Case 2 452 Part 5: Cases told Inc. Magazine, “It sounded like the poster child of bad Internet ideas .. . but I got sucked in.” After becoming CEO, Hsieh made an unconventional decision to keep Zappos going, even selling his San Francisco loft to pay for a new warehouse and once setting his salary at just $24. Zappos struggled its first few years, making sales but not generating a profit. The dot – com crash forced Zappos to lay off half its staff, but the company recovered. By the end of 2002, Zappos had sales of $32 million but was still not profitable. In 2003, the com – pany decided that in order to offer the best customer service, it had to control the entire value chain-from order to fulfillment to delivery-and began holding its own inventory. Zappos moved to Las Vegas in 2004 to take advantage of a larger pool of experienced call center employees. The company generated its first profit in 2007 after reaching $840 million in annual sales. Zappos a lso started to be recognized for its unique work environment and approach to customer service. In 2010, Amazon bought the company for $1.2 billion. Although Hsieh had rejected an offer from Amazon in 2005, he believed that this buyout would be better for the com – pany than management from the current board of directors or an outside investor. Hsieh said, “With Amazon, it seemed that Zappos could continue to build its culture, brand, and business. We would be free to be ourselves.” Amazon agreed to let Zappos operate independently and to keep Hsieh as CEO (at his current $36,000 annual salary). Hsieh made $214 million from the merger, and Amazon set aside $40 million for distribution to Zappos employees. After the merger, the company restructured into 10 separate com – panies organized under the Zappos Family. Zappos’ Business Model and Operating Philosophy Zappos has ten core values that guide every activity at the company and form the heart of the company’s business model and culture: • Deliver WOW through service. • Embrace and drive change. • Create fun and a little weirdness. • Be adventurous, creative and open-minded. • Pursue growth and learning. • Build open and honest relationships with communication. ‘Build a positive team and family spirit. • Do more with less. • Be passionate and determined. • Be humble. Zappos’ core values differ from those of other companies in a couple of ways. In addi – tion to being untraditional, the core values create a framework for the company’s actions. This is exemplified in the company’s commitment to their customers’ and employees’ well-being and satisfaction. Zappos’ Customer-Focused Business Model The Zappos business model is built around developing long -term customer relationships. Zappos does not compete on price because it believes that customers will want to buy from the store with the best service and selection. The company strives to create a unique and addicting shopping experience, offering a wide selection of shoes, apparel, Case 13: Zappos: Delivering Happiness 453 accessories, and home products, free shipping to the customer, free shipping and full refunds on returns, and great customer service. Shopping and Shipping Zappos strives to make the shopping experience enjoyable. The website is streamlined for an easy shopping experience. Products are grouped in specialized segments, with some (like outdoor products) on their own mini-sites. Customers can view each product from multiple angles thanks to photographs taken at the com – pany’s studio, and Zappos employees make short videos highlighting the product’s features. Zappos analyzes how customers navigate the site to improve features, adapt search results, and plan inventory. This spirit of simplicity, innovation, and great service extends to Zappos’ inventory and distribution systems as well. Zappos has one of the few live inventory systems on the web. If the Zappos website displays an item, it is in stock. Once the company sells out of an item, the listing is removed from the website. This helps to reduce customer frustration. Its inventory and shipping systems are linked directly to the website via a central database, and all its information systems are developed in-house and customized to the company’s needs. Their warehouses operate around the clock, which allows them to get a product to the customer faster. Fast shipping creates an instant gratification that is similar to shopping in a physical store. Most companies have a negative view toward returns, but Zappos’ mentality is the complete opposite. It sees returns as the ability to maintain customer relationships and to increase its profits. Zappos offers a 100% Satisfaction Guaranteed Return Policy. If a customer is not satisfied with a purchase, he or she can return it within 365 days for a full refund. The customer can print a pre-paid shipping label that allows all domestic customers to return the product for free. This return policy encourages customers to order several styles or different sizes and return the items that do not work out. While this strategy seems expensive, it actually works to Zappos’ advantage. The aver – age industry merchandise return rate is 35 percent, but Zappos’ most profitable customers tend to return 50 percent of what they purchase. The customers who have the higher return percentages are the most profitable because they have experienced Zappos’ customer service and return policy, which create loyalty to the company. These customers are likely to make purchases more often and to spend more on each purchase. Craig Adkins, who is the vice president of services and operations, stated that this is exactly what has made Zappos so successful, saying, “Since it costs the same to ship a $300 pair of pumps as it does a $30 pair of sandals, the Zappos policy of winning over shoppers with its returns policy has helped to bring in high profit margins on many of its orders.” Customer Service What really makes the Zappos business model unique is the company’s focus on customer service. The company has established a method of serving customers and handling