Why Zappos Shouldn’t Be Your Business Model

Everyone is at PubCon, and Tony Hsieh, CEO of Zappos gave the keynote yesterday in Vegas. I’m not there, but if you care to read what he said, you can read Lisa Barone’s excellent live blogging coverage of the keynote and other  sessions at the Outspoken Media Blog.

The Zappos story, culture and ethos of service is repeated everywhere by the media: It’s touted as a great way to build a company, have relationships with your customers, build your brand and provide amazing customer service. I’ll take their word for it, because I’ve never had the opportunity to buy something from them.

You know what Zappos is not touted as, though? Profitable. I did a little digging searched a little bit on Google and found two very interesting sites:

Zappos pre-tax net profit is in the low single digit range – 3-4%. For the independent SEO’s reading this , you’d be better off working in house on margins like that. For the veteran e-commerce players, you know that this is not a good long term business model.

Yes, I know they were acquired by Amazon for some obscene amount of money. The difference is that Amazon is a public company obsessed with market share and also less concerned with little things like profit margins.  I also imagine Jeff Bezos couldn’t stand that Endless.com was loosing to Zappos. Zappos was a venture backed firm, and I suspect they knew how bad the business model was, which is why they forced Zappos to sell out.

I think most people forget that the primary goal of any business needs to be turning a profit and increasing cash flow. To do that, you need to provide good services, products and value your customer, but all as a goal towards profit and cash flow. The business press would have you believe otherwise, but that’s why they write about business instead of running businesses.

Now, if you’re a venture backed firm with a sole goal of heading towards a big exit, then you don’t care about this stuff. You’re concerned with growth and market share, angling for an acquisition.

Most businesses aren’t venture backed, though. The majority are  long term endeavors started by entrepreneurs for all kinds of different reasons.  For those businesses, you need to focus on satisfying customers, there’s no doubt. At the same time, you can’t let customer satisfaction become the ultimate goal. The ultimate goal needs to be profits and keeping your business sustainable. Often this is partially obtained by keeping customers happy, but sometimes you’ll discover that keeping certain customers happy is not worth your while.

I’m not advocating being an ass to your customers, far from it. I just think that customer service needs to be a means to justify the end, and not an end unto itself.  Creating better products, selling more, making more profits, increasing your margins and other basic business issues are just as important and can contribute just as much, if not more, as customer satisfaction.


  1. Hey, It’s excellent to see sites with bing and thanks for the share that you’ve given. Commonly, I’m really amazed, but etc.

  2. Marcel Wiedenbrugge

    I think your blog puts the Zappos business model a bit more into a balanced perspective. I have read (and studied) the book Delivering Happiness and I also read the related Zappos Culture Book (2010 edition), which I both really enjoyed. But you are absolutely right, that the financial part is the weak spot, which does not means that the principles on which Zappos is build are wrong or should not be applied.

    I think the business model, where culture (people) is the brand (and the rest will automatically follow) is good in its basics.

    1) Have an overall common goal (WOW-ing customers, offer exceptional customer service) that applies to all people working for the organization.
    2) Create genuine values that apply to the people working for your organization.
    3) Hire people that have a culture fit with the company, so they really live the values, as the company values are their own values as well (creates more consistency).
    4) Optimize the terms and conditions that people can express and develop themselves according to their own wishes and capabilities.

    Especially 3 and 4 create a culture where people feel connected and over time a stable, collaborative, customer centric and integrated working environment arises.

    However, the purpose of a company is not profits and cash flow, but value creation. If you do that right, it leads to profitability and cash flow. Optimizing profitability and cash flow relates to how well you manage your supply chain, working capital and customer relationships.

    Zappos had many moments in its history, where they almost went bankrupt due to serious cash flow (and profitability) problems. As such, this is the mayor weakness in an otherwise strong concept.

    Nowadays there is lot to do around profitability (especially when we are talking about banks and bonusses), but it is an important topic to address as well as cash flow. Profit is not the issue, but it is the way it is created as well as the way it is reinvested. Zappos should have addressed this more profoundly and scientifically in order to build a sustainable and profitable business model. Now they were forced to sell themselves (though Amazon and Zappos fit well together).

    However, the business model of Zappos is a good development in the direction towards sustainable business models and personally I like to see more businesses develop into this direction without compromising cash flow, profitability and sustainability.

    Best regards,

    Marcel Wiedenbrugge