The Marriage of Amazon and Zappos

The big news today is that Amazon.com purchased Zappos.com for the tidy sum of nearly $900 million. I'm guessing that the $40 million earmarked for Zappos employees is going to provide some nice economic stimulus to the Las Vegas and Louisville, KY economies. Zappos's culture is legendary, and it's great to see their employees rewarded for working together to create such a wonderful business.

My immediate reaction to this deal is how these two companies are both remarkably similar and remarkably different from one another. They are both obsessed with customer experience, but they go about it in very different ways. They have also both grown at break-neck speed and maintained the first-mover advantage.

Two years ago I attended a presentation by Zappos CEO Tony Hsieh where he presented his "Top 10 Lessons Learned in E-commerce." I thought it would be interesting to look at these ten lessons and see how they fit with Amazon:

1. The e-commerce business is built on repeat customers. Lifetime relationship with each customer is the goal.

You can't get much more similar than this. Amazon repeatedly talks about the fact that the margin on any individual sale is irrelevant and that the long-term relationship with the customer is most important.

2. Word of mouth really works online. With a click of a mouse, anyone can tell fifty friends how great or terrible your company is. Even small, infrequent customers (i.e., unqualified customers) can spread the word about your company.

Another checkmark in the similarity column. Both companies get it, and it shows on their sites. Amazon has long integrated user-generated content. They pioneered customer-written product reviews. Likewise, Zappos' customer-driven "how a shoe fits" feedback is excellent. Both companies have earned great reputations and are loved by their customers.

3. Don’t compete on price. Invest in service instead of low prices. Low prices do not encourage loyalty and drive repeat business. Price is not an effective differentiator – someone can always beat you on price.

Whoa, stop the presses! Tony and Jeff [Bezos] do not agree on this one at all. Low prices are one of Amazon's customer experience "pillars." Jeff's pillar is Tony's killer.

4. Make sure your inventory is 100% accurate. Don’t drop ship from manufacturers. Their inventory feeds are only 80 – 90% accurate. Customers are only thrilled when you can deliver, and they are very disappointed when you cannot.

This one hits home since I spend much of my life managing a drop ship program that fulfills orders for Amazon. Tony's point is well made. There is no doubt that drop shipping is not perfect, and if you want total control over customer experience, you have to do it yourself. However, this is much easier when you're only selling shoes and apparel.

Huge selection is another Amazon customer experience pillar, and they sell 10 million SKU's. Drop shipping is a must for Amazon. What I can say from personal experience is that Amazon is obsessed with making their drop ship programs work, and they will quickly sacrifice sales before they will sacrifice customer experience. They dedicate significant resources to keeping drop ship vendors on track.

5. Centrally locate your distribution. What happens after checkout is just as important as what happens before checkout. Quick transit time equals better service.

Yup. They both do this.

6. Customer service is an investment, not an expense. Maximizing the value of each individual transaction is not as important as maximizing the lifetime value of the customer. Customer service is not a department – it is how we do business. Send flowers.

Zappos and Amazon are much different here. Zappos is easy to reach and values personal service. Amazon cannot afford the overhead. Instead, Amazon focuses on operational excellence; they avoid mistakes, therefore reducing the customer's need for personal service. Yes, they will call you if you want them to, but their customer service is essentially impersonal. As a weekly Amazon customer, I can vouch for the fact that they do a good job, but it's no where near the scale of Zappos.

It's interesting that Tony uses the same language talking about service that Jeff uses when he talks about price: "Maximizing the value of each individual transaction is not as important as maximizing the lifetime value of the customer." Low price is an Amazon customer experience pillar, but Zappos' pillar is service. Low prices and superior customer service rarely coexist.

7. Start Small. Stay Focused. You cannot accurately predict how customers will respond to new technology investments. Add features and adjust your site incrementally. Don’t advertise loudly until you have it working right.

They seem pretty similar here. This is really common sense.

8. Don’t be secretive. Don’t worry about competitors. Share information with your suppliers. The benefits outweigh the risk that they might spill the beans to your competitors.

I'm not sure about this one. Jeff talks about being obsessed with customers, not competitors, but it's in a different context. Amazon is not just a retailer, it is a retailing platform. Tony is approaching this more from the supplier relations standpoint.

9. You need to actively manage your company culture. If you get the culture right, everything else takes care of itself. People know what to do and you won’t need to worry about having a policy and procedure for everything. Fifty percent of our performance review process is about culture.

I don't know for sure, but I'll bet there are significant differences here. I've been to Amazon's offices many times. They seem to have a good culture, but Zappos is in a different league here. Amazon is a public company, and they have probably become much more process-driven and managerial in their culture. As a private company, Zappos just doesn't have the baggage. (Now they do!)

10. Be wary of so-called experts. Experts know a little about a lot of companies, but they know a lot about very few of them. No one knows your business as well as your own people know it.

Amen. Both companies have defied the odds. The doomsayers that declared that Amazon would never turn a profit were dead wrong. Zappos' free shipping both ways is about as in-your-face as you can get with regard to conventional wisdom.

I tallied five similarities, four differences and one "I don't know." If Amazon really lets Zappos run their own show, then it doesn't matter. At the very least, this acquisition diversifies Amazon's business, helps them jettison the Endless.com operation and probably raises their margins. They also grew their top line 5% overnight.

This is the marriage of two very strong, very successful dot coms that are industry leaders. It will be interesting to see if they can make it last.