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The Zappos Way of Managing

How Tony Hsieh uses relentless innovation, stellar customer service, and a staff of believers to make Zappos.com an e-commerce juggernaut -- and one of the most blissed-out businesses in America.
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Editor's Note: To celebrate Inc.'s 35th anniversary, Inc.com is showcasing highlights of our coverage of incredible innovators, risk takers, company builders, and thought leaders since 1979. Here, an article from our archives.

"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.

And yet, this mild-mannered fellow leads a company that is entirely uninhibited. Interviews are held over vodka shots, bathrooms are plastered with "urine color" charts (ostensibly to ensure that employees are hydrated but also just to be weird and funny), and managers are encouraged to goof off with the people they manage. Zappos's 1,300 employees talk about the place with a religious fervor. The phrase core values can prompt emotional soliloquies, and the CEO is held with a regard typically afforded rock stars and cult leaders.

Hsieh tries his best to keep up with the goofy, libertine culture. Every day, he blasts a steady stream of playful messages to 350,000 people on Twitter. (Before taking the stage at a conference earlier this year, he posted this missive: "Spilled Coke on left leg of jeans, so poured some water on right leg so looks like the denim fade.") He has also become an accomplished public speaker who spends a good chunk of his time on the road giving talks, which are delivered without notes.

What most of Hsieh's admirers -- and even some Zappos employees -- don't know is that this openness doesn't come naturally. Hsieh has been exceptionally shy all his life and finds meeting strangers exhausting. (His trick to get over his shyness is to pretend he's interviewing you for a job.) Those seemingly off-the-cuff Twitter missives? He spends 10 minutes or so carefully composing each one. He takes his employees out to restaurants and bars not because he loves nightlife but because he thinks it sets a good example. "I just want to have a company where people can hang out together," he says, "and then come in to work the next day and not worry about whether they've done something stupid." Most CEOs make their companies in their own image; Hsieh seems to have designed his company to behave the way he wishes he could.

Hsieh has always been a little different. He grew up in San Rafael, California, and excelled from an almost creepily young age. In first grade, he taught himself to program, playing with a Radio Shack microcomputer that his father, Richard -- a Chinese-born chemical engineer with a Ph.D., an M.B.A., and 29 patents to his name -- brought home. The next year, Richard blew a month's salary and bought his son an IBM XT personal computer. By third grade, Hsieh's bedroom was littered with pages of software code for a bulletin board system -- a precursor to today's Internet message boards, accessed by dial-up modem -- that he ran for several years, tying up the household phone line and mystifying his parents. "He stayed in his room for hours at a time," says Richard Hsieh.

Hsieh started his first company, LinkExchange, shortly after graduating from Harvard with a degree in computer science. The company allowed amateur Web publishers to barter for advertising by agreeing to publish one another's ads. "It was just something to keep busy," he says. "But within a week, we knew we were onto something." In three months, Hsieh signed up 20,000 websites; he decided that the site could make money by selling ads as well as trading them. Though Link-Exchange was unprofitable, the idea had enough steam to pick up a $3 million investment from Sequoia Capital -- Moritz led the investment. By 1998, the company, which had revenue of about $10 million, would be sold to Microsoft for a staggering $265 million. Hsieh was just 24 years old.

And yet, despite this success, Hsieh found himself depressed. "The easiest way to explain it was that going into the office started to feel like work," he says. He felt increasingly that the people he had hired were not committed to the venture's long-term growth. "The Silicon Valley culture is, 'I'm going to work hard for four years and make millions of dollars and then retire,' " he says. Work, which once had felt liberating, had become a chore. He resolved that his next company would not be about a short-term payday. It would be about long-term growth, about creating a place to which he and his employees would want to come every day.

When you visit Zappos's headquarters in Henderson, Nevada, it's easy to miss Hsieh's desk. Not only is it tucked into a row of cubicles in the middle of the floor, but it's also smaller and more cluttered than any CEO's desk I have ever seen. There are stacks of unopened mail, empty Styrofoam cups, several unopened liquor bottles, and a sizable collection of self-help books -- titles include Mastering the Rockefeller Habits, The Time Paradox: The New Psychology of Time That Will Change Your Life, and 14,000 Things to Be Happy About. There are a few science titles -- part of Hsieh's quest for a happiness framework -- a few on food and wine, and one on marathon running, which he recently took up.

