Tony Hsieh: Redefining Zappos' Business Model

We had started as a middleman, collecting orders from customers and then having other companies fulfill those orders. The idea was to form partnerships with hundreds of brands and feed their warehouses to customers. It's called drop ship and, on paper, it's a great business model. You don't have to manage the inventory or take on any of the risk.

In 2003, right after the dot-com crash, a lot of e-commerce companies were going out of business or were on their way. It was hard for us to persuade anyone to fund this crazy concept of selling shoes online, and about 25 percent of our revenue at the time was coming from drop ship. But we decided to end it. Even though it was hard to walk away from sales at a time when nobody is offering you money, we couldn't distinguish ourselves in the eyes of our customers if we weren't going to control the entire experience. We had to give up the easy money, manage the inventory, and take the risk.

We asked ourselves what we wanted this company to stand for. We didn't want to sell just shoes. I wasn't even into shoes—I used to wear a pair with holes in them—but I was passionate about customer service. I wanted us to have a whole company built around it, and we couldn't control the customer experience when a quarter of the inventory was out of our control.

We knew we had to stop doing [drop ship]. It was as if it were a drug. Over the long term, it was critical that we were handling the merchandise ourselves. This was the toughest decision I've had to make. We couldn't build a brand around customer service if we couldn't deliver it. When we had the goods in our control, we were able to do so much more.

Once we made that decision, all the other decisions became easy. We had already given up a lot, but we knew what we stood for at that point, and our employees could see that we were serious about this. That made all the difference.

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