Goods,
Services, and Operations Management: Zappos Case Study
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
youíve 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 India. Job one for these front-liners 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. Which 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.12 Over 95 percent of
Zappo's transactions take place over 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. It 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. Identify
and describe one primary value creation, one support, and one general
management process you might encounter at Zappos.
2. Explain the role of service encounters and service management skills at
Zappos. How does Zappos create superior customer experiences?
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.
