Delivering Happiness: A Path to Profits, Passion, and Purpose

by Tony Hsieh

I had discovered the beauty of selling products with high average selling prices and high gross margins.

thought that I was the invincible king of mail order, when all that had happened was that I had gotten lucky. I learned a valuable lesson in humility.

I also learned that it was pretty painful to bet the farm on something that didn’t work out. Now that I think about it, I hadn’t just bet the farm.

I posted a message to one of the electronic newsgroups and invited all the Harvard students who were taking the Bible class to participate in the largest study group that had ever been created, because this one would be virtual. For anyone who was interested, I would assign them three out of the possible hundred topics to research thoroughly. Each student then had to e-mail me their paragraphs on each of those three topics as if they were the actual topics chosen for the final exam. I would compile everyone’s responses together, have them photocopied and bound, and then distribute the binders for $20 each. You were only allowed to buy a binder if you had contributed your three topics to the project. As

I had discovered the power of crowdsourcing.

I also wanted to make the grill more of a place where people wanted to hang out, so I spent many nights recording music videos from MTV onto videotape, pausing the recording anytime a commercial came on, because this was the pre-TiVo era. The videos playing in the background turned out to be

a big hit, and combined with the new pizza offering, we ended up tripling sales at the grill compared with the previous year. The $2,000 investment was recouped within a couple of months.

We had a plan for how to sign up customers: First, we would approach the local chamber of commerce and offer to build their Web site for free. Then we could tell all the local businesses that the chamber was a customer of ours (avoiding any mention that they were not paying us), sign up as many local businesses as possible, and the money would start rolling in soon after.

By the end of the first week, it dawned on me that neither of us was actually passionate about doing Web design work. We loved the idea of owning and running our

own business, but the reality ended up being a lot less fun than the fantasy.

We didn’t know what we wanted to do, but we had learned what we didn’t want to do. We didn’t want to work for Oracle. We didn’t want to do any more Web design work. We didn’t want to make any more sales calls. And we didn’t want to be bored out of our minds.

So we spent our days and nights trying to figure out the next great Internet business idea, but we really couldn’t come up with anything that sounded good.

Sanjay and I were working around the clock, spending half our time doing computer programming and the other half answering customer service e-mails. We were religious about trying to answer every e-mail that came in as quickly as possible. Usually we were able to answer them within ten minutes, and people were amazed at our responsiveness.

Once a month, I’d send an e-mail out to the entire company letting them know that we were having an important meeting, and that some of our important investors and board members would be attending, so everyone was required to wear a suit and tie on the day of the meeting.

So once a month, all the newly hired employees would show up to the office dressed up in suits and ties. There they would realize that they were the target of the companywide practical joke. In the afternoon meeting, all the new hires would be called up to the front of the room to complete some sort of embarrassing task.

The short story is that we simply didn’t know we should have paid more attention to our company culture. During the first year, we’d hired our friends and people who wanted to be part of building something fun and exciting. Without

Then, as we grew beyond twenty-five people, we made the mistake of hiring people who were joining the company for other reasons. The good news was that the people we hired were smart and motivated. The bad news was that many of them were motivated by the prospect of either making a lot of money or building their careers and résumés.

Now what? What’s next? And then there were the follow-up questions: What is success? What is happiness? What am I working toward? I still didn’t have the answers. So I went to the bar, ordered a shot of vodka, and clinked glasses with Sanjay. Figuring out the answers could wait until later.

I was about to delete the voice mail, Nick threw out a few statistics: Footwear was a $40 billion industry in the United States, and 5 percent of that was already being done by paper mail-order catalogs. It was also the fastest-growing segment of the industry. I did some quick math and realized that 5 percent was equal to $2 billion.

“Footwear is a $40 billion industry in the United States, of which catalog sales make up $2 billion. It is likely that e-commerce will continue to grow. And it is likely that people will continue to wear shoes in the foreseeable future.” “Do you have any experience in the footwear industry?” Alfred asked. “No, but I walked around a shoe show in Las Vegas a few months ago and some of the people said they thought it was an interesting idea.” “Maybe you should find someone with footwear experience,” I said. “Yeah. That sounds like a good idea,” Nick replied.

Nick talked about the progress that the Web site had made over the past few weeks. They were already getting $2,000 worth of orders a week, and the numbers were growing. They weren’t making any money, because anytime an order was placed, Nick would run to the local shoe store, buy the item, and then ship it out to the customer. Nick wanted to put up the Web site just to

prove that people would actually be willing to buy shoes online.

The real business idea was to eventually form partnerships with hundreds of brands, and have each of the brands provide Zappos with an inventory feed of what was in each of their warehouses. Zappos would take orders from customers on the Internet, then transmit the order to the manufacturer of each brand, which would then ship directly to the Zappos customer.

We talked to eighty different brands over the next four days. Only three agreed to work with us. It wasn’t exactly a promising number, but it wasn’t surprising either. We were pioneering a new concept of having brands drop ship directly from their inventory to the customer.

are you going to ship it? Who’s your shipping carrier? How do you plan to handle returns?”

