Tony Hsieh
Adam Burns:
I’m Adam Burns and
welcome to MeettheBoss.tv. This week I’m
in Las Vegas, America’s home of gambling, to meet a man whose gamble really did
pay off. Mainly by adhering to one of
the core principles that’s made some of the hotels here so successful.
In 1998 fresh out
of college Tony Hsieh sold his first company to Microsoft for $265
million. A year later he invested in an
idea that no one else would touch, selling shoes on the Internet. Since 2000 when he joined as CEO he’s turned
Zappos around from $1.6 million annual turnover then to over $1 billion
now.
How? Well for Tony it’s all about a great customer
experience. And for that he needs great
employees. He says he only hires people
who are passionate about what Zappos is passionate about. Namely, that great customer service. He doesn’t care if you’re passionate about
shoes.
I spoke to him
about his business model and how he can grow a company in this increasingly
lean economy. So, Tony, firstly thank
you very much indeed for agreeing to the interview. Very kind and much appreciated.
I’d like to start
if I may with a little bit of background.
Selling shoes on the Internet not a classic business idea. People tend to be tactile about their shoe
buying. If you could tell me a little
bit about Zappos’ background and then also how you got involved.
Tony Hsieh:
Well, the founder
of Zappos was walking around a mall in San Francisco back in ‘99 looking
for a pair of shoes and went to three or four different stores and couldn’t
find the pair he was looking for in his size and in the color that he
wanted. And so he went online and couldn’t
find anything there and since it was 1999 when, you know, there were a whole
bunch of other dot com ecommerce companies starting, he decided to start a site
that sold shoes.
And his initial
goal was to have the best selection of shoes.
And over time we actually transitioned that so that really we just want
to be about the very best customer service.
So to answer your
question about how do you try them on without touching them or seeing them beforehand,
it’s really about bringing the shoe store into the comfort of your living
room. ‘Cause we pay for shipping both
ways. It’s free shipping both ways.
So a lot of people
might order ten different pairs of shoes, try them on with ten different
outfits and then just send back the ones that they don’t like or don’t fit.
Adam Burns:
Sure. And what got you involved? What got you interested in the idea?
Tony Hsieh:
I got involved
about two months after it started.
Originally I was an investor and part-time advisor and I was actually
involved in about 20 or so different Internet companies at the time as an
investor. And over time it became clear
that Zappos was both the most fun and the most interesting. So within a year I ended up joining full
time.
Adam Burns:
A large part of
your appeal is this hassle-free returns policy.
What are the challenges then from an operating point of view of
something like that?
Tony Hsieh:
Most companies are
not designed to handle returns in high volume and our return rate depending on
the brand can be anywhere from 20 percent to 40 percent. So we basically had to design our warehouse
operations and our customer service operations to expect and encourage returns.
And so for us it’s
just part of the business. There’s
definitely a cost associated with it and there’s extra steps that need to be
taken inspect returns when they come back in.
Make sure that they haven’t been worn and so on.
So it’s definitely
a lot more labor for us but for us it’s just part of the service and it’s part
of what makes people keep coming back to us because it’s so easy to return
items to us.
Adam Burns:
And how do you
negotiate that with your suppliers though?
I would imagine that they want to bulk sell and then it’s off our hands
and done. They don’t want to be dealing
with a company that potentially could be returning –
Tony Hsieh:
Yeah. We actually don’t return anything to our
suppliers. We will accept it back from
the customer. So it’s no different than
if you went to a shoe store, you know, the sales rep might bring out three
pairs of shoes for you to try on. You
try them all on and then you maybe choose one or two of them and then the
others go back into the stockroom again.
And so the same
thing happens here except our stockroom happens to be a giant warehouse that
carries four million pairs of shoes.
Adam Burns:
I suppose the fear
perhaps of other companies who are doing a hassle free returns policy is that
customers might take advantage. What’s
your sort of – what are your experiences in that?
Tony Hsieh:
Well, we’ve
generally found and believe that people are inherently good and I would say in
99 percent plus of the cases it just hasn’t been an issue. We do occasionally deal with customers that
maybe aren’t aware of our return policy which is that the shoes need to be in
the same condition that you received them in.
And so we’ll give the customer a call and, you know, usually just a
phone call and educating them on what our policy actually is takes care of the
problem.
Adam Burns:
Interesting
because its obviously a part of any other business if not the business on its
own, how do you deal with the fact that a shoe company, you have the advantage
I think at the moment that people can still go to a real store. And this must take place. They can go to a real store. They can try the shoes on and then perhaps
they go home and they order them at their leisure on Zappos.
What kind of
happens when the shoe stores aren’t there?
Do you think then there’s another level of customer service that you
have to get to?