their issues that is distinctive from the rest of the industry. Zappos believes great customer service is an opportunity to make the customer happy. Customers are encouraged to call Zappos with any questions. The number is displayed on every page of the website. Hsieh says, ” … At Zappos, we want people to call us. We believe that forming personal, emotional connections with our customers is the best way to provide great service.” Customer service representatives also actively use social media sites such as Facebook and Twitter to respond to customer issues. Another key aspect of Zappos’ customer service model is that nothing is scripted. Employees have free reign in their decision -making and are expected to spend as much time as they need to “wow” customers. They help customers shop, even on their competitors’ websites, encourage them to buy multiple sizes or colors to try (since return shipping is free), and do anything it takes to make the shopping experience memorable. 454 Part 5: Cases Zappos’ customer service representatives try to develop relationships with their customers and make them happy. Stories about great customer service include customer support calls that last for hours, sending flowers to customers on their birthdays, and surprise upgrades to faster shipping. Some extreme cases have included Zappos handdelivering shoes to customers who have lost luggage and to a groom who forgot the shoes for his wedding. Zappos has even sent pizzas to the homes of customers who have tweeted to the company about being hungry. Zappos believes that great customer experiences encourage customers to use the store again. In addition, Zappos’ long-term strategy is based on the idea that great customer service will help them expand into other categor ies. While around 80 percent of Zappos’ orders come from shoes, the markets for housewares and apparel are much larger. The company says it will expand into any area that it is passionate about and that meet their customers’ needs. The company a lso considers word-of-mouth marketing to be the best way to reach new customers. CFO/COO Alfred Lin says, “The customer is more powerful than paid advertising.” With over 75 percent of purchases made by repeat customers, it is evident that Zappos’ mission to “provide the best customer service possible” is working well for the company. Corporate Culture and Work Environment The corporate culture at Zappos sets it apart from nearly every ot her company. As Amazon’s CEO, Jeff Bezos, says, ”I’ve seen a lot of companies, and I have never seen a company with a culture like Zappos.” Zappos’ unorthodox culture is the work of CEO Tony Hsieh, an innovative and successful entrepreneur. Hsieh built the culture on the idea that if you can attract talented people and employees enjoy their work, great service and brand power will naturally develop. Zappos is famous for its relaxed and wacky atmosphere. Employee antics include Nerf ball wars, office parades, ugly sweater days, and donut-eating contests. The headquarters features an employee nap room, a wellness center, and an open mic in the cafeteria. Other quirky activities include forcing employees to wear a “rep ly-all” hat when they accidentally send a company-wide e-mail. This environment isn’t just fun; it’s a lso· strategic. According to Zappos, “When you combine a little weirdness with making sure everyone is also having fun at work, it ends up being a win-win for everyone: Employees are more engaged in the work that they do, and the company as a whole becomes more innovative.” Hiring and Training The key to creating a zany work environment lies in hiring the right people. The job application features a crossword puzzle about Zappos and asks employees questions about which_ superhero they’d like to be and how lucky they are. They may also check how potential employees treat peop le like their shuttle driver. Zappos is looking for people with a sense of humor who can work hard and play hard. Potential employees go through both cultural and technical interviews to make sure they will fit with the company. However, even Hsieh admits that finding great emp loyees is tough. “One of the biggest enemies to culture is hyper-growth. You’re trying to fill seats with warm bodies, and you end up making compromises,” says Hsieh. All new employees then attend a five-week training program, which includes two weeks on the phones providing customer service and a week fulfilling orders in a warehouse. To make sure that new employees feel committed to a future with the company, Zappos offers $2,000 to leave the company after the training (less than 1 percent of new employees take the deal). Even after the initial training is over, emp loyees take 200 hours Case 13: Zappo s: D eliveri H . ng app1 n e ss 455 of classes-with the company, covering everything from the basi’cs of business to advanced Twitter use-and read at least nine business books a year. Benefits Anot her aspect of Zappos that is unique is the benefits that i’t p ‘d . rovi es to its employees. The company has an ex tensive health plan, where it pays lOO f , . percent o employee s medteal benefits and on average 85 percent of medical expe11ses c , . . 