New Zappos: Shoes--and gadgets to boot

Sometime in the next few weeks, online shoe seller Zappos.com will launch a new user interface that could soon let consumers buy lipstick and MP3 players along with Birkenstocks and Nikes.

The company is preparing to do a soft launch of the new, cleaner look to around 1,000 customers before deciding on a formal rollout plan, CEO Tony Hsieh said.

"Frankly I'm kind of surprised that what we put on sells, how our customers find it," Hsieh said. "The new site is built for easier navigation and searching, with multiple categories in mind."

The rollout of the user interface, and the expansion into categories including small electronics and cookware, highlight the core of the company's mind-set: find out what the customer wants, and find the best way to deliver it.

"Customers will say, 'I wish you would start an airline.' Well, we're not going to do that. But if they say, 'I wish you would sell this because I just had a horrible experience somewhere else,' we'll look into it," Hsieh said. "We're experimenting with a lot of other categories. That's how we got into sunglasses. We're taking the same approach--not going out and buying 10 warehouses full of pots and pans, just trying it out."

Zappos prides itself on attention to customer service--an 800 number is plastered on every page, along with notes promoting the company's 24/7 customer service line and 365-day return policy. So far, this approach has been working: Zappos, which launched in 1999, had gross sales of $840 million in 2007, up from $1.6 million in 2000. As of the beginning of April, the company had a customer base of 7.7 million people.

The privately held company reported an operating profit in 2007, and "we exceeded (our goal) a little bit," Hsieh said. In fact, things are going so well that the company recently told its 1,600 employees they would each receive a bonus equal to 10 percent of their 2007 salary.

The company's two warehouses in Kentucky hold around 4 million items, but at just under a million square feet, Hsieh says Zappos has plenty of room to grow. And that's just what he's planning on; by the end of 2008 the company hopes to be selling footwear, apparel, sunglasses, watches, bags, bedding/linens, cosmetics, luggage, and electronics, according to his blog.

So, is Zappos ready to take on big players like Amazon.com? Hsieh says that's not the company's goal, but it'll certainly be going up against some strong competitors.

One challenge will be convincing customers who are happy to buy shoes from Zappos that they should also turn to the company for other items.

"Getting a customer to buy from different categories from you is difficult," said Patty Freeman Evans, an analyst at Jupiter Research. "We've talked to a lot of retailers about that. What we've also seen...is that over time consumers have not increased number of categories across online shopping."

According to Jupiter's data, consumers on average purchased items from 4.1 categories online in 2001, out of a possible 32. By 2007, that number had grown to just 4.7.

"When you redefine who you are it's critical that you make the connection with the customer," said Ted Vaughan, a partner in the retail and consumer product practice at consulting service DO Seidman. "What's going to distinguish them from other companies where (they're not as well-known), especially as they move into other areas?"

Meanwhile, Zappos is facing challenges on its home turf. Big names like Gap and Amazon have jumped into the online shoe sale business with their Piperlime and Endless stores, respectively.

And as Zappos tries to distinguish itself through its customer-service mantra, it's had to cut back a bit on bargains. The main Zappos store recently changed its policy regarding price guarantees and free overnight shipping. To that end, the company recently acquired 6PM.com from eBags.com, and has designated the 6PM brand as its home for bargains.

"Long term, our plan is to not have any sale items on Zappos," Hsieh said. "We want it to be more of a premium brand for customers who value service over anything else."

That message appears to have sunk in with customers. Zappos came in second in a recent National Retail Federation survey regarding customer service, beating out online and offline brands including Amazon, Land's End, and customer service legend Nordstrom.

"For some things the technical and customer service supporting a sale is very important to the customer. Whereas maybe a GPS device is less dependent upon that and is more dependent upon pricing," Vaughan said. "Two clicks away at another Web site they may have the devices, but do they have the convenience? And in the end if you have problems and have returns customer service is critical. Price is always an issue and always going to be an issue but it's not the only issue."

Zappos is hoping the service that keeps customers coming back will have them looking at new categories. On any given day, 75 percent of orders are repeat customers, Hsieh said. The free shipping and customer service department stand in for advertising as well; Zappos does relatively little traditional advertising, spending about 85 percent of its marketing budget on online buys. Besides print ads in magazines, Zappos' offline buys include ads in airport security trays where passengers place their shoes.

"The closest analogy to a brand we might use as a model is Virgin. They're involved in CDs and airlines and whatever, but the Virgin brand is about being cool and hip," Hsieh said. "For us it's about the very best customer service. Hopefully, 10 years from now people won't even realize we started out selling shoes online."