Howdy, Partner

By Duff Mcdonald  |  Posted 11-10-2006

Case Study: Fast, Simple Open-Source IT

Pop quiz: Name the fastest retail Web site for American consumers, as measured by the number of seconds it takes to load the home page. If you said Amazon, you're probably not alone. But you're wrong. Likewise if you answered Overstock.com, BestBuy.com or even Netflix. The correct response is Zappos.com, one of the most startling success stories in online retailing over the past several years. The site, which was founded in 1999 and is known mainly for selling shoes, had just $1.6 million in gross sales in 2000. This year, they're projecting $600 million.
Zappos, which is derived from zapatos, the Spanish word for shoe, also sells handbags, eyeglasses and other accessories. But according to Tony Hsieh, CEO of Las Vegas-based Zappos.com Inc., that's all beside the point. "We're a service company that happens to sell shoes and bags," he says. He alludes to their fanatical obsession with customer service, exemplified by a trio of promises: fast—and free—shipping (including returns), 24/7 live customer support, and a 110 percent price guarantee, which says if you find a better price on an item, the company will refund 110 percent of the difference to you. Customers also enjoy the inventory advantage that Web sites have over bricks-and-mortar stores: Zappos has over 106,000 styles, 918 brands, and more than 3 million items in stock.

They're doing something right. With more than 4 million paying customers, over 1 percent of the U.S. population has bought something from Zappos. In recent years, the company has expanded beyond basic shoes, adding a couture line in December 2003, women's bags in February 2004 and men's bags in the spring of 2005. And some 60 percent of sales come from repeat customers. "Ten years ago, we were all skeptical that anyone could make money selling shoes online," says analyst Sucharita Mulpuru of Forrester Research Inc. "But they've proven us wrong."

Given the company's status as a Web-only retailer, IT obviously plays a large role in the business. But according to Jon Field, director of development at Zappos, beyond a preference for open-source solutions the company eschews an explicit, overall IT philosophy. The only imperative is that IT must serve the business and not the technologists themselves.

In other words, it's never about technology for technology's sake. "We always make sure it's used to serve people and customers," says Field. "We try to avoid excess technology for the heck of it." What follows is the story of a company that uses IT as well as anybody, but only if—and when—it serves the ultimate aim of making customers come back for more.

Open House


Open House

Zappos doesn't make its own shoes, but it does make its own software. The company's 15-person development group—Zappos employs about 1,000 total—has actually built the majority of the systems that run the retailer's business, relying largely on open-source software such as Linux, MySQL, Apache and PERL. That includes the Web site itself, the company's warehouse management system, customer service and merchandising planning tools, and the extranet available to the company's vendors. The main reason: flexibility. "We like the ability to make changes on a daily basis," says Hsieh. "We don't roll out a new version of X, Y or Z every quarter. We do it incrementally."

Staying open source has offered a number of other advantages to the company's development team, according to Field. For starters, he says, he's able to solve coding issues a lot faster than he otherwise might with commercial software. "You can do a Google search or go to a message board and get an answer to a coding problem instantly, rather than waiting for some vendor rep to call," he says. More important, with the company growing at such a rapid clip, Field and his team are able to add both servers and people without having to worry about getting additional licenses. "Keeping a talented team of coders can be expensive," he admits, "but that's something we want to do, no matter what. If you want to make the best use of technology, you need the best people."

Like most retailers, Zappos' heaviest month is December, and the development team uses that end-of-year crunch as an indication of what needs to be done in the year ahead. "Each holiday we hit our peak, and we see how our servers stand up," says Field. Once things taper off, Field's team operates on the assumption that the next December will be double the previous one, and sets about beefing up the company's IT infrastructure. "We build up in the first half of the year," he says. "And we spend the second half riding it out."

Field and his development team stress simplicity above all else when tackling business challenges with IT tools. All departments tie into a central database, but beyond that, says Field, the system has a wide variety of small tools that are specifically tailored for the needs of each department and how it interacts with customers. Say, for example, the company starts selling a new category of product. Field and his team will set up a simple Web report that shows inventory levels and sales levels for each day. That might take just a day to set up. Then, perhaps, someone might want to see a detailed breakdown of sales on a given day. Field's team will create that, most likely linking it to the first tool, so the information will always be a click away. Without too much planning, says Field, this kind of approach has resulted in a very rich feature-set that has grown organically around people's needs. "Each little tool by itself is a fairly small thing," he says, "but hundreds of them together feels like a really powerful application." Because it's partitioned into simple Web-based scripts that don't affect each other, small bugs don't have as large an effect as they otherwise might.

A primary goal of the development team is to keep the Web site running at top speed. To that end, Field stresses a code-before-hardware approach to solving performance problems. "We only throw hardware at a problem as a last resort," he says. Consider a bottleneck in communications. The first step: Find the bottleneck. Second: Use the simplest solution available to fix it. "Maybe it's a code change, maybe it's a system configuration change," says Field. "I've seen relatively simple changes to code that have brought about tenfold performance improvements. You'll rarely see that kind of gain out of a simple hardware purchase," he says.