Tony Hsieh:
Well actually most
of our customers order from us initially it’s because of the selection. For any of our top brands we have literally hundreds
of different styles so they’re coming to us initially because there is
something we offer that they can’t find in their local shoe store.
And actually that’s
what gets us over the initial hump of, “Oh I would never order shoes online,”
because they usually end up finding something that they just can’t find
anywhere else. And then after they’ve
experienced our service once and seen how easy it is to return an item and seen
how quickly the items come, then that’s kind of what makes them come back over
again and again.
Adam Burns:
Any business is
reliant on its staff but customer experience is even more dependent. I asked Tony how he ensures his new hires are
the right cultural fit for Zappos.
Tony Hsieh:
Well, when we hire
anyone actually it doesn’t matter what position. You can be an accountant or lawyer or someone
that works for our customer loyalty team which is what we call our call center
reps. We actually do two sets of
interviews. The first set is done by the
hiring manager and his or her team so it’s for the standard stuff like fit
within the team, technical ability, relevant experience and so on.
But then our HR
department does a separate set of interviews purely for culture fit and they
have to pass both in order to be hired.
So we’ve actually passed on a lot of experienced and talented people
that we know can make an immediate impact on our top or bottom line but if they’re
not a culture fit, then we won’t hire them.
And one of the
things that we’re looking for are people that are actually passionate about the
company vision which is to be about the very best customer service.
Adam Burns:
Why do you think
more firms don’t take that approach?
Tony Hsieh:
I think cause it’s
expensive and it’s – we go through a lot of people. For example when we hold a job fair for the
call center about 200 people show up.
And we end up interviewing all of them in some way and we only end up
making an offer to about 20 of them.
And then after
they join everyone goes through four weeks of training where we go over the
company culture, how to use our customer service tools and people are out on
the phone actually talking with customers and those four weeks of training are
also very expensive.
And so I think
everyone knows that company culture and customer service are important. The problem is that the payoff is usually two
or three years down the line and most companies are being run where they’re
looking for some sort of payoff either in the same quarter or in the same
year. And if that’s what you’re looking
to maximize in terms of profits then it doesn’t make sense to invest in customer
service.
Adam Burns:
Was it always this
easy? You say 200 people and you hire
20. You know three, four years ago were
you getting those kind of volumes through now or has it, you know, the rolling
stone – this stone’s rolling I suppose.
Tony Hsieh:
Yeah. It’s definitely just like our main business
in terms of customers has grown primarily through repeat customers and word of
mouth. The same thing has happened with
when we have job fairs. And job
applicants.
The candidates,
most of them have heard of Zappos somehow whether it’s through a friend or a
roommate or a friend of a friend. And so
we’ve definitely seen the word of mouth effect help with getting better and
better candidates.
Adam Burns:
I know that you’re
known as a tremendously good employer in terms of healthcare and all these
other benefits that you offer. Is that
something that you talk about it being expensive in the HR and then the care I
guess of all the staff. Is that
something that you can do because of your particular business model?
Tony Hsieh:
I guess it’s not
really a business model thing so much as just fundamentally that there are all
sorts of companies. There are companies
that churn through employees very quickly and it probably doesn’t make sense
for those types of companies. And then
there are companies where they want employees to be at the company for a very
long time and so whether it’s health benefits or investing in employee’s
training and education so they can continue to grow for the next three to five
to seven years or even longer, those are all very expensive investments to
make.
But if you can get
the employee to stay and be happy and inspired and motivated working for the
company then you know the long-term benefits are huge.
Adam Burns:
I just thought of
something. Have you always believed that
from – so I know that you have this tremendous background of course with this
company that you built and sold to Microsoft fresh out of college, all that
sort of stuff. But even then did you
always believe if I had a company these are the tenets by which I would stake.
Tony Hsieh:
No. It’s definitely been a learning process over
the past I don’t even know how long. I’ve
been pretty entrepreneurial all my life and so every day I’m still
learning. And definitely trying to learn
from mistakes I made either at previous companies or even last week.
Adam Burns:
To what extent do
you think that you can train for customer behavior? For that sort of customer experience
approach? Rather than hiring for it?
Tony Hsieh:
We have the belief
that you should hire for attitude and then the rest can be trained. Skills can be trained. And I think it’s pretty hard to train someone
to have a good attitude if they don’t.
Adam Burns:
And I believe you’re
an advocate from net promoter score which is a system of measuring the customer
experience. To your mind, what are the
fundamentals of good customer experience metrics?
Tony Hsieh:
It’s interesting ‘cause
we are actually of the philosophy where you can do a lot more if you get the
culture right. Then most of the other
stuff actually takes care of itself in terms of great customer service. I view net promoter score more as a tool to I
guess manage the touch points and manage behavior but we actually believe that
if you can inspire employees that gets you a lot further than trying to manage
them.
Now of course if
you have both then that’s even better.
