Zappos – Powered by Service but Stunted by Recent Changes?

Zappos has effectively set the standard for other e-commerce operations and, with annual sales in excess of $2 billion dollars, it’s clear that Zappos has been able to align its business and operating models. However, as they continue to experiment in these operating areas, they should be wary of misalignment going forward.

Founded in 1999 with the goal of having the best online selection of shoes, Zappos has quickly evolved into a company that seeks to provide the best online service across any merchandise category. Their vision, in their words, is:

  • One day, 30% of all retail transactions in the US will be online.
  • People will buy from the company with the best service and the best selection.
  • Zappos.com will be that online store [1].

To say it simply, Zappos is a distributor. They procure goods from their vendors and ship to customers who order online or on the phone. To succeed with this business model, Zappos must excel in the following operating areas: distribution, vendor management, and customer service. Today, Zappos has effectively set the standard for other e-commerce operations and, with annual sales in excess of $2 billion dollars, it’s clear that Zappos has been able to align its business and operating models. However, as they continue to experiment in these operating areas, they should be wary of misalignment going forward.

Distribution

Core to accomplishing their vision is speedy delivery, and the location of Zappos’ warehouses plays a significant role in accomplishing this goal. Zappos chose to open two warehouses just miles away from the UPS Worldport, the carrier’s global hub in Louisville, KY, allowing the company to quickly receive merchandise, update inventories for customer selection, ship merchandise and enable quick returns. Faster return processing encourages customers to purchase more, potentially even more impulsively, because they trust the reliability of the delivery and return process. Finally, whereas most distribution companies have UPS trucks picking up shipments once daily, Zappos is able to send multiple trucks to UPS throughout different times of the day. This significantly increases the likelihood that customers receive material next day whereas other companies would delay shipments for customers who did not meet their ordering cutoff time. [2]

Zappos Warehouse in Sherperdsville, KY

Vendor Management

Customers must be satisfied with the breadth of product selection so Zappos must maintain solid vendor relationships. Zappos understands that by aligning incentives with their vendors, they both grow together. Unlike many retail companies, Zappos is completely transparent with information such as inventory levels, sales and profitability.  As a result vendors become an integrated part of the supply chain, and minimize potential bullwhip effects with upstream parties. When inventories become low, vendors can suggest orders for buyers to approve. In addition, vendors can give merchandisers suggestions on website presentation and set up new marketing campaigns. Merchandisers benefit from understanding how well their items sell, and even get direction from the Zappos team on which direction to move their product lines. This positive relationship between vendors improves Zappos’ ability to provide the best breadth of selection for customers. [3]

Customer Service

Zappos is able to captivate customers through their customer loyalty team. Their team of 600 employees takes thousands of calls, texts, and web messages daily, which represents interaction with 3-4% of its customer base on a given day (of which they operate 24/7). Their customer service team is also not constrained by designated call times or requirements to up-sell their customers. Rather, they are empowered to make decisions that are best for their customer. Customers, as a result, consistently receive service that exceeds expectations and brings them to Zappos again. [4]

The company trains all of its employees to ensure that they stay close to the company’s core value. New hire training, regardless of job function, includes 2 weeks of taking customer service calls and all employees are required to take 10 hours of customer service calls annually to keep employees calibrated on what is most important to the company and help them drive innovations that are catered to customer needs. [5]

Zappos Customer Loyalty Team

Success of Experimentation?

Zappos invests heavily on having a positive and quirky culture within the company. Positivity results in not only good decisions for customers, but experiments that change the way that Zappos operates. Zappos has experimented with ideas such as pop-up stores that act as a physical storefront that utilizes the company’s extensive inventory [7]. Other ideas tackle how the company operates hierarchically. In 2014, the company embraced holacracy, an idea that there are no bosses and “everyone is a leader of their roles and a follower of others”. After changing to this new model, 14% of the workforce left. Zappos claims to have piloted this experiment and found success, however, many question the decision given such success in their operating model in the past. Only time, and the satisfaction of their customers, will tell if this change will keep Zappos’ operating and business models aligned. [5]

Sources

[1] http://www.zappos.com/d/about-zappos

[2] http://www.entrepreneur.com/article/225140

[3] https://hbr.org/2010/06/a-lesson-from-zappos-follow-th

[4] http://www.zapposinsights.com/about/fact-sheets/clt

[5] http://www.forbes.com/sites/danpontefract/2015/05/11/what-is-happening-at-zappos/

[6] http://www.zappos.com/media/video/BuffaloElevatorPrank.mp4

[7] http://fashionista.com/2014/11/zappos-store

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7 thoughts on “Zappos – Powered by Service but Stunted by Recent Changes?

