Zappos Business Model: How Zappos Makes Money (2023)

Zappos Business Model: How Does Zappos Make Money?

Zappos business model allows it give the in-store shopping experience to clients at their homes as an online retailer. It started first with shoes, but has now expanded to a wide variety of other items as well. The business model is focused on delivering excellent customer experience and, therefore, building customer loyalty and driving word-of-mouth marketing.

In today’s blog post I will give a detail explanation of Zappos business model that has made it the biggest online shoe retailer in America, how it makes money and what makes it particularly successful.

Table of Contents

What is Zappos?

Zappos (url – zappos.com) is an American online shoe and clothing retailer that was founded in 1999 by Nick Swinmurn. The company was first launched under the domain name Shoesite.com. And from that domain name you could see that the original focus was on selling shoes. But today Zappos has gone beyond just shoes. It now sells clothes, handbags, accessories and many more. The categories available also cuts across men, ladies and children with thousands of unique products on offer.

Though Nick left in 2006, the company still reached $1 billion sales for the first time in 2008. And by July 2009, e-commerce behemoth, Amazon came calling. And just as you must have guessed, it is difficult to say no, when Amazon calls. So that was how Amazon acquired Zappos in an all-stock deal worth around $1.2 billion at the time. That is how Zappos came to become a member of the Amazon group.

Before we delve into Zappos business model and revenue model, let’s look at how it works.

Zappos Business Model: How it Works?

In the beginning Zappos started as a middleman. They they collect orders from customers and then have other companies fulfill those orders. The idea was to form partnerships with hundreds of brands and feed their warehouses to customers. It was a sort of dropshipping kind of business model. And of course dropshipping in itself is such a great business model. With dropshipping you don’t have to manage the inventory yourself nor take on any of the risks involved.

However, in 2003, right after the dot-com crash, a lot of e-commerce companies were going out of business or were on their way. It was then hard for Zappos to persuade anyone to fund the concept of selling shoes online. In fact it sounded crazy to many then. And about 25 percent of Zappos’ revenue at the time was coming from dropshipping. But the company took the bold and daring step to end it then.

The company would later note that “even though it was hard to walk away from sales at a time when nobody is offering you money, we couldn’t distinguish ourselves in the eyes of our customers if we weren’t going to control the entire experience. We had to give up the easy money, manage the inventory, and take the risk”.

So Zappos decided to change a couple of things as follows:

Inventory and Warehousing

The company started buying inventory and storing it within their own warehouses. By moving the fulfillment of orders in-house, Zappos had full control over the delivery times, something they couldn’t do with the dropshipping model. It also gave them perfect visibility into their inventory. And with that they could own the entire customer experience which is one of their major core values – providing exceptional customer service.

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Call Center Operations

Zappos understood that call center interactions were a critical part of customer service. However, when headquartered in San Francisco, it was difficult to find the right type of committed, service-oriented people with whom to staff its call centers. With its high cost of living and tech-heavy culture, the Bay Area was not a place where call center jobs were taken seriously. As a result, many of the call center employees were temps who did not deliver the desired level of quality.

To address this issue, Zappos moved its headquarters to Las Vegas. In addition to its lower cost of living, Vegas was also chosen for its unique culture. As a city with a heavy emphasis on hospitality, its citizens were more likely to view a customer service job as a way to start a legitimate career. Furthermore, with the city’s pervasive “all-night” culture, people were more willing to work odd hours, enabling Zappos to provide a 24/7 customer service line.

Emphasis on Quality Interactions

While other companies focus on reducing the issue resolution time on customer calls, Zappos does not limit the amount of time that customer representatives spend on the phone with each customer. Instead, Zappos encourages its employees to spend as much time as needed to really understand the customer’s issues and go above and beyond in helping the customer. To this end, Zappos also does not have a script for its call center reps, and encourages them to be authentic and build a personal emotional connection (PEC) with each customer.

Zappos Business Model: The Value Proposition

The current Zappos business model has been an incredible success ever since it tweaked its business model from dropshipping to owing its own inventory. Though it is difficult to have exact financial data, since Amazon doesn’t report its activities separately, but we still know that it has had amazing results.

