The Zappos Way of Managing

"What would make you happier in your life?"

Tony Hsieh asks me this question as we sit at a booth with half a dozen young people in one of those absurdly lavish lounges that can be found only in Las Vegas. It's called Lavo, setting of recent Paris Hilton and Nelly sightings and the city's newest hot spot. The theme is an ancient Roman bathhouse, and so, in addition to the normal nightclub features -- thumping bass, low tables, dim lighting -- there's the distracting aspect of two scantily clad women performing a risqué bathing routine, complete with damp sponges and music.

It's a strange setting for an interview -- especially for an interview with Hsieh (pronounced Shay). He's a thoughtful, low-key fellow who seems out of place in such a louche setting. Indeed, he seems oddly oblivious to his surroundings, which makes sense, given that he runs what is arguably the decade's most innovative start-up, Zappos.com. Hsieh helped start Zappos in 1999 as an online shoe store, and the company has since expanded to all manner of goods. Zappos booked $1 billion in gross sales in 2008, 20 percent better than the year before. It has been profitable since 2006.

At a time when most business leaders are retrenching, Hsieh is thinking big. In late 2006, he launched an outsourcing program to handle selling, customer service, and shipping for other companies, and last December, he started an educational website for small businesses that charges them $39.95 a month to tap Zappos executives for advice. Hsieh has said Zappos will eventually move beyond retail to businesses such as hotels and banking -- anything where customer service is paramount. "I wouldn't rule out a Zappos airline that's just about the best customer service," he announced at the Web 2.0 conference last fall.

But Hsieh, 35, isn't interested in talking about any of this right now. He's still on the happiness thing. "On a scale of 1 to 10, how happy are you right now?" he asks, informing me that, right now, he's at about an 8.

I think for a second and then respond, "Maybe a 7?"

This isn't polite conversation for Hsieh. "I've been doing a lot of research into the science of happiness," he says. In addition to asking everyone he meets what makes him or her happy, he has also been studying books on the subject, especially Jonathan Haidt's The Happiness Hypothesis, which uses social psychology experiments to evaluate the world's great religions and philosophies and concludes that ancient wisdom and science are both useful tools in the quest for contentment. Hsieh is working on a system to supersede both. "I've been trying to come up with a unified theory for happiness," he says.

Unlike the world's great religions, the Tony Hsieh Unified Happiness Theory is not entirely settled. It involves establishing balance among four basic human needs: perceived progress, perceived control, relatedness, and a connection to a larger vision. And because Hsieh's life is his company, the test subjects are Zappos employees. "I've got a few different frameworks, and I'm just figuring out how to combine them," he says without irony or even a smile. "I think I'm pretty close."

Hsieh is widely regarded as one of the most innovative Internet marketers of all time. The Web entrepreneur and marketing guru Seth Godin has likened Hsieh's ability to use technology to connect with his customers to the Beatles' ability to animate their teenage fans. The blog Search Engine Land calls Zappos "the poster child for how to connect with customers online." And Hsieh's mastery isn't limited to marketing. Zappos's warehouse boasts a fleet of 70 brand-new robots that allows it to ship a pair of shoes in as little as eight minutes, earning reams of praise from logistics-industry trade publications.

But Hsieh has a hard time getting excited about any of this. What he really cares about is making Zappos's employees and customers feel really, really good. This is not because Hsieh is a nice guy (though he is a very nice guy), but because he has decided that his entire business revolves around one thing: happiness. Everything at Zappos serves that single end. Other business innovators work with software code or circuit boards or molecular formulas. Hsieh prefers to work with something altogether more complex and volatile: human beings themselves.

That single-minded focus on happiness has led to plenty of accolades for the company, which routinely scores high on lists of the best places to work. But Zappos's approach to workplace bliss differs significantly from that of other employee-friendly businesses. For one thing, Zappos pays salaries that are often below market rates -- the average hourly worker makes just over $23,000 a year. Though the company covers 100 percent of health care costs, employees are not offered perks found at many companies, such as on-site child care, tuition reimbursement, and a 401(k) match. Zappos does offer free food to its employees, but the pile of cold cuts in the small cafeteria loses its allure faster than you can say Googleplex. Instead of buying his employees' loyalty, Hsieh has managed to design a corporate culture that challenges our conception of that tired phrase.

Hsieh's accomplishments are all the more impressive when you consider Zappos's origins. The idea of selling shoes on the Web may seem merely unoriginal today, but it seemed truly wrong-headed in 1999. "There wasn't an ounce of evidence to suggest it would work," says Michael Moritz, a partner with Sequoia Capital and the guy who backed Yahoo, Google -- and, after initially passing on the company in 2001, Zappos. And yet, as Hsieh turned that daft idea into a business, his company transformed. Zappos now boasts systems that are breathlessly praised by academics, entrepreneurs, and, of course, the customers who seem eternally tickled by the company's free shipping and unbelievably responsive service. At many companies, talk of corporate culture dulls the luster, inducing cynicism among employees and creating hours of busywork for managers. At Zappos, the culture is the luster. And Hsieh -- soft-spoken, deliberate, awkward -- has emerged as a most unlikely business guru.

I first met Hsieh three years ago at a cocktail hour at the Inc. 500 conference. (Zappos had landed at No. 23, with revenue of $135 million.) We spoke for 10 minutes or so, and I remember being struck by the scope of his achievement. But I was even more impressed by the oddness of Hsieh's mannerisms.

Hsieh is hard to know and even harder to read. He's generous and smart, but so subdued in one-on-one conversation that it's easy to mistake his reticence for rudeness. When he does speak, it's in full paragraphs that sound as if they have been formulated in advance. He sometimes smiles -- as he does when he's explaining the clever way Zappos manages its call center -- but he doesn't laugh at other people's jokes and seldom tells his own.