Last year online apparel retailer Zappos sold to Amazon in a billion dollar deal. But back in 2002, the company was struggling. That was until Zappos CEO Tony Hsieh and colleagues changed their game. In this extract from his book Delivering Happiness, Hsieh details the moment Zappos altered their business model and their future.
Looking at the company’s financials it became pretty clear that just focusing on cutting expenses wasn’t going to get the company to profitability. We needed to figure out a way to grow sales.
This was a particularly challenging problem because we had cut back most of our marketing budget. We were already focusing more on getting the customers we already had to shop with us more often, but that alone wouldn’t get us very far in the short term.
What we really needed was a miracle.
In high school, I’d taken a Greek history class and learned about deus ex machina, which is a Latin phrase that literally translates into “god from the machine.” According to Wikipedia, it is a “plot device in which a person or thing appears out of the blue to help a character overcome a seemingly insolvable difficulty. It is generally considered to be a poor storytelling technique.”
As I sat in the office at my desk pondering what to do next, I turned to Fred, [our VP of merchandising at the time]. I didn’t care if this would make for a bad story later as long as we could figure out how to save the company.
“Fred, do you have a deus ex machina?”
“A what?” Fred was confused.
“Deus ex machina,” I repeated. “You know, a Greek miracle.”
“Oh, no, sorry,” he replied. “I accidentally left mine at home in my shirt pocket.”
“Maybe we can find one over a drink,” I said. “It’s 4:00 PM and we need to figure out how to save the company. Is it too early for a drink?”
“Of course not.”
So we stopped what we were doing and headed over to the bar at Venture Frogs Restaurant. I ordered a Grey Goose soda and Fred ordered a beer. We sipped our drinks in silence for a few minutes.
I broke the ice. “So…any ideas on how to increase sales more quickly?”
Fred looked pensive. “I come from a merchandising background. I like to say that all we need is the right product at the right time in the right quantity, and the sales will take care of themselves. The problem is that we don’t carry the brands or the styles that I know will sell. We just don’t have the right products to offer our customers.”
“How do we get the right products?”
“The problem is that a lot of the brands that we want to carry can’t drop ship,” Fred said. “Their systems and warehouses aren’t set up to send the orders from their warehouse directly to our customers. And even for the brands that can drop ship, usually they’re sold out of their best stuff, so we wouldn’t be able to offer those styles to our customers.”
I paused for a moment to think about what Fred was saying. “So how come all the brick-and-mortar stores are able to offer all the best-selling brands and styles?” I asked.
“Because they hold and own the inventory,” Fred explained. “The brick-and-mortar retailers future out their orders ahead of time, pay for the inventory, and take the inventory risk. If a retailer isn’t able to sell something, then that’s the retailer’s problem, not the brand’s or wholesaler’s problem. But we can’t do that, because that’s not our business model.”
We had both finished our drinks.
“Another drink?” I asked. Fred nodded solemnly and motioned for the bartender to bring us another round.
“So…what if we did that?” I said, thinking out loud. “What if we carried all the inventory of the brands and styles you wanted? How much do you think our sales would go up by?”
“Oh, we’d easily triple sales, no question,” Fred said without hesitation. “Probably even more than that.”
“Okay, let’s figure out what we need to do to make that happen. If changing our business model is what’s going to save us, then we need to embrace and drive change.”
Fred and I spent the next hour talking through all the different challenges that we would have to address if we wanted to start carrying inventory in addition to the drop shipping business that we were already doing. By the end of the hour, we felt we had a pretty good list. The list was daunting, but at least we now knew what we needed to do to save the company:
- We would need to hire and grow a buying team to decide what products to buy and to manage the inventory. Fred could do this in the short term, but at some point we would need a dedicated team.
- We would still need to convince the brands to sell to us. Most of the brands that we wanted would only sell to brick-and-mortar stores.
- We would need to update our software to enable our Web site to sell inventoried products instead of just products that were being shipped.
- We would need a warehouse to hold all the inventory we were buying. We would need to hire staff to ship the shoes out of our warehouse.
- To address number 2, we would need to open up a physical retail store and hire staff to actually run it. Given our current financial situation, it would be pretty hard to convince any landlord to sign a lease with us.
- We would have to figure out how to come up with the cash to purchase the inventory we wanted. Fred figured we would need another $2 million. The problem was that we didn’t have an extra $2 million lying around.
- We would have to accomplish all of these things within a few months.
Fred and I divided up the list. He would handle numbers 1 and 2. I would work with our computer programmers and work on number 3. For 4, we figured we could get everyone in the office to squeeze together and turn half of the office into our warehouse for the short term.
“What about number 5?” Fred asked. “How are we going to open up a brick-and-mortar store?”
“What if we turned the reception area of our office into a ‘store’?” I asked. “What’s the definition of a store? What if stuff is available for purchase but we end up selling only one pair of shoes a week out of the store, and the rest off the Internet? Does that still count as a brick-and-mortar store?”
“I guess technically that would fit the definition of a store. Some of the brands might go for it, but probably not most of them once they saw what the store looked like,” Fred said.
“Well, let’s start with that then,” I said. “And in the meantime, we can start looking for a real store that’s in some small town somewhere that doesn’t do a lot of business. We can buy the store for cheap if it’s in the middle of nowhere. And once we take that store over, then all of the brands that the store is carrying can be grandfathered to us as the new owners of the store. We can start selling those brands on our Web site at the point.”
Fred looked skeptical. “I guess it doesn’t hurt to try asking around. What’s the worst that can happen? All they can do is say no.
“But what about number 6?” Fred went on. “Where are we going to get the money to pay for all the inventory for the new brands we sign up?”
I looked at him. “I’ll worry about that part. Just assume that if you can convince a brand to sell to us, then we’ll have the money to pay for the inventory for that brand.”
I had no idea how Fred was going to convince enough brands to work with us in such a short period of time, and Fred had no idea how I was going to come up with the cash to pay for the inventory. But we trusted each other, and we knew we were in this together. This was a “bet-the-company” plan. Our new strategy was going to either save Zappos or ensure our speedy demise. But we really had no other option. Continuing with the drop-ship-only route that we had been on and dying a slow death didn’t sound like very much fun. It would just be delaying the inevitable.
What Fred didn’t know was that while we were talking, I had already formulated a plan for getting the $2 million. But I didn’t want to tell Fred what I was thinking because he probably wouldn’t have gone along with it. My plan was to take almost everything that I had left in my name and liquidate it in a fire sale. I would bet the farm and put all the proceeds into Zappos. To an outsider, it may have seemed like a desperate and reckless plan.
But in my mind, it wasn’t. We had taken Zappos this far, and there was no turning back now. In my heart, I knew it was the right thing to do.
I believed in Zappos, and I believed in Fred.