10r emp 1 oyees dependents. The company also provides employees with dental, vision, and life insurance. Other benefits include a flexible spending account, pre-paid legal services, a 40 percent employee discount, free lunches and snacks, paid volunteer time, life coach – ing, and a car pool program. Along with the extensive benefits package, Zappos has developed a compensation model for its “Customer Loyalty Team” (call center representatives) that incentivizes employee development. All employees are paid $11 per hour for the first 90 days. After 90 days, the employee moves to $13 per hour. To move beyond $13 an hour, employees must demonstrate growth and learning by completing specific skill set courses that allow employees to specialize in certain areas of the call center. Although the reasoning for Zappos’ compensation model is to motivate employees and promote personal growth, the $13 base pay is less than the national hourly average of $15.92 earned by call center representatives. Zappos says, “While the Zappos Family tends to pay on the low-average to average side of the scale, the relaxed environment and potential for advancement both add value that cannot be counted on a paycheck.” Work-Life Integration One of Zappos’ core values is “Build a positive team and family spirit,” so the company expects employees to socialize with each other both in and out of the office. In fact, managers spend 10 to 20 percent of their time bonding with team members outside of work. Zappos outings include hiking trips, going to the movies, and hanging out at bars. Hsieh says that this increases efficiency by improving communication, building trust, and creating friendships. Along with creating friendships, employees are encouraged to support each other. Any employee can give another employee a $50 reward for great work. Zappos employees compile an annual “culture book” comprised of essays on the Zappos culture and reviews of the company. The culture book helps employees to think about the meaning of their work and is availab le unedited to the public. This positive work environment comes with the expectation that employees will work hard. Employees are evaluated on how well they embody the core values and inspire others. Zappos will fire people who are doing great work if they don’t fit with the culture of the company. Hsieh says, “We definitely don’t want anyo ne to feel that they’re entitled to employment for life. It’s more about us creating an environment and growth oppor – tunities for our employees such that they want to be employees for life.” Transparency As with its customers, the foundation of Zappos’ relationships with its employees is trust and transparency. The company wants its employees, like its customers, to active ly discuss any issues or concerns that may come up. Hsieh does not have an office; he sits in an open cubicle among the rest of the employees. He believes that “the best way to have an open-door policy is not to have a door in the first place.” Zappos’ management is very open with employees by regularly discussing issues on the company blog. Employees receive detailed information about the company’s performance and are encouraged to share information about the company. Zappos believes that employees should dev elop open and honest re lationships with all stakeholders with the hope that this will assi st in maintaining the company’s reputation. Hsieh uses Facebook and Twitter to s hare informa – tion with emp loyees and customers (he has over 2.6 million followers). 456 Part 5: Cases Despite the benefits of transparency, it can also be pa,inful at times. In October 2008, Sequoia Capital, a venture capital firm and controlling investor in Zappos, told the company to “cut expenses as much as possible and get to profitab’.lity and c~s~ flow positive as soon as possible.” As a result, Hsieh had to make a difficult declSlon and lay off 8 percent, or 124, of Zappos’ employees. Hsieh strived to handle the layoffs in a respectful and kind manner. He sent an e-mail notifying employees of the layoff and was honest and upfront about the reasons behind the decisions, even discussing the move on Twitter and his blog. Employees ;.vho were laid off received generous severance packages, including six months of paid COBRA health insurance coverage. Because of the company’s honesty and transparency, employees and customers were more understanding of the tough decision Hsieh and Zappos had to make. Although some companies may hesitate to open themselves to public criticism, Zappos feels it has nothing to hide. In fact, most of the public posts on Zappos’ social media sites are praise from customers. Corporate Social Responsibility Zappos also takes an unconventional approach to corporate social responsibility and philanthropy. Many companies have CSR programs that are dedicated to a certain area or cause such as education, but Zappos prefers to support a variety of programs based on the needs of communities and the interests of employees. . . Zappos is involved in a variety of philanthropic efforts. Programs mclude donatmg shoes and gifts, giving gift cards to elementary school students, and participating in LIVESTRONG Day (wearing yellow to create awareness about cancer). Zappos donates money to organizations such as the Shade Tree, a non-profit that provides shelter to women and children, and the Nevada Childhood Cancer Foundation. Zappos recently started a campaign to improve the company’s impact on the envir~nment. A group of employees created the initiative, which is known as Zappos Leadmg Environmental Awareness for the Future (L.E.A .F.). The campaign focuses on several environmental efforts, including a new recycling program, community gardens, and getting LEED certification for the company. L.E.A.F.’s most recent effort was Z~ppos Recycles Day, an event to raise awareness on recycling and other ways t.he company can reduce its carbon footprint. Like the rest of the company, L.E.A.F. is very open with its progress posted on its Twitter account and blog. Another area on the company’s blog is a section on “Eco -friendly Products.” Here, the company highlights new products that are organic or were manufactured using environntally friendly procedures. The postings also list ways that customers can live more sustainable lifestyles, including tips on how to throw an eco-friend ly party. Zappos’ Marketing ·challenges Like any company, Zappos has faced some challenging bu siness and ethical issues i~ the past. When these issues occur, Zappos attempts to handle situations in a profess10nal and efficient manner. However, the transparency at Zappos makes some business and ethical issues more complex as the company strives to solve problems while keeping its stakeholders informed. Merger with Amazon In 2009, Zappos was acquired by ecommerce giant Amazon.com. Many Zappos custo – mers were confused by the unexpected move and expressed concerns about the future