A conversation with the CEO of Zappos.

Question: Why do you link happiness with business?

Tony Hsieh:  Yeah, well so I guess maybe it would be helpful to backtrack a little bit.  Prior to Zappos I had cofounded a company called Link Exchange.  This was back in 1996, during the first dotcom boom. And a college roommate and I started it out of our living room and grew it to about 100 or so people and ended up selling the company to Microsoft 2 1/2 years later, in 1998. But what a lot of people don’t know or realize is the reason why we ended up selling the company and it’s because the culture just went completely downhill, and I remember when it was just 5 or 10 of us it was a lot of fun, kind of your typical dotcom, working around the clock, sleeping under our desk, had no idea what day of the week it was and as we grew we started hiring our friends and I remember there was one friend of mine that was on a cross-country road trip and he stopped and we needed help and he actually never made his way back home.

And that worked great until we got to about 15 or 20 people and then we ran out of friends to hire and so we then started hiring people that had all the right skill sets and experiences, but weren’t necessarily great for the company culture. And we just didn’t know any better to pay attention to culture. And by the time we got to 100 people I myself dreaded getting out of bed in the morning to go to the office, and that was kind of a strange feeling because this was a company I had co-founded and so that is what led us to sell the company and then afterward both my co-founder and I we left the company, left Microsoft shortly thereafter.

So as I started getting involved with Zappos, originally my role was just as an investor, an adviser. I was also doing that with a bunch of other companies.  I realized within a year that for me Zappos was pretty...  Sorry, investing was pretty boring and I really missed being part of building something.  I felt like I was always standing on the sidelines, so Zappos... really liked the people there and got involved full-time and I’ve been full-time ever since.

And for me the initial motivation was really what would make me happy. And I wanted to... you know if I was going to go into an office I wanted it to be with people I would choose to be around even if we didn’t have to work together and so that was one of the major reasons why I decided out of all the different companies we invested in to work with Zappos. But over time it has kind of evolved where originally Zappos was all about just selling shoes online and we decided to focus on customer service, which is all about making customers happy and then over time we put more and more emphasis on company culture, which is all about making employees happy and so kind of took a step back and realized we’re basically trying to make customers happy, make employees happy and also make our vendors and business partners happy, so let’s kind of take a step back and just be about delivering happiness, hence, the title of the book.

Question: Does wealth lead to happiness?

Tony Hsieh:  Yeah, well what is interesting is they’ve actually...  So when I was thinking to that that was prior to really a lot of this research behind the signs of happiness that happened and what they’ve found through the research is basically money is...  If you’re worried about putting food on the table or putting a roof over your head, that stress is definitely will contribute to unhappiness, but once you have your basic needs met then incremental money and in fact I think there was an article that came out a couple of weeks ago where they said any... what they found is anything above I think the number was $75,000 a year in terms of income actually when they studied the happiness level of people that were making more money they actually were less happy because they were… for whatever reason they were stressed about all the additional things that come with it and then other studies have also shown that people are... the happiness is much longer if you’re buying experiences versus things. And so I guess I think kind of the default assumption that I had and that our society in general has is more money equals more happiness and all the research has shown that that’s true up to a point, up until you can get your basic needs met, but then really there is other stuff that has a much bigger impact on your happiness besides just money.

Question: What are the three kinds of happiness?

Tony Hsieh:  Well so the three types of happiness that you just stated, pleasure, passion and purpose are really just come out of the whole research that has been done on the signs of happiness and I think both for myself and probably for most people our kind of default is to kind of try to chase after the pleasure type of happiness where what the research has shown it’s great if you can sustain it.  The problem is it’s very hard to sustain unless you’re basically a rock star and so that’s why I refer to it as the rock star type happiness and what the research has shown is out of those three types it’s the shortest lasting type of happiness.  Basically as soon as the source of stimuli goes away your happiness just plummets and drops right down to where it was before.