  1. Holacracy is an interesting concept. It sounds similar to Valve’s case. Is the structural change only reason causing the loss of 14% of the workforce or Zappos simply intended to restructure its workforce by renaming it “implementing Holacracy”? Interesting to see how this change affects Zappos’s performance.

    1. Hi Aki. Thanks for commenting.

      Yes, the 14% turnover is directly attributed to the change to holacracy in April of 2014 and is above and beyond the typical turnover that the company realizes on an annual basis (I believe it’s around 13% voluntary + 7% involuntarily). When Tony Hsieh, the CEO, implemented the change, he offered all members of his team an opportunity to take severance and leave if holacracy is not for them. I would be fascinated to see what the demographic of those leaving was — were they high performers who favored a more structured system or were they low performers who would have left anyway? Also, will Zappos be able to achieve the same level of consistent service if everyone is their own entrepreneur under holacracy? Only time will tell!

  2. Great article Eric. Back where I was working at, we read about Zappos and it’s success, trying to understand what exactly was that made it grow so quickly. I believed that this was mainly centered around Customer Service but your article really shows other facets of the company that I was not aware of. As Aki mentioned above, I would also like to dive in on the Holacracy concept and understand exactly why they believed they had to change company culture. It was also interesting to read about the bullwhip effect and transparent supply chain management integration.

    1. Hey Sebastian, thanks for commenting.

      I did a little bit more research to find that the change to holacracy is largely based on the Zappos’ move to other merchandising areas. Although they dominate the e-commerce shoe market – they want to use holacracy to help them unearth new service models related to additional types of merchandise. I’m hesitant to say that this is the right move because I’m not convinced that this could not be achieved with a more traditional hierarchy.

      More reading available here: https://hbr.org/2015/06/zappos-and-the-connection-between-structure-and-strategy

  3. Eric – Great article. It’s cool to see from your work how Zappos’ vendor management and employee operating models are clearly aligned with their goal of being a customer service oriented company. I love that everyone has to spend some time on customer service calls.

    A couple of questions came to my mind – the Zappos service-oriented business model clearly did a lot to build a strong fan base for their shoes, but is this type of ‘cult’ following willing to grow with them into other retail sectors? From ‘Delivering Happiness’ by Zappos’ founder Tony Hsieh, he talks about starting the company because online penetration of shoe sales were so low and Zappos picked up a bunch of this slack. To this day, I still think of them as a shoe company, and I’m just not sure what % of their sales are from other retail categories. I wonder if that’s because they focused so intensely on building a culture around shoes. Also, on the operating model – how much overlap does Zappos’ operating model share with Amazon and have they leveraged anything of their acquirer to improve their business model? Don’t know if you have any quick thoughts on these.

    1. Dan, thanks for commenting.

      Your question about transition to other merchandise is what I think Tony Hsieh is trying to tackle with holacracy. Their team is designed to sell shoes well but 75% of customers are repeat customers. So, I think his aim is to increase average ticket sizes from with these customers by using holacracy to help unearth new service models related to additional types of merchandise. More merchandise and stellar service may increase word of mouth marketing attracting more new customers down the road. More reading available about holacracy, if you’re interested, here: https://hbr.org/2015/06/zappos-and-the-connection-between-structure-and-strategy

      Your second question about integration with Amazon is a good one. They moved their warehouse operations to Amazon in 2012, but I couldn’t find much information about how they are integrated with their dozens of warehouses across the globe. I would imagine that Zappos is able to leverage the numerous Amazon warehouses to improve their ability to ship and process returns quickly.

  4. Nice post, Eric. I’ve been a Zappos customer for a while now, and while I’ve always been pleased with their quick shipments and strong customer service, I didn’t realize what was going on behind it all.

    Thinking how Zappos is placed so efficiently close to UPS’s hub, I first wondered how long Zappos would be able to compete with Amazon on logistics…until I saw in Dan’s reply that Zappos is actually owned by Amazon. Aside from their e-retail and shipment prowess, Zappos and Amazon seem like very different outfits. Even if it wasn’t for that scathing recent NYTimes piece, I don’t think “fun” and “quirky” are the first words many would use to describe working at Amazon. Do you have any sense of whether Amazon’s ownership has led to changes in Zappos’s approaches to employee atmosphere and vendor relationships, both in terms of overall efficiency and the levels of personal satisfaction for everybody involved?

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