Case Study: Fast, Simple Open-Source IT - ' Show Me The Money '
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Show Me The Money

The biggest challenge Zappos faces in becoming the king of online customer service? Making money along the way. While the company's free-shipping policy has made many a happy customer, Zappos' return rate is reportedly about 25 percent, well above the 5 percent or so of a typical retailer. And it can get expensive when finicky customers order five pairs of shoes—with every intention of returning four of them. Older, more established companies doubt whether Zappos can continue to succeed with such an ad hoc IT philosophy as it grows into a billion-dollar business with added complexity.

But so far, Hsieh says the strategy is working: Zappos has found that customers who return 25 percent to 50 percent of their orders are more profitable than those who return less. They buy more frequently, choose higher-priced items, and spend more dollars per order. "It can be an expensive proposition," says Matt Powell, an analyst with SportsOneSource. "But it's a fabulous marketing tool."

The result: While Amazon blew through untold millions of dollars before turning a profit, Zappos' Hsieh says the company has been operating within a stone's throw of breakeven almost since the start. He isn't saying how big the IT budget is, but he insists it's small relative to most online retailers. He says the company will look to clear 1 percent of revenues as net profits this year, and then begin to ease that number up over time. It's difficult to know where they're going to get those additional profits. But you can bet your boots it won't be easy.

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