But I think a lot of people including myself back then were trying to chase that, sustain that and then with the thought of if I ever... you know once that’s sustained on an ongoing basis, which the research has shown is next to impossible, then I’ll worry about the passion part of it and then if I ever get around to it I’ll worry about the higher purpose part of it because that feels like more kind of philanthropic or charity type of angle. But based on the research data that third type, the higher purpose type is actually the longest lasting type of happiness.  So the proper strategy should actually be to figure out that first and then layer on top of that the passion type of happiness and then anytime you experience the pleasure type it’s just kind of icing on the cake. And it’s definitely counter-intuitive and even if you take out the kind of, I don’t know what you’d call it, like philanthropic side of being part of something... Like even if you approach it from a purely selfish perspective in trying the maximize your own selfish happiness that actually is kind of ironically the best strategy for doing so.

Question: How did your higher-purpose mindset evolve?

Tony Hsieh:  We definitely did not start out with you know "higher purpose," and what is interesting is now we have books in our library.  When you come visit our offices you’ll see we’ve got 30 or 40 titles in our library out in the reception area and we give those books freely out to visitors and employees, but two of the books that not only do we give out, but we teach classes on to our own employees are "Good to Great" by Jim Collins and "Tribal Leadership." And we actually partnered with the authors of "Tribal Leadership" so you can download the audio version for free from the Zappos Web site, but and I wish I had read both of these books prior to Zappos, but basically the authors researched and looked at what separated the great companies in terms of long-term financial performance from just the good ones or the mediocre ones and they were actually surprised by their findings. 

They found that there were two important ingredients that the great companies had.  One was the great companies all had very strong cultures and the second one is actually kind of surprising is the great companies all had a higher purpose that wasn’t just about being number one in market or profits or making money and ironically by having that higher purpose it actually enabled those companies to make more profits in the long run. And so the subtitle of my book is "A Path to Profits, Passion and Purpose" because for businesses you need all three of those in order to continue to grow the brand and the business and I think too many companies in corporate America focus on just the profits, which if they forget about the passion and purpose part of it, it actually ends up hurting their long term profits for the company. And so for us we kind of accidently stumbled onto this because I hadn’t read the book. I don’t even know if the books existed at this time.

And so in 1999 when Zappos started it was all about let’s just build the brand to be about shoes, selection.  We’re just going to be the market leader in shoes.  And then about four years into it, in 2003, we all kind of sat around and asked ourselves what do we want to be when we grow up.  Do we want to be about shoes or something more meaningful?  And actually, at the time the main motivation was we just don’t want to be pigeonholed into just shoes and so then we decided "Okay, let’s build our brand to be about the very best customer service and customer experience and with the philosophy of we’ll invest... take most of the money we would have spent in paid marketing and paid advertising, invest it into the customer experience and let our customers do the marketing for us through word of mouth." 

So, and a funny thing happened when we actually communicated this to our employees.  We found that suddenly employees were a lot more passionate about the company, a lot more engaged. And when customers called they could sense the person on the other end of the phone wasn’t there just for a paycheck, but really wanted to provide great service. And when vendors came into our offices of visited us they wanted to stay longer and visit more frequently, so all of these things had this kind of multiplicative snowball effect that really drove our growth a lot over the years and it wasn’t something that we expected.  It is something that we just kind of accidently stumbled into. And then a couple of years after that we decided okay, let’s build the... Company culture had always been important because I didn’t want to repeat the same mistake I had made at my previous company, but instead of just saying it’s a priority let’s actually make it the number one priority of the company, with the belief that if we get the culture right then most of the other stuff—like delivering great customer service or building a long term enduring brand or business—will happen just naturally on its own and so over time it has kind of expanded from just shoes to customer service to culture and then now realizing the thing that ties all that together is delivering happiness.

And it’s really interesting because once we came up with "Okay, it’s going to be delivering happiness," and this was in 2009 then that opened up a whole new world of possibilities for us and so now we had this program called Zappos Insights.  It’s actually its own separate Web site and entity within the Zappos family and so if you go to ZapposInsights.com there is anything from a monthly video subscription service to one-day and two-day seminars that we actually host here in Vegas and people from all over the world fly in and we help them figure out how to create their own strong cultures.

And it has been really neat because we’ve seen...  Well first of all, it’s just neat because it’s its own separate business.  It has nothing to do with selling shoes online, but it’s also really neat because this whole idea of happiness as a business model we’re now spreading beyond just to Zappos employees and Zappos customers.  We’re helping other companies go make their customers happier, make their employees happier and there is this one company, called the Atlanta Refrigeration Company, they do repairs out in the field.  And afterward they did this thing that went through "we can focus on making customers happier," focus on culture to make employees happy and they’re reporting that in a down economy the revenues are up.  They’re profits are up and they even sent us before and after pictures of their offices to show the change in culture and so it’s just really neat seeing this idea of happiness as a business model working in other companies and other industries.  It’s not just a Zappos thing and it’s not just an internet thing.

