Zappos: Best in Class Customer Service

Zappos's operating model supports its mission to provide superior customer service.

Zappos is a company that has a strong alignment between its business and operating models. Zappos is an online shoe and clothing retailer that has over $2 billion in annual revenue. After reading Delivering Happiness by Zappos’s CEO, Tony Hsieh, it is clear to me that the decisions that Zappos makes about how it operates are in full support of the overall strategy of the firm.

Business Model

Zappos started off with a strategy of having the best online selection of shoes.  However, over time, Zappos’s strategy has changed, and it now strives to be the company with the best customer service.  This has allowed Zappos to solve the issue of customers not being able to try on products before buying products online, and Zappos has made the customer shopping experience easy and painless.  Zappos offers its customers many different features that have helped Zappos become best in class in customer service:

  • Free Shipping – Customers are not charged for shipping when they buy or return a product.
  • Excellent Call Center Service – Zappos’s customer service representatives are not compensated on their call volume or how quickly they complete calls. Instead, their goal is to create a personal emotional connection with the customers, and they take time to listen to the customers’ problems and give them recommendations.
  • 365-Day Return Policy – Customers can order multiple shoes at a time and return the pairs of shoes that they do not want free of charge. Returns account for a third of the firm’s revenues.
  • Special Moments – Customer service representatives do things like sending flowers to a customer because the customer had a death in the family.

While all of these features are additional costs, Zappos views these as expenses that the firm incurs in place of advertising and maintaining physical store locations.  Additionally, all of these build Zappos’s brand of superior customer service, and this drives additional sales volume.

Operating Model

Zappos has set up its operations to fully support its strategy of being the company that provides the best customer service through a variety of ways:

  • Supply Chain – Zappos has intentionally made the decision to insource all operations.  By doing this, Zappos is able to ensure the best customer experience.  Early on, when Zappos was unprofitable as a company, some of its only profitable items were items fulfilled with drop shipments (manufacturers shipping directly to customers).  However, these items usually had a lot of late shipments and unfulfilled orders, so Zappos made the decision to purchase inventory from the manufacturers.  They continued to outsource warehousing, but this again resulted in bad customer experiences with incorrect orders and late shipments.  Therefore, Zappos decided to operate its own warehouse because Zappos workers will ensure customers are satisfied with their experience.  Even within the warehouse, Zappos intentionally operates inefficiently in some areas so that it can provide better customers service.  Zappos’s warehouse workers will work orders immediately to get orders out to customers as soon as possible instead of letting orders pile up to increase pick density.  Additionally, they will work return shipments from customers and upgrade customers to overnight delivery, and the warehouse is open 24 hours a day, which is extremely costly.  Zappos will take on all of these additional expenses in order to improve customer satisfaction.
  • Customer Loyalty Team – The call center (later named Customer Loyalty Team) is extremely important to Zappos’s business model because it directly works with customers. However, it was tough to find the right people to work in the call center out of their San Francisco location because of the cost of living.  Zappos again thought about outsourcing the call center or opening a second office.  Ultimately, Zappos decided that it needed to move its entire headquarters to Las Vegas because that is a city that would be a good fit for its call center.  Zappos did this because this move showed that customer service is a priority for the entire company, and it is not just a priority for one department.
  • Culture – Zappos has core values that have shaped its culture.  Zappos believes that its culture allows the superior customer service to happen because happier workers will deliver superior service.  Zappos only hires people that it believes will fit in with the company, and culture is a part of yearly performance reviews and monthly surveys.  Additionally, all employees go through culture training in the first four weeks of working at Zappos.
  • Holacracy – Zappos is at a point where it believes that it needs to innovate in order to continue to grow.  In order to do this, it is changing its internal operating model.  Now, when a problem arises, a new team is formed to develop a solution.  Once a problem has repeatedly come up, multiple different teams have developed solutions to this problem for different customers.  At this point,  executives analyze the different solutions to determine what makes the most sense from a customer experience and financial standpoint.  This is not the most efficient way to solve problems, but it should generate solutions that please customers.

Zappos’s business and operating models are closely aligned, and this has allowed Zappos to thrive.  From its warehouse to headquarter operations, everything that Zappos does is with the intention of providing the best possible customer service and improving customer satisfaction.

Tony Hsieh

References

Hsieh, Tony. Delivering Happiness: A Path to Profits, Passion, and Purpose. New York: Business Plus, 2010. Print.

Hsieh, Tony. “How I Did It: Zappos’s CEO on Going to Extremes for Customers.” Harvard Business Review. 1 Aug. 2010. Web. 5 Dec. 2015. <https://hbr.org/2010/07/how-i-did-it-zapposs-ceo-on-going-to-extremes-for-customers>.

Richards, Dick. “At Zappos, Culture Pays.” Strategy + Business. 24 Aug. 2010. Web. 5 Dec. 2015. <http://www.strategy-business.com/article/10311?gko=c784e>.

Vazquez Sampere, Juan Pablo. “Zappos and the Connection Between Structure and Strategy.” Harvard Business Review.  3 June 2015. Web. 5 Dec. 2015. <https://hbr.org/2015/06/zappos-and-the-connection-between-structure-and-strategy>.

Zappos.com. 5 Dec 2015.

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3 thoughts on “Zappos: Best in Class Customer Service

  1. Great summary Matt. Reading through several of these TOM Challenges I’ve seen a trend of quite a few companies differentiating themselves with great customer service. For Zappos I think it’s particularly important to continue this emphasis on customer service given such competitors as large as Amazon in the space. Aside from a profitability and logistics standpoint, I want to say it’s easy for any company to offer free shipping or free returns on orders – and many new clothing retail companies do that now. It’s a lot harder to offer the excellent customer service through call centers as you mentioned in the summary, let alone additional personal item recommendations. This involves people – which requires training and culture reinforcement. I think that’s where Zappos should continue to spend its time and energy. It could set it apart from competitors like Amazon who just won’t be able to offer the same personalized experience given the scale and breadth of different products it offers.

    1. Great post, Matt, and great observation, Armand. I agree that, at first blush, it’s hard to imagine why Zappos would be able to compete against the likes of a behemoth like Amazon, which offers much the same type of service. And although competing on customer service is valuable, I wonder how many customers actually interact with an employee of Zappos (and thereby experience their superior customer service), versus just interacting with their website in a click-and-buy type scenario. If it is the case that most customers actually do not interact with Zappos employees in a typical transaction, then I think what Zappos is actually competing on first of all is their reputation as trusted curator of quality and fashionable shoes and clothing. This differs from Amazon, which is generally seen as simply playing a middle-man role in facilitating online shopping transactions. So the value added by Zappos is that they are offering a curated selection that enables customers to know that they’re buying a good product, because Zappos approves it. In my view, the operating model that Matt described serves both to offer great customer service but also to enable Zappos to inhabit that position of trusted curator.

      1. Armand and Jeff – Both of you made very strong points. The one point that I wanted to address (only because Zappos’s CEO pointed it out specifically in his book) is the comment on how many consumers interact with an employee of Zappos. Tony Hsieh actually said that most customers will talk to a customer service representative at least once in their time of being a Zappos customer. Zappos’s philosophy on this is that this is an opportunity for the customer service representative to build the Zappos brand by providing exceptional customer service. Their philosophy is that if the customer service representative can create a personal emotional connection with the customer, than that person will be a customer for life.

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