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HOW I DID IT

How I Did It: Tony Hsieh, CEO, Zappos.com

SHOE FETISH Tony Hsieh sold five million pairs of shoes last year. He buys a pair for himself every month.
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As told to Max Chafkin

Industry: Retail

2006 Inc. 500 Ranking: 79

Three-Year Growth: 948%

In 1998, 24-year-old Tony Hsieh sold his company, Internet advertiser LinkExchange, to Microsoft for $265 million. A year later, he met an even younger entrepreneur, Nick Swinmurn, who had an idea no investor would touch: selling shoes on the Internet. But Hsieh (pronounced shay) was intrigued and invested $500,000 in ShoeSite.com (they soon changed the name to Zappos, after zapatos, which is Spanish for "shoes"). Within six months, he and Swinmurn were running the show together. Early this year, Swinmurn moved on, leaving Hsieh at the helm of a company that had sales of $252 million in 2005.

I almost deleted the voice mail. Nick left a message saying he wanted to start a company that sold shoes online. I didn't think consumers would buy shoes sight unseen, and Nick didn't have a footwear background. It sounded like the poster child of bad Internet ideas.

But right before I hit Delete, Nick mentioned the size of the retail shoe market--$40 billion. And the more interesting thing was that 5 percent was already being done through mail order catalogs. That intrigued me. Initially, I was just an adviser. But I got sucked in.

We all sat around one day talking about what we wanted the Zappos brand to represent. We decided to be about providing the best service; we said, "We're a service company that just happens to sell shoes." But in order for that to happen, we had to control the entire customer experience. We expanded the warehouse to 77,000 square feet and stopped having manufacturers ship directly to customers. It was a scary time--drop shipping was 25 percent of revenue, and we gave it up all at once.

We thought about going under every day--until we got a $6 million credit line from Wells Fargo. It's now $60 million.

I'd rather spend money on things that improve the customer experience than on marketing. We run the warehouse 24-7--it's not very cheap or efficient, but it allows us to get the shoes out more quickly. We have a 365-day return policy with free shipping both ways.

We have to untrain employees' bad habits from previous call centers, where they're trying to be more efficient by minimizing the time they talk to the customer. If someone is looking for a specific shoe and we happen to be out of stock, we have employees direct those people to competitors' sites.

In January 2004, we decided to move to Las Vegas. It was one of those things we started talking about at the beginning of lunch, and by the end of lunch, we'd decided. We were having a hard time finding good customer service people in San Francisco. Las Vegas has a lot of call centers and lots of people who want to do customer service as a career. We announced it later that week and people were moving by March.

We interview people for culture fit. We want people who are passionate about what Zappos is about--service. I don't care if they're passionate about shoes.

Last updated: Sep 1, 2006




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