Delivering Happiness

Growing Up
“What do we want to be when we grow up?”
It was a question I’d been thinking about for a while. I was at a Mexican
restaurant with Fred, asking him the same question.
“Do we want to be about shoes, or do we want to be about something
bigger?” I asked. “We can get to $1 billion in just footwear sales by 2010,
but what about beyond that?”
“It would be pretty natural for us to expand into handbags and apparel,”
Fred said. “We could be the number one destination online for outfitting
people from head to toe. We could appeal to every lifestyle—running,
outdoors, fashion, and so on.”
I thought back to my poker days and about the most important decision
being which table to sit at. We had been sitting at the online footwear sales
table. It was time to make a switch and move to a bigger table. I wondered
if we could think of something even bigger than shoes, handbags, and
apparel online.
“We had a customer e-mail us the other day,” I said. “He had ordered a
pair of shoes that we had in our warehouse and we surprised him with a
shipping upgrade so that he got his order in two days instead of our original
promise of a week. He said he loved our customer service and would tell his
friends and family about us. He even said we should one day start a Zappos
Airlines.”
“That’s pretty funny,” Fred said.
“Have you read Good to Great by Jim Collins?” I asked.
“No, is it a good book? I mean… is it a great book?”
“Yeah, you should definitely read it,” I replied. “He talks about what
separates the great companies from just the good ones over the long term.
One of the things that he found from his research was that great companies
have a greater purpose and bigger vision beyond just making money or

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being number one in a market. A lot of companies fall into the trap of just
focusing on making money, and then they never become a great company.”
“Well,” Fred replied, “making money would certainly be a nice problem
for us to have right now.”
“We’ll get there. We just need to get through this year. We had a good
phone call with Wells Fargo today, so maybe we can get a loan from them.”
“What are the chances of that happening?” Fred asked.
“It’s too early to tell. But at least they didn’t flat-out say no like all the
other banks we tried to contact.”
Fred and I continued talking. On the one hand, we had to get through
our short-term cash-flow challenges. On the other hand, we wanted to make
sure we were thinking long-term and laying the foundation for the future of
the company. We knew we couldn’t choose one over the other. We had to do
both.
By the end of lunch, we realized that the biggest vision would be to
build the Zappos brand to be about the very best customer service. Maybe
one day there really would be a Zappos Airlines that would just be about
the very best customer service and customer experience.
We talked about how the Zappos brand could be like the Virgin brand
and be applied to many different types of businesses. The difference was
that we thought the Virgin brand was more about being hip and cool,
whereas we just wanted the Zappos brand to be about the very best
customer service. Customer service had always been important at Zappos,
but making it the focus of our brand would be a bold move, especially for
an online company.
“Let’s sleep on this for a while and see if we still feel good about it in a
week or two,” I said.
“Sounds good,” Fred said. “You know, we could apply the whole service
mentality to our vendors as well. That’s never really been done before in the
industry. We already treat our vendors well, but we can build up our
reputation within the vendor community even more by really treating our
vendors as true partners in the business. Most vendors aren’t happy dealing
with most retailers because the retailers, especially the department stores,
usually try to squeeze every last dollar out of them. We could be the first
major retailer that doesn’t try to do that.”
I nodded, thinking of the possibilities.

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Fred looked at me. “By the way, do you have any other books you
would recommend reading?”
“Yeah, there are a lot of really good business books out there. I’ll give
you a few of the ones that I really like.”
Fred sent me an e-mail the next day.
Date: February 17, 2003
From: Fred Mossler
To: Tony Hsieh
Subject: Books
I was thinking about our book conversation. Maybe a cool way of
encouraging people to read would be to create a board with
everyone’s names down one side and recommended books along the
top. When a person completes one, they would get a check mark in
the box. Perhaps, you would take to lunch once a month, the people
that have completed the recommended books? Or maybe they would
get movie tickets or gift certificates for completing three books, etc.
We could have a Zappos library with a couple copies of each of
the books so people could check them out?
We didn’t realize it at the time, but the idea of the Zappos library would
evolve far beyond just a small set of books that a few employees would
read. Five years later, there would be a hundred titles in our lobby available
for free to all of our employees and visitors. Many of the books would
eventually become required reading for our employees to help them pursue
growth and learning, and Zappos would even offer classes to go over some
of the more popular books.
A
month later, we still weren’t profitable. We still couldn’t raise funding.
But we had a decision to make.
How serious were we about this idea of making the Zappos brand be
about the very best customer service? We had discussed the idea internally
with our employees, and everyone was excited about the potential new
direction.

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But was it all talk? Or were we committed?
We hadn’t actually changed the way we did anything at Zappos yet. We
did a lot of talking, but we weren’t putting our money where our mouths
were. And our employees knew it.
At the time, about 75 percent of our sales were coming from inventoried
product. If it wasn’t for our decision to start carrying inventory, our gross
merchandise sales in 2002 would have been $8 million instead of $32
million.
For 2003, we were projecting sales to double, with about 25 percent of
our overall sales coming from our drop ship business. The drop ship
business was easy money. We didn’t have to carry inventory so we didn’t
have any inventory risk or cash-flow problems with that part of the
business. But we had plenty of customer service challenges.
The inventory feeds that we were getting from our vendors for our drop
ship business were 95 percent accurate at best, meaning that we would not
be able to actually fulfill 5 percent of all of our drop ship orders. On top of
that, the brands did not ship as quickly or accurately as our own WHISKY
warehouse, which meant we had plenty of unhappy and disappointed
customers. But it was easy money.
We all knew deep down inside that we would have to give up the drop
ship business sooner or later if we were serious about building the Zappos
brand to be about the very best customer service. We also knew that the
bigger we grew, the more reliant we would be on the cash from drop
shipping. There would never be a good time to walk away. The longer we
waited to pull the trigger, the more our employees would lose faith in us.
So we made what was both the easiest and hardest decision we ever had
to make up until that point. In March 2003, with the flip of a switch, we
turned off that part of our business and removed all of the drop ship
products from our Web site.
We took a deep breath and hoped for the best. We knew in the back of
our minds that there was a small chance we could get a loan from Wells
Fargo, but we had only had phone conversations with them so far. Even if
everything went smoothly, getting a loan was at least a few months away.
We were truly testing our faith that we had made the right decision for the
company.

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We had to deal with our first test of our new direction right away. With
the drop in revenue, cash was even tighter than before.
Now we had to figure out how to make next week’s payroll.