Howdy, Partner


Howdy, Partner

The world of retailing can be a secretive place. Even the most powerful consumer goods manufacturers can still find it difficult to get real-time feedback from retailers about which products are selling. Not so with Zappos. Through an extranet, Zappos' suppliers can view pretty much anything Zappos' internal team can see: inventory; sales over the past 24 hours, week, or month; what's on sale; and what is or isn't selling well at that exact instant. It's not just trivia we're talking about: With Zappos representing about 1 percent of all footwear sales, a look at how a new line of shoes is selling on the site can be a proxy for the entire market, giving shoe companies invaluable information for product planning. That's especially true because Zappos' seasons start earlier and end later than in the bricks-and-mortar realm, and trends can show up earlier on the company's site.

Tom Austin, the Zappos account manager for Clarks (the popular brand from $1.2 billion, U.K.-based C&J Clark International Ltd.), says Zappos provides far more dynamic and comprehensive access to how his company's shoes are selling than any retailer he's dealt with in the past. "The most useful thing is that I can use real-time data to write suggested orders down to specific sizes and widths of shoes," he says. Even better, he adds, Zappos has built an algorithm that uses past and predicted sales trends to help him order appropriately. "I don't know of anybody else that comes close to what they do," Austin says.

Using a Web-based interface, vendors such as Austin can log into Zappos' site and find an array of reports available to analyze how their products are selling. Zappos utilizes standard protocols such as XML and EDI for information exchange with vendors, and the company is prepared to adapt to whatever particular set-up a vendor may already have. "When we start negotiations, we ask them how they want to do it," says Field. "XML, FTP, whatever. We will pretty much work with whatever they want. It eases the transition when you decide up-front."

Keep the Information Flowing


Keep the Information Flowing

Because Zappos thinks of itself as a customer-service business above all else, the company is finely attuned to customers' thoughts and preferences. Customers can talk to live reps around the clock—the 1-800 number is on every single Web page—in addition to submitting questions or requests through the Web site itself. And everyone at Zappos is trained to deal with customers: Every employee spends their first four weeks at Zappos in a customer-loyalty training program. To stay responsive to those desires, Zappos keeps information flowing so that everyone—from the merchandising team to coders working on new aspects of the site—knows what they need to know. A report is run every morning that shows which brands customers have searched for the previous day. If Zappos hasn't heard of a brand, the company's merchandising team follows up.

More important, the company keeps a dialogue channel open between its customer-service reps and development team, so the IT crew hears directly what customers are saying, without that information getting lost in bureaucratic pathways. Weekly meetings are held, not between higher-level managers, but between actual coders and frontline customer-service supervisors. A wiki-style collaboration tool lets everyone in the company post to a central repository any information they think is worth sharing—from the addition of new brands to good places to eat near the office. "It's that kind of focus on service that differentiates them," says Angelique Dab, an equity analyst who covers the footwear and specialty apparel industry at Nollenberger Capital Partners Inc., based in San Francisco. "Zappos has managed to bring a top-notch, Nordstrom-like feel to an online store, which is quite an achievement."

The Need for Speed


The Need for Speed

There's a thing most of us have about buying shoes: Once we buy them, we want to wear them. That works just fine in the bricks-and-mortar world, where we can walk out of a store wearing the shoes we just bought, but that's clearly an impossibility online. While Zappos knows it can never give you the shoes the instant you buy them, the company is dedicated to shrinking that delay of gratification to as short a time as possible.

To that end, the company keeps its 905,000 square-foot, Cedar Grove, Ky.-based warehouse open 24 hours, seven days a week. That way, a customer can order shoes as late as 11:00 p.m. and still have the option of next-day delivery. "It's not the most efficient way to run a warehouse," says Hsieh. "But it does allow us to get shoes to customers as quickly as possible." Short of expedited shipping, Zappos promises customers their shoes will arrive in four to five business days, free of charge. For repeat customers, the company's order-management system randomly selects customers for upgrades to second-day shipping, or sometimes even next-day air shipping. "The customer isn't expecting that, and it's a way of improving their experience," says Hsieh. "That results in even more repeat customers and better word of mouth."

While the company strives to get merchandise orders on the very next truck that leaves the warehouse, Zappos also knows that, for peace of mind, online customers need the ability to track the status of their orders. "Integrating with different sources that you don't have control over is one of the hardest parts of the IT job," says Field. "But we work with our shippers, like UPS, to monitor and improve communications between our system and their systems. We're vigilant in that regard."

As with much of its software, the company's warehouse-management system was custom-built by its development team, aided by a number of off-the-shelf hardware and software solutions from companies such as Symbol Technologies Inc. The interface to the WMS is through a browser—a luxury made possible by the fact that Zappos is staffed by people who started their careers using Internet technology. The simplicity allows an average turnaround time of eight hours from when a customer places an order to when it goes out the door.

To make sure customers are never left waiting, Zappos also stocks every shoe that's available on the Web site. Indeed, a pair of shoes won't show up for sale until warehouse workers scan a barcode on a shoebox and a sticker on a warehouse shelf to log the shoes' location, thus guaranteeing that every shoe shown online is in stock. "The only time we run into trouble is if there's only one pair of a certain shoe left, and two people have it in their online shopping cart at the same time," says Field. "Without realizing it, they're racing with someone else to buy the same pair of shoes. But in general, if you've put it in your shopping cart, we already know which box on which shelf is going to you."

Show Me The Money


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.