Question: How do you measure happiness in business?

Tony Hsieh: I think it is hard sometimes to measure the benefit of any one thing you do and I think if you approach it that way it’s...  You know the way we really think about it is what it is going to be like in the aggregate and over the lifetime of the customer and so a perfect example of something that doesn’t make sense in the short term but does in the long term is if you call us and you’re looking for a pair of shoes and we’re out of stock for your size, everyone is trained to look on three competitor Web sites to see if they can find it there and if they do direct you to that competitor. 

Obviously in the short-term we’re going to lose that transaction, that sell, but we’re not trying to maximize for every transaction.  We’re trying to maximize the customer experience and build that lifelong relationship with customers and not only...  That’s not only great from a loyalty perspective, but it’s stuff like that that drives a lot of the word-of-mouth, which... So from our point of view yes, a lot of the things that we do, free shipping both ways is really expensive, surprise upgrades to overnight shipping is expensive, phone calls where we actually just found out our longest phone call was seven and a half hours long.  We just set that about a month ago and so all those things are expensive, but we really just while on a P&L maybe that falls under I don’t know, "cost of goods" or some other line item, but we really view those as our marketing costs.  It’s we are investing in the customers and then relying on them to do the marketing for us through word of mouth and so that... so then we don’t need to spend all this money on more, I guess, normal methods of marketing.

And so we’ve grown from no sales in 1999 to in 2008 we hit a billion dollars in gross merchandise sales and even despite a down economy over the past 24 months we’ve continued to grow.  Our Q1 net sales this year are up almost 50% year over year in a down economy and a lot of people ask us what did you do in the past 24 months and it’s not anything we’ve done over the past 24 months.  It’s what we did prior to that, really all the things we’ve just been talking about that may be hard to justify in the short term, but we’re reaping the rewards of because we’ve always done that.

Question: How can other companies be happy and profitable?

Tony Hsieh:  Yeah, I mean ultimately I guess that is what business is all about, right? About learning to balance the short-term, medium-term and long-term and I think it’s when things are going well it covers up a lot of mistakes and bad decisions because you’re growing so quickly... when really those are the times when you really should be investing more in the long-term. And I think for us we’ve basically just always invested in the long-term while trying to make our short-term targets as well.  So yeah, there is no easy answer, but ultimately that is what business is.  You need all of the above.  It’s not just "Well I can’t afford to do that." And the other thing is a lot of the stuff actually doesn’t have to be expensive.  Focusing on company culture, for example. It doesn’t cost anything to say hi when you pass someone else in the hallway, whereas, most corporations if you pass you avoid eye contact and so on.

Question: How do you engage Millennials as employees?

Tony Hsieh:  Well for us we’ve never actually focused on Millenials and we tend to get asked that question a lot just because the things we focus on I think are pretty universal human wants or needs.  It’s just that I think maybe 50 years ago people just had less mobility in terms of being able to job hop. But I don’t think we would if it was 50 years ago still be doing the same thing, and really focusing on employee happiness.  I think it was more 50 years ago companies didn’t have to, and they could still get away with it. Whereas, our point of view is "If employees can be happy and feel like they can be themselves in the office"... You know there is so many people in corporate American where they’re a different person at home on weekends versus what on Monday when they’re in the office and they leave a little part of themselves or a big part of themselves at home. And I think that was definitely true 50 years ago and maybe what the Millenials are kind of bringing more into the forefront is maybe they’re just saying they want to be the same person and if not they can... we live in a world  where they can afford to job hop.  It’s much easier. 

So yeah, I don’t know if it’s specific to Millenials, but everyone wants to be part of something bigger than themselves that they believe in and everyone would ideally want to be passionate about whatever work that it is they’re doing and so... and everyone wants to feel connected to people and so I don’t think those are specific to Millenials.  Those apply to everyone.

Question: Is your business philosophy catching on?