Hsieh is a relentless self-improver, which may help explain why, after selling LinkExchange, he didn't start a new company. Instead, he started 27. In 1999, he and Alfred Lin, a Harvard classmate, launched something called Venture Frogs. Though structured as a venture capital fund, it was more ambitious. Hsieh and Lin leased 15,000 square feet of office space in the same San Francisco building in which they both owned lofts, and they gave the space to the start-ups in which they invested.

Hsieh's involvement in Zappos started with a voice mail from a young man named Nick Swinmurn, who said he wanted to start an online shoe company. Hsieh had never been particularly taken with the idea of online retail, but when Swinmurn mentioned that catalog companies sold $2 billion a year worth of shoes, Hsieh got interested. In 1999, Venture Frogs agreed to invest $500,000, if Zappos -- the name is a play on zapatos, the Spanish word for shoes -- could recruit someone with shoe experience. Swinmurn found Fred Mossler, then a Nordstrom buyer.

Six months later, Swinmurn was out of money, and the site offered only three shoe brands. (Most orders were initially filled by a few local retailers.) "We were down to the last day, essentially," says Mossler. "And Tony called." Hsieh said he would keep the company afloat and offered to help. By the summer of 2000, Hsieh and Swinmurn were co-CEOs, and Zappos was operating out of Hsieh's living room. Says Hsieh: "It was the most interesting opportunity, and the people were the most fun."

This is also a delicate way of saying that Hsieh was not especially happy as an investor. A few of Venture Frogs' investments succeeded -- notably the search engine Ask.com and the restaurant reservation system OpenTable -- but as the dot-com bubble burst, most struggled to survive, and some were shuttered. Hsieh had been attracted to investing because it seemed to bring all the fun of start-ups on a larger scale; instead, it became a treadmill of meetings full of bad news. "I think it was much harder than he first imagined," says Moritz. What Hsieh wanted, he realized, was the unstructured fun of a new company. As he puts it, "I wanted to be involved in building something."

Zappos's early years were a scramble. Footwear brands, which associated the Web with heavy discounting, resisted putting their merchandise on Zappos. Still, Mossler succeeded in signing up about 50 companies in the first year and a half. Hsieh wrote software code and focused on financing -- he bankrolled the company until he secured a line of credit with Wells Fargo in 2003. Nobody had set jobs, nobody cared about titles, and everybody hung out with everybody else after work. The economy was falling apart around them, but somehow, even the struggle was fun.

The defining aspect of the Zappos customer experience -- free shipping and free returns -- was concocted out of necessity. Hsieh figured that there was no other way to get people to try the site. He also added a prominently displayed toll-free customer support number, a personal buying service, free socks -- anything to help put skeptical customers at ease. Because the company could not afford to spend money on marketing, the sales strategy involved making customers so happy that they bought again or told their friends or both.

Though shoemakers were initially reluctant to sell to Zappos -- Nike held out for more than seven years -- by 2002, Mossler had lined up more than 100 brands, including Steve Madden and Converse, and the company was beginning to do a brisk business. Sales hit $32 million in 2002, up from $8.6 million the previous year. At the time, 25 percent of orders were shipped from manufacturers' warehouses; these orders were often delayed for days. Hsieh decided to stop listing these items on Zappos and opened a warehouse outside of Louisville.

A few months later, Hsieh moved the company from San Francisco to Las Vegas -- 70 of the company's 100 employees made the trip. The move made sense for lots of reasons, chief among them lower taxes and a lower cost of living. Hsieh also wanted to be in a city where restaurants and stores are open 24 hours a day, to accommodate call center reps who work the graveyard shift. The move corresponded with yet another jump in sales and helped put an end to any financial worries. In late 2004, the company, which sold $184 million worth of goods that year, landed $20 million from Sequoia Capital.

Such rapid growth was exciting. But it also led Hsieh to wonder how he could preserve Zappos's radical dedication to customer service and its fun, loose work environment. "We always hired for culture fit," he says. "But we were growing so quickly that managers who hadn't been around for very long might not know what our culture was." He wrote an e-mail to the entire company asking for help, and he distilled the responses into a list of 10 core values, including "Be humble," "Create fun and a little weirdness," and "Deliver WOW through service." Then he assigned and collected short essays from every employee on the subject of the company's culture and published them, unedited, in a book that he distributed to the staff.

