than 400 employees now Tweet regularly). Last November, the company even used Twitter to publish its explanation for why it was laying off (largely at the direction of investor Sequoia Capital) 8% of its staff. In the current economy, the reasons were clear enough, but what stood out was the way Zappos handled the event. Fired employees were given up to three months' severance and six months' worth of paid COBRA benefits. As Hsieh put it on Twitter: "We expect that it will actually increase, not decrease, our costs for 2008, but we feel this is the right thing to do for our employees."

Zappos hopes other companies can learn from its example. At the end of last year, it launched a consulting service called Zappos Insights. For $39.95 a month, companies can absorb the Zappos Way through a series of video shorts. It may not be much of a threat to the McKinseys and Booz Allens of the world, but stranger things have happened. And who knows? If Zappos created a segment to help organizations find their humanity--"Soul Search"?--it might just have a shot.

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