Tony Hsieh:  Well it’s been really interesting.  We’ve been on a...  So we’re in the middle of a 23-city bus tour that is taking 3 months and you can see all the list of cities wherein if you go to DeliveringHappinessBus.com. But what has been really interesting and we have a separate website kind of as a follow up to the book at DeliveringHappinessBook.com and there is a section called "Join the Movement" and we’re just having people submit their stories of if the book or discussion on the Web site has inspired them to either follow their passions or focus more on making customers happy or employees happy and so on, but a lot of the stuff actually hasn’t even...  We’ve definitely heard a lot of feedback from other entrepreneurs and businesses, but what surprises us is also we’ve been hearing from churches and school systems and where we had a teacher that told us that they passed the book out to their faculty and within two weeks the whole vibe of the school changed, which I thought was really cool and certainly not anything that we thought would be affected from the book and so I guess we don’t necessarily... 

The "Delivering Happiness" team is actually a team of about 15 or 20 of us.  It’s basically its own separate startup and we don’t have a clear vision of exactly what this happiness movement will end up and a lot of it is being generated by people that are inspired and doing their own thing from all different industries including businesses and over time the website will be evolving and really that is how we’re learning what is resonating and what is not with different people, but it has definitely been… We’ve only gone in seven cities so far and just in those seven cities it has been really interesting.  One of the cities we went to was Iowa City and at University of Iowa the book is now required reading for one of the classes and we’ve heard that for about three or four other universities and schools, so who knows what is going to happen with it.

Question: Do businesses need to be profitable before they can be happy?

Tony Hsieh:  I think it really depends on each person’s specific situation, but what we generally hear the most about is not that people really can’t afford to follow their passion.  It’s they kind of have ingrained in their mindset "Well I have to do this" and what they say the book has helped them do is actually realize that the ultimate goal of everyone, whatever... you know people have different goals in life, but ultimately the purpose of achieving that goal is they believe it will make them happier. And there are so many people that for example will work really hard in a job they hate for two years so they can go on this two-week vacation, dream vacation when people like Tim Ferriss in "4-Hour Work Week" basically woke up one day and was like if I want to travel then I’ll just travel and you can do it for much less than what your assumptions are. So I think a big part of the book is really question what your assumptions are in terms of what you have to do. And a lot of people realize "I don’t have to work in this job that I’m miserable at every year, or every day, and I don’t have to live in, for example, New York City where it’s super expensive and if I live somewhere else that is less expensive and could pursue my passion like, I can afford to do that."

Question: What is the right way for businesses to adopt change?

Tony Hsieh:  For us it’s just built into the culture and I think for organizations in general it’s pretty important to have something like that as part of their culture because there is a quote from Darwin that it’s something like "It’s not the fastest or most intelligent of the species that survives.  It’s the one that is most adaptable to change."   And I think the same is true for businesses as well. And if you look back on the history of giant businesses, corporations that have kind of lost their way or gone bankrupt or whatever it’s because they were stuck in their old ways and for us I think we’ve...  So we have 10 core values total.  One of them is embrace and drive change.  One of them is to be adventurous, creative and open minded. And one of them is to be humble. So I think if you combine those three it’s kind of I think for us really encapsulates this idea of "just because something worked yesterday doesn’t mean that is what we should be doing tomorrow" and just always be open minded and not wed in your ways and be ready to adapt and change and basically ask the question "Why not?" as often as possible.

Question: What can Zappos teach Amazon?

Tony Hsieh:  As a precondition for even exploring the acquisition start... because most Amazon and I guess corporate America in general acquisitions are the plan is to integrate the company being acquired into the parent company and eventually the company becomes... the identity becomes lost. And we said as a precondition we would only consider it if Zappos could remain independent and we would continue to grow our brand, our culture and our way of doing business our way. And they remained true to their word.  From our point of view it’s as if we swapped out our board of directors with a new one. And yes, there is definitely a lot we can learn from each other.  Amazon I think really takes more of a high-tech approach.  We take more of a high-touch human approach.