Looking back, a lot of our growth happened that way. We’d just throw ideas against the wall to see if they’d stick, improvise, and make it happen.

For the first few months, I found poker both fun and challenging, because I was constantly learning, both through reading different books and through the actual experience of playing in the field. I started to notice similarities between what was good poker strategy and what made for good business strategy, especially when thinking about the separation between short-term thinking (such as focusing on whether I won or lost an individual hand) and long-term thinking (such as making sure I had the right decision strategy).

Evaluating Market Opportunities Table selection is the most important decision you can make. It’s okay to switch tables if you discover it’s too hard to win at your table. If there are too many competitors (some irrational or inexperienced), even if you’re the best it’s a lot harder to win.

Marketing and Branding Act weak when strong, act strong when weak. Know when to bluff. Your “brand” is important. Help shape the stories that people are telling about you.

Financials Always be prepared for the worst possible scenario. The guy who wins the most hands is not the guy who mak...

The guy who never loses a hand is not the guy who makes the most money in the long run. Go for positive expected value, not what’s least risky. Make sure your bankroll is large enough for the game you’re playing and the risks you’re taking. Play only with what you can afford to lose. Remember that it’s a long-term game. You will win or...

Strategy Don’t play games that you don’t understand, even if you see lots of other people making money from them. Figure out the game when the stakes aren’t high. Don’t cheat. Cheaters never win in the long run. Stick to your principles. You need to adjust your style of play throughout the night as the dynamics of the game change. Be flexible...

Differentiate yourself. Do the opposite of what the rest of the table is doing. Hope is not a good plan. Don’t let yourself go “on tilt.” It’s much more cost-effective to take a bre...

Continual Learning Educate yourself. Read books and learn from others who have done it before. Learn by doing. Theory is nice, but nothing replaces actual experience. Learn by surrounding yourself with talented players. Just beca...

more learning to do. You might have just gotten lucky. Don’t be afra...

Culture You’ve gotta love the game. To become really good, you need to live it and sleep it. Don’t be cocky. Don’t be flashy. There’s always someone better than you. Be nice and make friends. It’s a small community. Share what you’ve learned with others. Look for opportunities beyond just the game you sat down to play. You never know who you’re going to meet, including new friends for life or new busines...

I learned that the most important decision I could make was which table to sit at. This included knowing when to change tables. I learned from a book that an experienced player can make ten times as much money sitting at a table with nine mediocre players who are tired and have a lot of chips compared with sitting at a table with nine really good players who are focused and don’t have that many chips in front of them.

In business, one of the most important decisions for an entrepreneur or a CEO to make is what business to be in. It doesn’t matter how flawlessly a business is executed if it’s the wrong business or if it’s in too small a market.

if you decide to start a business that competes directly against really experienced competitors such as Wal-Mart by playing the same game they play (for example, trying to sell the same goods at lower prices), then chances are that you will go out of business.

They were expensive lessons, but I guess what I ended up learning was that it’s a bad idea to invest in industries you don’t understand, in companies you don’t have any control or influence over, or in people you don’t know or trust.

I made a note to myself to make sure I never lost sight of the value of a tribe where people truly felt connected and cared about the well-being of one another.

PLUR was an acronym that stood for “Peace, Love, Unity, Respect,”

“Envision, create, and believe in your own universe, and the universe will form around you,” she said softly. “Just like what you did tonight.”

I started to have feelings of self-doubt. I wondered whether I had just gotten lucky with LinkExchange. Was I just a dot-com lottery winner who happened to be at the right place at the right time?

So I decided to take off my investor and adviser hat and put on my entrepreneur hat again. I joined Zappos full-time later that year. I decided that Zappos was going to be the universe that I wanted to help envision and build. It would be the universe that I believed in. My search over the past few months was finally at an end. I had figured out what I wanted to focus on for at least the next few years. I had discovered my new passion.

we stay focused on maximizing our chances of getting to profitability before we run out of money. We have a financial plan in place that makes sense and is within our reach of accomplishing, but we have to make sure that we all understand what’s required in order to follow the plan. So, first and foremost, we need to watch our expenses very carefully. We have a budget set aside for hiring which will need to be followed very carefully, and we won’t be able to hire as many people as we’d like in any of our departments. After watching expenses, our most important priority is to maximize the gross profit we make over the next 9 months. This translates into increasing the average gross profit and order size per customer, increasing conversion rates, increasing new qualified visitors to our site, and increasing the percentage of repeat customers. In evaluating new projects for the company over the next 9 months, we need everyone to think about how it will increase our total gross profit over the next 9 months. This will mean that some projects that we might normally pursue will have to be put on hold until we get to profitability.

Even though it would hurt our growth, we decided to cut most of our marketing expenses, and refocused our efforts on trying to get the customers who had already bought from us to purchase again and more frequently. Little did we know that this was actually a blessing in disguise, as it forced us to focus more on delivering better customer service. In 2003, we would decide to make customer service the focus of the company.

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,”

Start with Essentiel and Bellerose

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.