Every year, all employees, both new and old, contribute a fresh essay to the book, which has grown to 480 pages. Hsieh uses it as a way not only to get employees thinking about the meaning of their work but also to show the outside world what he has built. Talk to Hsieh for five minutes, and he will inevitably try to get your address so he can mail you a copy. The book is painfully earnest and yet affecting nonetheless. There are all the clichés one might expect -- acronyms, ridiculous overstatement (one call center rep compared Zappos to China's Ming Dynasty), and a fondness for the word Zapponians. It often goes way over the top. "Could you imagine if Zappos was more than an online retailer, or the job that pays the bills, but actually became a way of life?" wrote Donavon Roberson, a pastor who left the ministry before joining Zappos.

Most Zappos employees are familiar with all this history. In fact, despite all the research I did before heading to Las Vegas, I didn't know that Nike had spurned Zappos until I sat in on a two-hour Zappos history class -- part of a four-week course on the subject -- and watched as employees called out various milestones: 2002, $32 million in gross sales! 2006, the year the company recorded its first $3 million day! 2007, the year Nike joined Zappos!

This mastery isn't accidental. It's required. All new Zappos employees receive two weeks of classroom training. Then they spend two weeks learning how to answer customer calls. At the conclusion of the program, trainees are famously offered $2,000, plus time worked, to quit. The practice, Hsieh's idea, began in 2005, with a $100 offer. "Our training team had gotten good at figuring out who wasn't going to make it, and we were thinking, How do you get rid of those people?" says Hsieh. Paying them to quit saves the company money by weeding out people who would jump ship anyway and allows those who remain to make a public statement of commitment to their new employer.

More recently, Hsieh has overseen the development of an even more comprehensive curriculum. The first course, intended for employees who have worked at Zappos for two years or less, involves more than 200 hours of class time (during work hours) and mandates that students read nine business books. Topics include Sarbanes-Oxley compliance and Twitter use. Advanced students can take classes in public speaking and financial planning. "The vision is that three years from now, almost all our hires will be entry-level people," Hsieh says. "We'll provide them with training and mentorship, so that within five to seven years, they can become senior leaders within the company."

The Zappos headquarters takes up three modest buildings in a nondescript office park about a 20-minute drive from the Las Vegas Strip. Walk in, and it becomes immediately clear why for some entrepreneurs, visiting Zappos is of a piece with the buffet at the Bellagio or a trip to the top of the (replica) Eiffel Tower. In fact, Zappos hosts a tour of its headquarters every couple of hours, an operation that is staffed by 12 people and includes two SUVs and a bus with custom Zappos paint jobs. Call the company from your hotel, and someone will pick you up and ferry you to Henderson.

My tour is led by Roberson, the former pastor, who wears jeans and a maroon polo shirt and carries a giant Zappos flag. We are joined by four consultants from Deloitte. In the lobby, Roberson points out the Reply to All Hat -- a sort of dunce cap for employees who commit that venial office sin of the inadvertent mass e-mail -- and takes us past the nap room, where three employees are stretched out on couches. At the office of the company's staff life coach, who also happens to be Hsieh's former chiropractor, we are each photographed while sitting on a throne.

But the most striking thing about the tour is the extent to which the company's long-term plan is on display. A sales chart in the lobby informs everyone in the building that the day before -- March 4, 2009 -- Zappos sold $2.5 million worth of merchandise. A computer printout in the hallway notes that there are currently 4.1 million items, mostly shoes, in stock in the warehouse in Kentucky. At the conclusion of the tour, we are invited to peruse the company library, which is filled with multiple copies of two dozen business and self-help books. We are urged to take whatever grabs our fancy, a policy that applies to employees as well. Roberson explains that one of Zappos's core values is personal growth and that books are given out to help employees grow with the company.

When I tell Hsieh that Zappos strikes me as not unlike a religious cult, he doesn't disagree. "I think there's a lot you can learn from religion," he says. "This is not just a company. It's like a way of life."