And we’re not I guess trying to necessarily change each other, but we recognize that there is also a lot we can learn from each other, but the way it has worked from our perspective is now it’s as if Amazon is this giant consultant company with lots of resources and knowledge that we can tap into as little or as much as we want to. And we leave it up to each individual department or sub-department to decide how much they want  to do that, so for something like on the warehousing side for example the way we run our warehouse is pretty different from the way Amazon runs their warehouses.  There is a lot of sharing back and forth because there is a lot of learning.  You know there is some areas that they are better at than we are and vice versa on the warehousing side, but then there may be other departments where they just do a quick phone call once a quarter, just check in, and it’s much less interaction. But we really leave it up to each of our department or sub-department owners at Zappos.

Question: Where do you see Amazon and Zappos going?

Tony Hsieh:  Yeah, in terms of, because we are so independent from Amazon I don’t know actually much of what their internal plans are, but I can tell you from Zappos’ perspective.  We started out in footwear and now doing over a billion dollars in gross merchandise sales there, and in the U.S. apparel is four times the size of the footwear market. So in theory at least that should keep us busy until we hit five billion and then I’m sure the footwear category will continue to grow during that time as well, so we’ve got plenty of work cut out for us for at least the next several years just focusing on expanding into clothing.

Question: Are you still in charge of Zappos?

Tony Hsieh:  Yeah, I am still CEO of Zappos and have no plans to leave and actually it’s interesting because we actually structured the deal so it was not like most normal deals.  Most deals I guess whether it’s Amazon or another company they have a retention pool or bonus that they give to the top 5 or 10 executives, in order to keep people in the company. But for me personally I actually asked not to participate in the pool and we actually spread the bonuses amongst all our employees and my salary prior to the acquisition was $36,000 a year and it still is now, so and that’s is the only... So there is really nothing keeping me at Zappos except for making sure that I’m happy. So in a weird way that actually gives me more leverage over Amazon in terms of they have to worry about making me happy because I don’t have any golden handcuffs or anything and what makes me happy is feeling like we have our independence, can make our decisions at Zappos.

Question: Why do you offer new hires money if they quit?

Tony Hsieh: Yeah, on average it’s about 2 or 3% of people take it. So there are some classes where each class is 20 to 40 people... so some classes nobody takes it and some classes 2 or 3 people might take it. We started this a few years ago and it actually started out at $100 dollars and we keep actually upping the offer.  It’s at $2,000 now and actually at the end of the training, which is 4 weeks we up it to $3,000 and extend it beyond that and we keep upping it because we feel like not enough people are taking it and the original motivation was to get people that...  We don’t want people at Zappos that are there just for a paycheck. We’re headquartered out of Las Vegas...  Starting pay is $11.00 an hour for a call center, so it’s a pretty significant chunk of money and our thought was we want people that really believe in the company and really want to be with the company for the long term and the biggest surprise was actually from the people that didn’t take the offer because they still had to go home after their weekend and talk to their friends and family and ask themselves is this a company that I really believe in, that I really want to commit myself to?  Is this a company whose culture I want to be a part of and contribute to and when they decide to turn down the easy money when they come back to the office on Monday they’re that much more passionate and engaged and committed and that has been by far, the biggest benefit

Question: Are there employee milestones at Zappos?

Tony Hsieh:  I guess we’re actually trying to think of it less as milestones and more as… and performance reviews is maybe a good example because I think in most companies performance reviews are this annual thing that everyone hates going through and it’s kind of a waste of time and so we’re actually in the process of shifting from these annual performance reviews to this idea of having an employee kind of dashboard almost for themselves, so they can always see how they’re doing, not just specific job performance wise, but also from a cultural perspective what they’re teammates think of how well they represent each of the 10 Zappos core values, so that is actually I guess moving away from milestones and more towards this kind of idea of continuous ongoing feedback.

Question: How can employees align with a higher business purpose?

Tony Hsieh:  I would say involve your employees and I’m constantly surprised by there is so much hidden talent and passion amongst our employees and stuff that you would just never know until you get to know people on a more personal level, which is why we try to encourage a lot of bonding outside the office for our employees.  You know it might be someone that…  For me personally there is someone that works in merchandising, but over time found out that she ran logistics for the Olympics in Beijing, like having so completely different things and I think the same thing.  If you just ask employees what they think the higher purpose should be or bounce ideas off of them or let employees know okay, this is our higher purpose.  Now we need your ideas to help make that happen.  I think you’ll be pretty surprised by the quality and quantity of the responses if employees feel like you truly care about their opinion and you’re going to do something about it.