But we’ve really – are much more extreme on trying to inspire people
through the larger vision and living the core values. Whereas NPS is really I guess in my view more
about managing to metrics. And so we
actually, we do look at our NPS scores but we actually don’t really do much
with it.
Adam Burns:
The other day –
and we were talking about this at the NPS conference in
San Francisco. Brad Smith talked
about letting the – the absolute kind of importance of letting your employees
hear the applause as he described it. Is
that something that you would agree with?
Tony Hsieh:
Yeah. And for us, you know, a lot of it is instant
because the customer is on the phone and so when you wow the customer you can
hear the customer feedback instantly from the customer himself or herself. We also put out a weekly newsletter that goes
out to the whole company for whenever someone emails us or calls us or tells us
about a great experience and we compile those all together and so everyone can
read it.
Adam Burns:
A good customer
experience is supposed to create promoters, the intention. People who will recommend your brand to
others. What are the bottom line
benefits to you of that?
Tony Hsieh:
Well we’ve grown
from basically no sales in 1999 to in 2008 we did a little over $1 billion in
gross merchandise sales and the number one driver of that growth has been
through repeat customers and word of mouth.
So promoters are to us a very important thing.
Adam Burns:
But if you’ve
actually seen, well for example can you take money out of the marketing
pot. Is there a clear sort of business
benefit to it?
Tony Hsieh:
Yeah. Well for us we actually spend a lot less on
paid advertising than we otherwise would.
In fact most of the money that we would have spent on paid advertising
we put into the customer experience.
So things like the
free shipping both ways. The 365-day
return policy. Staffing our call center
24/7. Those are all very expensive
things. But we really view those as our
marketing costs. Any costs that we’ve
put into investing in the customer experience ends up driving that repeat
customer behavior and word of mouth and so we think of it as an indirect
marketing cost.
Adam Burns:
I notice you blog
regularly internally and these sorts of things.
I’m wondering what you feel are the business benefits of that.
Tony Hsieh:
Well for us at
Zappos we really believe in trying to form a personal, emotional connection
with as many customers as possible. So
that’s why we put our 1-800 number on the top of every single page of our
website. Because we actually want to
talk to our customers.
And if we have
their undivided attention for five or ten minutes and we get the interaction
right, if they feel the person is not reading from a script because we don’t
use scripts. And actually cares
genuinely about what happens to the customer, then they’ll remember that and
they’ll tell their friends about that.
And whether it’s
through blogging or much more through twittering I think it’s just another way
where customers can feel a more personal, emotional connection to the
company. It’s not just a faceless
corporation.
And we’ve also
used it to really help our culture.
Employees get to know each other in a different context from a different
perspective. Many have met up outside
the office because of Twitter for example.
Adam Burns:
Demographically
what’s your kind of core market? Your
core audience?
Tony Hsieh:
Well, we carry
over 1,500 brands so we have shoes for kids and we have shoes for 80-year-olds
and everything in between. And we have
$40.00 shoes and I think $2,000.00 boots and everything in between. So there really isn’t really a target
demographic. It’s pretty much anyone
with two feet.
Adam Burns:
Yeah, yeah. Of course.
So the Twitter thing works.
Because I was wondering if it was more – in fact you touch on it. I was wondering if Twitter was more in fact
almost an internal form of marketing for you rather than an external because I’m
thinking would I – am I really interested if I’m buying shoes from Zappos, am I
really interested in what – no offense – you know your –
Tony Hsieh:
Yeah. Some are and some aren’t. But yeah for Twitter the initial motivation
was really for employees. For employees
to get to know each other better.
Adam Burns:
And do you not
feel – I know that also having watched a video – that you sit and your desk is
deliberately placed, you know, in this sort of open planned environment. You’re not secreted off in a big glass
cubicle anyway.
Do you feel that
there is a pressure on you then more than normal perhaps to live Zappos? Because most CEOs – everything starts at the
top. I understand that. But most CEOs will come out 15 minutes. It’s easy to gee yourself up and to go out
and to hit that floor hard and get the energy through it.
But to be there
24/7, to be exposed, is a very different proposition.
Tony Hsieh:
Yes and no. I guess it would be a lot more difficult if
the core values of Zappos were different than my personal core values. And that’s actually – if you look at the list
of our core values it’s not what you might find at most big corporations. Because we wanted to make sure that whatever
lists we came up with were committable core values. They were ones that we would actually be able
to live up to. That we’d be willing to
hire based on and fire based on.
And so most core
values are they might call them guiding principles at other companies or they
read like press releases and they’re kind of a meaningless plaque on the lobby
wall and maybe you learn about them on day one of orientation. But no one really pays attention to them.
But if you look at
our list those are things that you can actually consistently live up to not
only at work but just in your life in general. And so that’s basically what we look for when
we hire people. People that are
naturally able to live up to those core values.
