CIO Insight: You used to be a venture capitalist. Is it true you almost passed on investing in Zappos.com?
Hsieh: Yes, it is. I was running a venture fund with Alfred Lin, our current CFO. We were making early-stage investments in a number of companies. [Zappos.com founder] Nick Swinmurn approached us near the height of the dot-com boom, in 1999, and we almost deleted his voice mail—it sounded like the poster child for bad Internet business ideas. But then he mentioned that footwear was a $40 billion industry, and $2 billion was done by mail order. That sounded pretty appealing, as we thought Web sales would surely surpass mail order. That's why we decided to make our initial investment.
You have a fanatical focus on customer service. What else would you say separates Zappos.com from other shoe retailers?
We offer a larger selection of footwear than any other shoe retailer, online or offline. In bricks-and-mortar stores, it's physically impossible to come close to what we have, which is a little over 3 million pairs of shoes in our warehouse.
Big question, as with all online retail: Does it make money?
Amazon went through hundreds of millions, or billions, of losses before they started making a profit. We've been running at breakeven and achieved that with much smaller revenue numbers. Getting profitable is not a switch we want to turn on overnight. This year we want profits of 1 percent of net revenue and then we'll slowly ease it up. We're still in investment mode, trying to capture new customers and categories.
Paid search is obviously a big part of online retail. Is it your most important source of sales leads?
We do use paid-search advertising. But it really doesn't matter to us if it's search or some other form, like banner ads. We measure every campaign we do. If it achieves a certain level of sales-per-spend, we continue it. If it doesn't, we stop spending. So we're pretty agnostic at the end of the day. Maybe we're a little different from some of our competitors in that we don't really say, "We have $X in marketing this month." We look at achieving a certain ratio—roughly $6 of sales for every $1 of advertising that we spend. If we are achieving that ratio, then our marketing budget is basically unlimited.
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