EXECUTIVE SUMMARY In late 1998, Nick Swinmurn created an online footwear retail site shoesite.com, which was later rechristened as Zappos. Hsieh and Lin, the founders of Venture Frogs, funded Zappos; later the pair assumed leadership positions in the firm. Throughout the 2000s, Zappos grew tremendously, thanks to its undiluted focus on the three C's – clothing, customer service, and company culture. Some of the key issues facing Zappos are high return rates, strain on the supply chain (reverse logistics), and expansion strategies.

ANALYSIS One of Zappos’ core strengths is its culture. The firm places great emphasis on recruiting not only the best and the brightest, but also those who fit the culture. Workforce is the most important asset of any firm; Zappos scores here. Zappos recruits only “happy” individuals, puts them through a series of paid training programs, weeding out uncommitted individuals, and empowers its employees by letting them be creative and imaginative. Furthermore, employees are authorized to go to any extent to satisfy the needs of the customer. The firm’s undiluted focus on the three C's- clothing, customer service, and culture – is probably the most important reason for its tremendous growth and success. Given the focus of Zappos, these competitive advantages are sustainable.

Online retailing has traditionally been about cutting prices; this is a zero sum game, in which the value is captured by the consumers and not by the players. Zappos’ strategy is to focus on customer service. Given the limited interaction with online shopping, Zappos’ positioning strategy is unique. Only a fraction of those placing orders online contact customer service; even those who never contact customer service are influenced by the perception Zappos has ingrained in its customers.

While customers take time to decide on a product, they would like to have it at the earliest. Zappos incurs heavy costs with next-day air shipment, but this next-day air shipment is what differentiates Zappos from a million online retailers. In other words, this is a key differentiating factor for Zappos. In order to reduce costs, Zappos should consider next-day air shipments for orders above a certain minimum value (eg; orders worth above $100). This accomplishes two objectives: (1) make customers who want their orders instantly buy more (in order to exceed $100) who would otherwise not do so; and (2) make customers inherently understand and make a trade-off between spending and waiting time (those placing an order for $50 know that they will have to wait for 3-5 business days to get their package). The consumer makes the decision, driving down costs for Zappos.

To reduce its strain on the supply chain and improve the efficiency of the same, Zappos should impose a cap on the number of free returns per household or per person (eg: 5 free returns per year per person). This would ensure that the customers use utmost discretion while returning products. For example, customers returning a product after 60 days because they are “bored” will think twice before returning. Even with this cap, Zappos would provide more flexibility than sites that offer no free returns.

To expand its business business, Zappos should consider extending its offerings both breadth-wise and depth-wise (while staying away from private labels; private labels are generic and do not enhance the reputation of Zappos). This will not only increase product variety and options, but also the number of shipments. By law of larger numbers, the number of returns will reduce as a percent, thereby reducing costs significantly. Inventory costs would go up (more SKUs), but Zappos has a very unique and efficient inventory mechanism in place; the benefits easily outweigh the costs. Zappos may also be able to get better pricing from UPS, its logistics provider, due to increased volume. Zappos should focus on the domestic market and consolidate further before considering international expansion.