At the height of the dot com boom during the late 1990s, all sorts of absurd business models were concocted by entrepreneurs more concerned with cashing in on the internet gold rush than building a sustainable long term business franchise. Many high profile failures involved attempts to use the internet as a portal where customers could order bulky merchandise such as pet food or groceries. Firms typically failed because they had no real competitive advantage and were saddled with expensive inventory and infrastructure.
When Nick Swinmurn initially pitched his idea for an online shoe store, Tony Hsieh thought it sounded like “the poster child of bad Internet ideas.” Intuitively, it seems obvious that customers prefer to try on shoes prior to making a purchase. However, the statistics on the size of the paper mail order catalog business for shoes convinced Mr. Hsieh to give the idea more thought. Delivering Happiness: A Path to Profits, Passion, and Purpose is the story of how Zappos rose from obscurity to achieve a $1.2 billion valuation when Amazon.com acquired the company in 2009.
Early Days and Link Exchange
The book’s main focus is on the Zappos story, but the first few chapters are more of a personal memoir as Mr. Hsieh takes us through the business activities he pursued during his teenage years. Like many entrepreneurs, Mr. Hsieh had an interest in business from a very early age and pursued a variety of small business ventures.
After graduating from Harvard and spending five months at Oracle, Mr. Hsieh founded LinkExchange, an advertising cooperative that focused on banner ads. In late 1998, LinkExchange was acquired by Microsoft for $265 million and Mr. Hsieh was set for life financially. His activities in venture capital led him to eventually make a large investment in Zappos in late 1999 and early 2000, a time when more established venture firms like Sequoia were reluctant to participate. By the time Mr. Hsieh joined Zappos as CEO, he was nearly out of money and had to resort to selling his apartment to keep the company from running out of cash.
Building Zappos
The majority of the narrative is devoted to describing the Zappos story from the company’s bootstrap early days up to the present time. The initial business model involved drop shipping shoes directly from distributors to customers which was a low overhead approach. No inventory was required and logistics and warehousing were outsourced to the distributors. However, this approach quickly became problematic due to spotty availability of inventory and unpredictable delivery performance to the customer. Eventually Zappos had to carry inventory and handle warehousing and delivery logistics. After a disastrous attempt to outsource warehousing and distribution to a third party, Zappos built a state of the art facility in Kentucky near a major UPS distribution facility.
It’s All About Customer Service
The theme of the book is that Zappos seeks to “deliver happiness” to customers and will spend the money to provide service that exceeds expectations. This sounds like the typical meaningless “mission statement” that nearly all companies have, but one gets the impression that this approach is firmly embedded in the Zappos culture. Offering customers very quick free delivery as well as free return delivery if necessary is a costly proposition, but has created a great deal of customer loyalty. Mr. Hsieh refers to this as the “WOW Factor” – meaning that customers are amazed and delighted by the quick service and this results in free word of mouth advertising for Zappos.
Some Missing Elements
In the preface, Mr. Hsieh clearly states that the book is not intended to be a comprehensive history of Zappos, so perhaps it is not fair to criticize the lack of details regarding financial performance over the years. However, by not providing much information regarding the financial implications of various decisions, it is difficult to understand the context in which many of the key decisions were made. For instance, it would have been interesting to know more about how Zappos margins were impacted over time by aggressive promotions such as free shipping and the impact of economies of scale on the warehouse and logistics operations as the company grew. This type of information is notably absent.
More Self Reflection Needed
There is much information in the book regarding Zappos corporate culture and the high standards employees are held to. Most of these standards are admirable and it seems like Mr. Hsieh has created an enduring culture that works for Zappos.
In light of these very high standards, it is a bit disconcerting that Mr. Hsieh does not seem to regret actions earlier in his life that fall short of the high standards he sets forth for Zappos employees. For example, the core values of Zappos involve ideals such as doing more with less, taking the initiative to drive change, going above and beyond one’s job description, etc. Yet, early in the book, Mr. Hsieh writes about how he barely worked six hour days during his brief time at Oracle after graduating from college and took no initiative beyond his job duties. Later, when LinkExchange was sold to Microsoft, Mr. Hsieh agreed to stay with the company for a full year during a transition period. He describes that period as unpleasant, indicates that he did not do much work, and eventually he left early and forfeited several million dollars in compensation.
Rather than reflecting on these early days as a time where he fell short of his later ideals, one gets the impression that Mr. Hsieh views his actions as being consistent with his pursuit of personal fulfillment and happiness. However, this disregards the interests and well being of the people on the other side of the table – specifically, Oracle which paid a new Harvard graduate $40,000 per year in 1995 expecting something in return and Microsoft which paid $265 million for LinkExchange expecting the seller to honor the terms of the sale.
Overall, the book is a very interesting story of a remarkable company and its leader. However, when the author takes the subject beyond his business success and concludes with a chapter on how readers should apply these lessons in their own lives, it is disconcerting to not see more self criticism for mistakes made earlier in life.
Disclosures: None.