Part three in a four-part series on innovation and change as the new schools of business management…

To call Zappos an online shoe store takes away from the brilliance behind the 12-year-old e-commerce powerhouse. While its original premise was based on helping people find the shoes they want, in one place, online, and discounted, it certainly evolved into something nothing short of disruptive. As we hear so often with technology startups, Zappos was born in a college dorm room.

Already a success by any startup standards in just a few short years, Tony Hsieh, CEO of Zappos, looked at the $32 million his company generated in 2002 and challenged his team to do better.

Roughly four years into the game, Hsieh decided it was time to look beyond shoes and move his company toward a more significant mission. His epiphany was the result of learning through research that companies serving customers with a higher purpose outperformed those that focused on market leadership and profitability in the long run.

Putting the Customer in Customer Service

In 2003, the Zappos brand evolved from an online shoe etailer toward a customer-centric organization powered by service. Everything started with looking at the pains customers were experiencing and the options they faced when making purchase decisions. One of the biggest sore spots for the company was something that was out of the company’s realm of control. While drop shipping equated to 25% of the annual revenue at the time, it was also the very thing that prevented the company from keeping its promise of delivering exceptional customer service. If the company was truly to become customer-focused, it would need to take control of the entire experience, from beginning to end. After killing drop shipping and taking control of its inventory, Zappos’ new customer service program resembled that of industry retail giant Nordstrom where the customer experience was paramount. Leaders for both companies will say that doing so, directly correlates service to loyalty, repeat business, word of mouth, and increased revenues.

“If you’re looking for a pair of shoes, and we’re out of your size, we made it part of our policy to refer them to a competitor that had it in stock.”

Almost immediately, the team noticed a difference Customers weren’t the only people singing Zappos’ praises. Employees were more engaged and passionate as a result. The new focus gave representatives something they could stand behind. Customers could hear the passion of the person on the other end of the phone. They cared. And, vendors noticed too. Suddenly their onsite visits would increase in frequency and length to see what the new Zappos was all about.

Focusing on customer service caused a snowball effect that helped Zappos soar to new heights. At the end of 2003, Zappos nearly doubled its revenues to $70mm. By 2004, the company earned $184mm.

Culture Shock

Business leaders, especially innovators, are continually looking at what’s working, but more importantly, what’s possible. By the close of 2004, the Zappos team believed that focusing on customers and their experiences had not only boosted revenues by 600%, doing so created a global community of enthusiasts and advocates behind the Zappos brand. In 2005, the team was set for its biggest transformation yet.

“We never really paid much attention to what other companies were doing. We never knew that the decisions we made were in direct contrast to those of our competitors.”

Tony believed that if making customers happy would help improve business, then focusing on company culture was a natural progression. Making company culture the number one priority resulted in the creation of a pipeline team, a group of trained professionals who host more than 40 classes to help improve morale and career development. Courses ranged from career and interdepartmental training to Zappos history to personal development programs such as strength finders, the science of happiness, and optimism. In 2005, early Zappos investor and professional life coach Dr. Vic moved into the Zappos HQ. He offered onsite coaching to employees looking for empowerment and direction and as a result, employees continued to evolve from a role driven by passion to one of now of a company stakeholder. The evidence of success was in the sales. 2005 hit a new high with $370 mm and 2006 generated almost $600 mm. With a customer and employee focused organization, the company would eventually hit $1 billion in 2008.

Delivering Happiness

In 2009, Zappos sought to reinvent Zappos once again, this time by focusing on employees, customers and also other companies through one powerful, yet uncommon business term, happiness.

“Customer service is about making customers happy, company culture is about making employees happy, so let’s just simplify it and at the same time, amplify our vision for our customers, employees, vendors, and peers.”

Following the success of investing in company culture and customer service, Hsieh was introduced to positive psychology. So the team took a step back and looked at the science of happiness in order to develop the company’s next growth strategy, delivering happiness to the world.

It started within.

For example, the management introduced elements of progress into its career advancement program to help employees stay happy consistently. Rather than give big promotions every 18 months to deserving employees, management introduced incremental advancement every six months.

Zappos also formalized the definition of culture into 10 core values:

1. Deliver “wow” through service;

2. embrace and drive change;

3. create fun and a little weirdness;

4. be adventurous, creative and open-minded;

5. pursue growth and learning;

6. build open and honest relationships with communication;

7. build a positive team and family spirit;

8. do more with less;

9. be passionate and determined;

10. be humble.

Following in the footsteps of the Walt Disney Company, Zappos looked externally to find ways to share its experience with culture and service to help others reinvent their businesses. As a result, Zappos introduced its Insights program, a series of immersion workshops designed to bring other businesses into the world of Zappos. By exposing its company secrets around happiness, culture, and service, other organizations could learn the Zappos way to improve relations with customers and employees.

To date, the Insights program has helped many businesses, many of which report that learning the Zappos Way helped increase sales and morale almost immediately. Zappos didn’t do too bad either. It closed 2009 with $1.2 billion in revenues and Amazon also acquired Zappos for $928 million in November that year.

The deal with Amazon proved gratifying. Over the years, Amazon attempted to “kill” Zappos with Endless.com, but Tony credits the company’s unique championing of employees, customers, and happiness with winning. Under Amazon, Zappos now runs as an independent brand, a brand that only continues to excel under the banner of happiness.

And, when you create an empowered workforce that is not only happy, but evangelical, placing them in front of social networks such as Facebook and Twitter ensures that the company’s mission, purpose, and culture scale as social media become pervasive as next generation platforms for sales, marketing, and service. At current count, 436 Zappos employees use Twitter, including CEO Tony Hsieh. For the record, Tony has over 1.8 million followers.

As Tony says, “Your culture is your brand. Customer service shouldn’t just be a department, it should be the entire company.”

Introduction: The Innovator’s Dilemma
Part 1: Jack Dorsey, Twitter and Square
Part 2: Zappos’ Tony Hsieh Delivers Happiness Through Service and Innovation
Part 3: Dennis Crowley, FourSquare

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