Adam Burns:
There’s more of a
kind of an ethical stance in that. Sort
of a personal ethical stance as opposed to –
Tony Hsieh:
I wouldn’t even
say it’s ethical. For example one of our
core values is to be humble. I don’t
think it’s unethical to not be humble. I
just personally wouldn’t want to hang out with people that are really
egotistical. And so yeah. I wouldn’t say it necessarily has anything to
do with ethics but it’s more about just how you want to live your life and who
you want to be around.
Adam Burns:
It must be
fantastic, I guess, being able I guess to shape a company in your image like
that. I think that must be quite –
Tony Hsieh:
Well the funny
thing is it’s not like I came up with the list of core values. We actually spent a year and we asked all our
employees what our core values should be and basically through a year-long
process everyone submitted suggestions and we went back and forth and
eventually consolidated everything down to a list of ten.
Adam Burns:
In this tight
economy companies cross all verticals, are having to make tough decisions. Hsieh himself recently announced quite a
number of layoffs. But was widely
praised for the way in which he handled them.
I asked him about his approach.
Tony Hsieh:
In 2007 we did
about $840 million in gross merchandise sales.
And in 2008 we ended up doing a little over $1 billion in gross
merchandise sales. So we were still
growing, which is great. But the economy
definitely affected us ‘cause our original plan when we laid out our financial
plan a year earlier was to do closer to $1.1 billion.
And so all of our
hiring and expense structure was based on assuming we could hit the $1.1
billion. When we knew we were gonna fall
short of that, the expense structure just didn’t make sense anymore and so we
did have to lay off about 8 percent of our employees. Which was a very tough decision but at the
same time we wanted to be proactive about it and not wait until we basically
had no choice and then lay them off with two weeks or no severance.
Instead, we
decided the right thing to do was to be proactive about it so that the company
would be in a healthy position for 2009 and we actually gave every employee at
least two months of severance and on top of that if they had been with the company
for three or more years they got a total of essentially one month per year that
they worked. Oh, and then on top of that
we offered to reimburse them for up to six months of COBRA payments so that
they were taken care of on the medical side as well.
And so it was
definitely a tough thing to do but we were very open and honest in terms of the
business reasons for doing it. We sent
an email to all the employees explaining why we had to do it and why it was the
best choice for the company given the economy.
And then we also
posted that same letter on our blogs and it was announced through Twitter and I
guess it’s not really something that was unique to the layoffs. Just being open and honest and transparent is
just one of our core values and it’s part of our culture.
Adam Burns:
I’m guessing now
you talked about lessons that you learned.
I’m guessing that’s the largest sort of mass layoff you’ve had to do,
had to deal with. Do you think it will
make Zappos stronger and how do you think?
Tony Hsieh:
It was actually
our second round of layoffs in the company’s history. The first time we had to do it during the
first couple years of the company and at that time it was fewer people but
percentage wise it was actually much greater.
And, you know, looking back that actually ended up being a blessing in
disguise because when we had to lay off people in the early days we didn’t have
money to spend on marketing and it kind of forced us to really focus on
customer service and repeat customers and the customer experience.
And I think if we hadn’t
gone through that we wouldn’t be who we are today. Where we’re not only focused on that but that’s
what we want our brand to be about is the very best customer service. So you know it’s interesting. I think a lot of things good or bad at the
time it’s hard to know what the benefit will be until you have the hindsight of
a few years and then we’ll see it.
But for us we
definitely do see this as an opportunity for us to make our culture stronger
and more tightly knit and also make the company more efficient.
Adam Burns:
You previously
described Zappos as a service company that just happens to sell shoes. Which of course makes your core competencies
entirely transferrable. What are the
plans then for the future?
Tony Hsieh:
Well, we’re making
a big push in new clothing this year. We
actually already sell clothing, even electronics, housewares, kitchenware. But really I would say ten years from now or
20 years from now it doesn’t even have to be an online business.
We really just
want to be about the very best customer service. And so it can be for example we’ve had
customers email us and ask us if we would start an airline. So a Zappos Airline would just be about the
very best customer service.
And, you know, one
brand that we look towards for inspiration sometimes is Virgin. Virgin does airlines, music and a whole other
bunch of businesses but their overarching brand is this brand about being hip
and cool. Whereas we just want to be
about the very best customer service and customer experience.
Adam Burns:
And what does it
take do you think to be a good company in a tight period?
Tony Hsieh:
I think a lot of
times when, you know, whether it’s because of the economy or just I guess times
are tough in general, I think that’s when a lot of companies start compromising
on their values and so a lot of companies might let the company culture go downhill
or might scale back on customer service and for us it’s in order for us to be
true to ourselves like those would be the absolute last things to go.
Adam Burns:
All right. Thank you very much indeed.