The Zappos Way of Managing

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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.

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Senior contributing writer Max Chafkin has profiled companies such as Yelp, Zappos, Twitter, Threadless, and Tesla for the magazine. He lives in Brooklyn, New York. @chafkin