Question: How should a start-up business reach out to potential customers?

Tony Hsieh:  I definitely think that especially when starting out there is this temptation to like try to sign up as many whatever, customers, users, whatever you want to call them as much as possible and we certainly had that mentality when we started at Zappos and we bought a billboard behind the Giants' stadium to try to advertise Zappos and market to new customers. But I think a much better use of time and resources is to really focus on your existing users or customers and figure out what changes can you make in the Web site, the service, the product, whatever, to get them to come back more often to generate that repeat business and once you kind of figure out that formula, then when you get new customers the whole thing just kind of grows exponentially. But I would say rather than focus on trying to get a lot of customers to market yourself, really focus more on the actual product or service itself and existing users to, like, what would make them happier, what would make them come back more and more times or in our case buy more often.

Question: Is your customer service applicable to B2B business models?

Tony Hsieh:  I actually think B2B has a much bigger advantage because for most B2B it’s actually fewer customers than B2C for the same amount of revenue or profit and so you can actually invest more time in relationship-building and making it a lot more personal and so on... Versus it just wouldn’t make economic sense for us to call each one of our customers say once a month to say "How's it going?" But if you’re selling $10,000 equipment to offices then a phone call once a week to whoever is in charge of purchasing that is you know and then going to lunch with them or whatever is definitely one way you can build up that personal emotional connection and what we believe is that once you have that personal emotional connection that is when the loyalty really comes in.

Question: Which companies do you admire?

Tony Hsieh:  Well so one…  This is a West Coast chain, but one company that I really admire—and I actually don’t know how it works on the inside—is In-N-Out Burger, so great product and every place I’ve gone great service, friendly employees, happy employees. And I think that is partly true because I think they’re family-owned, and they’re not trying to expand as quickly as possible, maximize growth and profits, but they’re being true to themselves. And I think that is ultimately who's going to win in the long run.  Apple is another company, on the product side they’re not trying to jam every feature in every product, but really they know who they are and they’re staying true to that and I think that is true for Apple.  That is true for In-N-Out and that’s true for us.

Question: Does your advice apply to both small and large companies?

Tony Hsieh:  Now I think the most important thing is just if you hire people whose personal values match the corporate core values—and not just the stated ones, but the ones actually in practice—then that’s definitely the easiest way and if anything... you know we didn’t rollout our core values until 2005, so 6 years into it and if I could do it all over again I’d do it from day one. Because it’s actually, the smaller you are the easier it is to do it and so my advice would be to start really you know, depending...  I don’t know how big they are. But the easiest way is if you’re just starting out just figure out your own personal values and then just make those the corporate core values, but if it’s a smaller group then make sure to engage the employees and then the other thing that we found when we rolled out our core values was there was not everyone bought into it and fit into it and so the key is making sure you manage those people out and what we found is once that happened then the people remaining really became a lot more passionate and engaging, committed to growing the organization around our culture and core values.

Question: What has been your biggest customer challenge?

Tony Hsieh:  In general we try to… not even me, but just we try to empower our frontline employees to just make the right decision and do whatever they feel is right for the customer. So we don’t have rules of "If this happens then you have to get supervisor approval." And so for the most part it never really makes its way up to me because we take that mentality.  We’d much rather... What is interesting is usually most companies bring these escalation rules for approval because they don’t want the frontline employee to, you know... say someone bought a $50 shoe and refund them $1,000. And the reality is it’s usually the opposite problem that we have.  We find that our frontline employees are too protective of the company and we actually have to… especially if they come from other call centers we have to un-train that mindset and teach them to be more generous with our customers. 

Question: What surprises you about today's online shoppers?

Tony Hsieh:  I think not so much now, but definitely in the early days what surprised me was just how quickly word-of-mouth can spread online, and how—even though they don’t have to—how customers once they’re happy put in effort to let their friends know about it. And there has been so many blog posts about Zappos for example where, I mean, they’re long and it’s like it took them an hour.  It clearly took them an hour to write and there is no you know we’re not… They’re not getting paid to write this blog post.  We’re not paying them and yet they’re so passionate about the service they received that or their experience that they felt like they should spend an hour writing an essay and then sharing it with the world and so I think just that type of mentality has been pretty surprising to me.

Recorded September 24th, 2010
Interviewed by Peter Hopkins