Zappos.com Inc. CEO Tony Hsieh has grown the company into the No. 1 online shoe retailer by focusing on two points: maintaining low-key marketing programs and concentrating on customer retention.

This specific combination, he says, has let them achieve a $6-to-$1 ratio on actual sales vs marketing dollars. Perhaps most intriguingly, out of Zappos.com’s 1,200 employees, they have accomplished this feat with a marketing team of nine. (Last year, it was five.)

Here are Hsieh’s 10 biggest lessons learned since he came on board in 2000:

-> Lesson #1. Customer retention

Rather than putting the lion’s share of their marketing budget into advertising, Hsieh and his team have allocated an increasing amount of dollars into customer retention, including three key tactics:
o Free overnight shipping
o Free return shipping
o 24/7 fulfillment operations (including order processing and customer care)

Building the brand as customer-centric has helped their profitability tremendously. “We could have put those resources into advertising. Instead, we wanted to work on getting people back,” Hsieh says. “We believe that the way to build a long-term, growing business is to focus on how to get repeat customers back to your site and purchase more often.”

-> Lesson #2. Beta-test new products

When they first started to create brand awareness, they bought mass ads, including expensive sports stadium signage. But the tactic didn’t create enough conversions to justify either the often inaccurate response forecast or the unspecific ROI analysis once the campaign ended.

Now, Hsieh's team quietly rolls out every new feature/product line beta in order to test the waters. For instance, they recently launched an apparel category, but played the move close to their vest.

“There’s still a temptation to come out in a big way and waste a lot of money like we did in the early days,” he says. “It’s better to start small because, until you are actually doing it, you cannot predict the thousand little things that will inevitably happen.”

-> Lesson #3. Maintain accurate inventory

Until four years ago, they used drop-shipping quite a bit and suffered from the fact that 80%-90% of the product being displayed on the Web site was currently in stock. The data feeds going from retailer-to-manufacturer-to-fulfillment produced regular glitches in the pipeline.

“That means 10%-20% of our customers were finding out a couple days later that their item was out of stock, and they’d be extremely upset, creating a lot of negative word of mouth,” Hsieh says. “Drop-shipped orders were producing 25% of our revenue, and we walked away from it because we knew it was important to be true to our brand.”

-> Lesson #4. Service and selection over price

Shortly after joining the company in 2000, Hsieh had his marketing team test discounts and ecoupons for six months. What they discovered was that these tactics attracted too many price-minded, one-time customers rather than brand loyalists.

“In terms of the three major areas -- service, selection and price -- you can really only offer two of them at the same time,” he says. “Our brand [niche] was in service and selection.”

-> Lesson #5. Centrally located fulfillment

For in-house fulfillment Hsieh and his team used to operate a warehouse facility in California, using ground shipping to all corners of the United States. This hurt not only the timing of their deliveries, but also the price points because of regular cost on ground shipments.

In 2002, Hsieh moved their fulfillment operations to a Shepherdsville, KY, facility, creating more expeditious delivery, as the United Parcel Service’s largest domestic shipping hub was just 20 miles away. And, the new fulfillment spot fell within 600 miles of two-thirds of the nation’s population. The relocation was crucial in allowing them to trot out an ongoing free next-day shipping offer.

-> Lesson #6. Do it yourself

Where Hsieh once paid consultants to advise on customer service, operations and advertising, he has since brought it all in-house. He says this do-it-yourself attitude has improved every facet of their business, including ROI.

“You have to avoid falling into the trap of a consultant telling you that, ‘If you spend a large amount of money with us, all of your problems will be solved, and you’ll never have to worry about this again.’ In the end, they are outsiders and do not understand your business as well as you do.”

-> Lesson #7. CRM: investment or expense?

When balancing the books, Hsieh once ledgered CRM/fulfillment costs in the “expense” column rather than as an “investment” -- where categories like marketing dollars were accounted. Now, he and his team view customer service as an investment.

“We no longer believe that customer service is something that we should make into a smaller number. We should make it into a bigger number. I am sure that our call center and warehouse costs are much higher than most organizations, but that’s due to the fact that we view them as customer retention and word-of-mouth investments rather than operational costs.”

-> Lesson #8 Positive word of mouth

While many marketers have increased their focus on seeded viral efforts, such as videos on YouTube and through guerilla blogging, getting the best word of mouth is by having excellent customer service. Hsieh says traditional WOM -- when followed up with service that exceeds expectations -- produces better lifetime value than many trendier marketing mediums.

“That’s why with every extra dollar we get, we are more prone to putting it back in the customer experience rather running a big campaign.”

-> Lesson #9. Don’t fret the competition

Hsieh says he doesn’t keep a close eye on what other online shoe retailers do. Unlike other retailers who worry about potentially competitive data getting around, he lets his distribution vendors see exactly what is selling at all times.

Through a secure extranet, partners can log in and see, for example, how many of their products have sold in the past 30 days. They also get regular emailed reports on how the stock they wholesaled to Zappos.com is moving.

“We have around a thousand [partners], so that’s like an extra thousand eyes helping us look at the business,” he says. “They can see what products are in the warehouse and see what ones are being returned. They can alert us if we are out of size 10s -- something we may not be aware of at that moment -- and then we can place an order with them, which helps everyone’s sales.”

-> Lesson #10. Keep core values intact

When the company began to rapidly grow, Hsieh knew that brand identity -- so reliant on company reps at all points of contact -- might evolve into a runaway train. So, they created a list of 10 core values that would help determine whether to hire someone -- for call center reps, order packers, marketing director or CFO.

Here’s the list they’ve followed:
o Deliver “wow” through service
o Embrace and drive change
o Create fun and a little weirdness
o Be adventurous, creative and open-minded
o Pursue growth and learning
o Build open and honest relationships with communication
o Build a positive team and family spirit
o Do more with less
o Be passionate and determined
o Be humble

Tony Hsieh is speaking at this week's eTail 2007 conference in Washington, DC. For more information, go to http://www.wbresearch.com/etail/

Useful links related to this article

Zappos.com Inc.:
http://www.zappos.com