Of course, nobody except Hsieh works at Zappos to save his or her soul. It's a job -- and not a particularly glamorous one. Customer service reps start at $11 an hour, warehouse workers at $8.25. But even in its hiring process, Zappos creates wildly different expectations than do most companies. Prospective hires must pass an hourlong "culture interview" before being handed off to whatever department they are applying to. Questions include, "On a scale of 1 -- 10, how weird are you?" and "What was your last position called? Was that an appropriate title?" (The first question makes sure that employees are sufficiently weird; the second, in which the interviewer is trying to goad the applicant into grumbling about his or her title, tests for humility.) 

If there is a disagreement between HR and the manager doing the hiring, Hsieh personally interviews the candidate and makes the final call. His strategy is to get the applicant into a social situation to see if they can connect emotionally. Alcohol often figures in the hiring process. "I had three vodka shots with Tony during my interview," says Rebecca Ratner, Zappos's head of human resources. "And I'm not atypical." I asked Hsieh if this wasn't exposing the company to unnecessary risks. "It's a risk," he says. "But if we're building a culture where everyone is friends with everyone else, it's worth the risk."

After my tour, I spend a few minutes sitting in the Zappos call center with Grace Hale, a bubbly young woman with dyed black hair and a lip piercing. Unlike most call center operators, Zappos does not keep track of call times or require operators to read from scripts. Hale has a penchant for offering unsolicited commentary on customers' shoe selections -- "They are beautiful," she coos during one call, as she pulls up a picture of a pair of Dr. Scholl's Asana heels that a customer found uncomfortable. Not only are reps encouraged to make decisions on their own -- for instance, offering a refund on a defective item -- they are supposed to send a dozen or so personal notes to customers every day. "It's all about P-E-C," Hale explains to me. "Personal Emotional Connection with the customer." (After a few hours at Zappos, you actually stop noticing this argot.)

All of this is designed to impress customers -- or as Hale would have it, "wow them." Last year, Zappos stopped promising free overnight shipping on its website, but not because of the cost. In fact, the company still ships almost every order overnight, but Hsieh wanted customers to be surprised when they got the item the next day. According to Patti Freeman Evans, an analyst with Forrester Research, this has helped Zappos fend off challenges from copycat sites such as Amazon's Endless.com and IAC's Shoebuy.com, which offer similar perks and even lower prices. "A lot of companies talk about service. Zappos really does it," Evans says. 

During Zappos's early days, long workdays would often spill into late-night socializing. Hsieh enjoyed this so much that he formalized it at Zappos: Managers are now required to spend 10 percent to 20 percent of their time goofing off with the people they manage. "It's just kind of a random number we made up," Hsieh concedes. "But part of the way you build company culture is hanging out outside of the office."

On my last night in Las Vegas, Hsieh offers to take me out and show me what he is talking about. We are joined by a couple of his friends and six Zappos employees and bounce from a bar to a lounge to a nightclub. By the time I beg out, at 2 a.m., Hsieh and a few others are heading to a dive bar to grab a late-night bite to eat. Though Hsieh seems to enjoy himself -- and though he does indulge in a few shots of Grey Goose -- he never really lets loose. For the first half of the evening, we chat seriously about happiness. Then he withdraws, eventually sitting down, playing with his BlackBerry, and watching the party with what looks like a smile.

In his speeches, Hsieh likes to point out that Zappos does not have specific policies for dealing with each customer service situation. He claims that the company's culture allows it to do extraordinary things. I saw him make this point earlier this year in New York City, when he told a story about a woman whose husband died in a car accident after she had ordered boots for him from Zappos. The day after she called to ask for help with the return, she received a flower delivery. The call center rep had ordered the flowers without checking with a supervisor and billed them to the company. "At the funeral, the widow told her friends and family about the experience," Hsieh said, his voice cracking and his eyes tearing up ever so slightly. "Not only was she a customer for life, but so were those 30 or 40 people at the funeral." 

Hsieh paused to compose himself. "Stories like these are being created every single day, thousands and thousands of times," he said. "It's just an example that if you get the culture right, then most of the other stuff follows."

Max Chafkin is Inc.'s senior writer.

Last updated: May 1, 2009




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