Monday, September 26, 2011

How I Do It

By Brenna Fisher, in, reprinted by permission.

When you hear that online retailer is expected to make more than $1 billion in gross sales this year, you might imagine this large company is the very model of traditional corporate America—a well-oiled moneymaking machine. While is the ever-expanding No. 1 online shoe retailer, profits aren’t the top priority.

Zappos CEO Tony Hsieh, 35, makes a paltry $36,000 a year. Of course, he did sell advertising network LinkExchange, which he co-founded, to Microsoft for $265 million in 1998. So he’s not hurting for money. But Hsieh will be the first to tell you he’s not motivated by money, but by the prospect of creating something different. He talks to SUCCESS about the Zappos culture.

What were the first steps the company took to make customer service the No. 1 priority?

It was already important, but definitely not the No. 1 priority. Basically, what we found was that as we kept making improvements to the customer experience—and that was through a number of different ways—the more loyal customers were, the more word-of-mouth occurred.

Which customer-service elements make stand out?

It’s free shipping both ways. We have a 365-day return policy. We promise customers that they’re going to get their shoes in four to five business days, but actually, for almost all of our customers, we do a surprise upgrade to overnight shipping. We run our warehouse 24/7, which isn’t the most efficient way to run a warehouse, but it gets the orders out to customers as quickly as possible.

We run our customer loyalty team, which is our call center, 24/7. Most call centers have this concept of average handle time, which is all about how many customers a day each agent can talk to—and the more the better. But that just ends up translating into, “How quickly can we get the customer off the phone?” which we don’t think is great customer service. We don’t upsell the customers. Everyone is trained so that if their customer is looking for a specific pair of shoes, and we’re out of stock in their size, then they look at three other competitor Web sites. If they find that shoe in stock, they are supposed to direct the customer to that Web site.

How did you manage to hang on to such expensive business practices for so long without making a profit?

The year 2007 was the first where we made a significant profit. It was roughly 5 percent operating margins off of our net sales. Several years prior to that, we ran the company at break-even in order to maximize our growth. We could have made a profit in any of the previous three years, but we decided, whatever profit we did make, to reinvest it back into the business.

We didn’t always have all of those [expensive practices]. As an example, we used to ship everything ground, and then, when we could afford it, we would ship everything in three days as a surprise. Then, finally, we got to the point where we could afford to ship everything overnight as a surprise.

How has this investment in customer service affected your sales in the long run?

Basically, over a nine-year period, we’ve gone from zero to $1 billion in gross merchandise sales. And the No. 1 driver of that growth has been repeat customers and word-of-mouth. On any given day, [repeat business] is about 75 percent of our orders.

How do you train your employees?

It’s a four-week program. We go over company history, our philosophy about customer service and the importance of company culture, which is actually our No. 1 focus for the company (not customer service). It doesn’t matter which position you [accept]. You can be an accountant or a lawyer, and you still go through that same training that our call center representatives go through…. If we want our brand to be about customer service, then customer service needs to be the whole company, not just a department.

Is it true that you don’t have your own office? And if so, why not?

We figure the best way to have an open-door policy is not to have a door in the first place. I think, for employees, it’s good because they can just walk by and say hi or ask a question. For me, it’s good just because I can overhear conversations that are happening nearby, and that gives me a feel for what’s going on in the business.

Why is the personal connection with employees important?

I think it helps humanize all of us and makes us more approachable. We have, for example, happy hours for different departments and the new classes, and I try to attend as many of those as possible. I also host a New Year’s party and a Fourth of July barbecue at my house every year, and all the employees are invited. In Vegas, it’s about 800 people. This past Fourth of July we probably had about 300 show up.

What advice would you give to other business owners?

The traditional thing has been that you want to separate work from personal, and we really just view it as one blended thing. We actively encourage our managers to spend 10 to 20 percent of their time outside the office with their teams because when teams get to know each other as people and get to see them in different environments and perspectives, it really helps with communication and trust inside the office. We’ve asked, “How much more efficient are [your] teams because [you’ve] known each other outside the office?” The answers range anywhere from 20 percent on the low end to 100 percent on the high end, in terms of increased efficiency. If you’re able to do that with your team, it should be viewed as an investment, and it will more than pay off in terms of overall productivity.

How do all these activities and benefits, including daily free lunches and full medical and dental coverage, affect your employees and, ultimately, the business?

I think that happier employees lead to happier customers, and happier customers lead to better business overall.