How was the company able to achieve such level of success? It is all down to strong value propositions wrapped up in Zappos’ company culture. And at the heart of this culture are 10 core values:

Deliver Wow customer experience through Service
Embrace and Drive Change
Create Fun and a Little Weirdness
Be Adventurous, Creative and Open-Minded
Pursue Growth and Learning
Build Open and Honest Relationships with Communication
Build a Positive Team and Family Spirit
Do More with Less
Be Passionate and Determined
Be Humble

How Zappos Manages to Keep with This Culture

The company knows that to keep with this culture they must get it right at the recruitment level, because people are the ones who are going to drive it. For this reason, every potential employee must complete two sets of interviews.

The first series of interviews, focuses on the candidate’s usual skills, competencies and experience. Candidates who make it through this round moves to the second stage.

The second stage is where they meet with the HR department. And the focus at this stage is to see if there is a culture fit.

Finally, if one makes it beyond this, there is no confirmation yet, though hired. Once hired, every new employee must go through a four-week training program that stresses both their culture and customer service. And at the end of the first week, Zappos offers each trainee $2,000 and reimbursement for the time spent in training to walk away if they do not think such a person is not a good fit.

To many, that might look like a waste. But as far as Zappos is concerned, they know it is far less costly than having an employee who does not fit in nor someone who is only after the money.

In fact, it was a result of this culture emphasis that even after the company was bought by Amazon in 2009, instead of being absorbed just like most other companies Amazon acquired, it allowed Zappos do its thing. The implication of this is that till today, Zappos has their own staff and maintain their culture.

Zappos Insights Live

So great, strong and distinguished has become the culture experience in Zappos that they are now building another business off it. In fact it has become another revenue source for the company. How does this happen?

Because every company now knows that Zappos is the standard, as long as culture concerned, organizations are queuing to copy the way they did it. So the company has established a program they call Zappos Insights Live, where executives from ‘regular’ companies pay $5,000 to participate in a two-day culture immersion.

Participants learn how to create a culture like Zappos’ so they can bring these principles back to their firms.

Zappos is definitely unique, and though not all of its methods will work for every business, every company can—and should—work to make their culture more vibrant and exciting.

Zappos Business Model: How They Make Money

From my research, there are four key ways Zappos makes money from their customer focused business model:

1. Margins from sales: Since Zappos now maintain its own warehouse and inventory it makes its money primary from margins from sales.

2. Returning Customers: 75% of Zappos purchases come from returning customers. That is an incredible number in any industry. However, that is not surprising if you consider what the company invests to keep their customers happy and coming back.

3. Extra Value Service: Zappos competes more on service than price. Those that patronize Zappos repeatedly are aware that they will pay more money for the same pair of shoes they’ll find elsewhere. But the extra cent or dollar is what they will gladly pay owing to the extra value they deliver shopping with Zappos. Besides, that markup covers the extra cost of “free” shipping and restocking.

4. Zappos Insight Live: Though not originally part of the Zappos revenue model, but having distinguished itself as the reference point in culture experience, it has become a revenue source for Zappos.

Zappos Business Model: What Makes Them Unique?

From our discussion so far you could see that Zappos unique value proposition has been built majorly around a culture of excellent customer service. In fact the CEO once facing a UK parliament was quoted as saying that happy customers = business growth.

In fact, Zappos doesn’t value the processing of high call volumes, nor of quick-time resolution. Nonetheless, each agent is expected to spend at least 80% of their time in customer-facing interactions. Whether this means a hundred or a single call a day, it doesn’t matter to Zappos. However long it takes to make each customer happy is time well spent for Zappos.

As a matter of fact, the philosophy seems to have been taken to the extreme recently. There is this widely publicized case of a Zappos employee that took a customer service call that lasted a record-breaking 10 hours and 43 minutes in 2021.

Well, that is how much a customer’s happiness mean to Zappos. And that is also how it won the customer’s loyalty.

Zappos Business Model

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