Zappos (www.zappos.com) is a Las Vegas–based online retailer that has been cited in Fortune’s list of the Best Companies to Work For and Fast Company’s list of the world’s most innovative companies. In fact, its remarkable success resulted in Zappos being bought by Amazon for $850 million in 2009. Zappos was founded in San Francisco in 1999 and moved to Las Vegas for the cheap real estate and abundant call center workers. The company sells a large variety of shoes from nearly every major manufacturer and has expanded its offerings to handbags, apparel, sunglasses, watches, and electronics. Despite the crippling economic downturn, sales jumped almost 20 percent in 2008, passing the $1 billion mark two years ahead of schedule.

The company’s first core value is “Deliver WOW through service,” which is obvious if you’ve ever ordered from Zappos. It provides free shipping in both directions on all purchases. It often gives customers surprise upgrades for faster shipping. And it has a 365-day return policy. In 2003, Zappos made a decision about customer service: It views any expense that enhances the customer experience as a marketing cost because it generates more repeat customers through word of mouth. CEO Tony Hsieh never outsourced his call center because he considers the function too important to be sent to overseas. Job one for these frontliners is to delight callers. Unlike most inbound telemarketers, they don’t work from a script. They’re trained to encourage callers to order more than one size or color, because shipping is free in both directions, and to refer shoppers to competitors when a product is out of stock.

Most important, though, they’re implored to use their imaginations. This means that a customer having a tough day might find flowers on his or her doorstep the next morning. One Minnesota customer complained that her boots had begun leaking after almost a year of use. Not only did the Zappos customer service representative send out a new pair—in spite of a policy that only unworn shoes are returnable—but she also told the customer to keep the old ones, and mailed a hand-written thank-you.14 Over 95 percent of Zappo’s transactions take place on the Web, so each actual customer phone call is a special opportunity.

“They may only call once in their life, but that is our chance to wow them,” Hsieh says. Zappos uses a sophisticated computer system known as Genghis to manage its operations. This includes an order entry, purchasing, warehouse management, inventory, shipping, and e-commerce system. Genghis tracks inventory so closely that customers can check online how many pairs of size 12 Clarks Desert boots are available in the color sand.

For employees, it automatically sends daily e-mail reminders to call a customer back, coordinates the warehouse robot system, and produces reports that can specifically assess the impact on margins of putting a particular item on sale.

Free shipping has become a customer expectation.

Research has found that online customers abandon their virtual shopping carts up to 75 percent of the time at the end of their order entry process when they can’t get free shipping.

Other online retailers have copied the free-shipping policies of Zappos. L.L. Bean, for example, now provides free shipping and free returns with no minimum order amount.

Case Questions for Discussion:

1. Draw and describe the customer benefit package that Zappos provides. Goods? Services? Digital content? Who manufacturers the physical goods? Who is responsible for the quality and delivery of the physical goods?

2. Identify and describe the primary, support, and general management processes needed to execute a customer order at Zappos.

3. Describe how any three of the OM activities in the box “What Do Operations Managers Do?” impact the management of both the goods that Zappos sells and the services that it provides.

4. Explain how this case illustrates each of the seven major differences between goods-producing and service-providing businesses.