of the company’s culture and customer service. Most CEOs would not have felt any Case 13: Zappos: Del ivering Happiness 457 obligation to address customer concerns over the merger, but Tony Hsieh valued the support of Zappos’ employees and customers. Shortly after the acquisition, Hsieh issued a statement about why he sold Zappos to Amazon. In the statement, Hsieh discussed the disagreement between Zappos and Sequoia Capital over ‘management styles and company focus. Specifically, Hsieh said, “The board’s attitude was that my ‘social experiments’ mi ght make for good PR but th at they didn ‘t move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time sell – ing shoes .” Hsieh and Alfred Lin, Zappos’ CFO and COO, were the only two members on the board committed to preserving Zappos’ culture. The board could fire Hsieh and hire a new CEO who would focus more on profits. Hsieh decid ed that the best way to resolve these issues was to buy out the board, but he could not do this on his own. After meeting with Amazon CEO Jeff Bezos, Hsieh committed to a full acquisition, as long as Zappos could operate independently and continue to focus on building its cu lture and customer service. Many customers were concerned that Amazon was not a good fit for Zappos, but Hsieh addressed those concerns, saying, “Amazon wants to do what is best for its customers – even, it seemed to me, at the expense of short -term financial performance. Zappos has the same goal. We just have a different philosophy about how to do it.” Although consumers were not pleased with the acquisition, they at least understood why it occurred. Moreover, Hsieh’s commitment to his beliefs and management style reso – nated w ith customers and emp loyees. More than Shoes Campaign To bring awareness to the fact that Zappos sells more than just shoes, Zappos created a marketing campaign in 2011 that was designed to catch people’s attention. The company released several advertisements that featured people who appeared to be naked doing daily activities such as running, h ailing a cab, and driving a scooter. The creative advertisements had certain parts of models’ bodies blocked off with a box that said “more than shoes.” The campaign received criticism from several groups because of its sexual nature. However, the catch with these ads was that the subjects of the ads were not actually nude; they .wore bathing suits or small shorts that were later covered by the box. Because of the negative attention, Zappos pulled the ads and released an apology that explained the production process. Technical Difficulties In October 2011, Zappos experienced some technical difficulties that resulted in delays and problems in customers’ orders and shipments. Zappos upgraded one of its processing systems, and in the process many orders were del e t ed or delayed. Some orders had the incorrect shipping information, and products were shipped to the wrong locatio n. Although this upset several customers, Zappos h andled the pro – bl e ms and reassured customers that it would get their merchandise as soon as possi – ble. The company also offered different perks, depending on the circumstances of each customer experience. Another problem Zappos encountered was that every item from 6pm.com, one of its websites, was priced at $49.95 for six hours in 2010. The company had to shut down the website for a few hours to solve the probl em. Zappos honored all the orders from the pricing mistake, which resulted in a $1.6 million loss. In January 2012, hackers broke into Zappos’ computer system, and the company had to respond to the theft of 24 million customers’ critical personal information. The stolen 458 Part 5: Cases data included customers’ names, e-mail addresses, shippng and billing addresses, phone numbers, and the last four digits of their credit cards. Zappos immediately addressed the situation by sending an e-mail to customers notifying them of the security breach. Zappos assured customers the servers containing their full credit card information were not hacked. Zappos’ next move was to disconnect its call center, reasoning that the expected number of calls would overload its system. While Zappos has a reputation for delivering customer service that is unmatched by any competitor, some customers were unhappy with how Zappos handled the hacking. Many customers were upset by their information being hacked, but the situation was made worse by Zappos’ action of disconnecting its call center. Although this situation caused problems for Zappos and blemished its customer service record, the company believes that it can restore its reputation. The Future of Zappos Zappos remains committed to serving its customers and employees. So far, the company has retained its unique culture and continues to expand into new product categories. In a recent interview, Hsieh talked about the growth of Zappos and how he believes that expanding into the clothing and merchandise market will help the company to grow. Hsieh says that “the sky is the limit” for Zappos, and that growing and expanding into many different types of businesses is Zappos’ future. During his interview, Hsieh states, “Although Zappos is a long way from becoming a company that is similar to Virgin, it does consider Virgin a role model in how Zappos wants to shape itself.” (Virgin Group Limited is a successful U.K. conglomerate .) As Zappos expands, it will have to work harder to hire the right people, avoid technical issues, and maintain its quirky culture. Leadership is a key factor in the success of any company, and for Zappos, having Tony Hsieh as a leader is a strong indicator for future success. Hsieh has expressed that he will do whatever it takes to make his employees, customers, and vendors happy. The future for any company looks bright when its leadership is committed to such s~rong values. However, Zappos needs to make sure that it continues to focus on its stakeholders and its long-term vision with or without Hsieh. Ultimately, Zappos intends to continue to deliver happiness to its stakeholders. Hsieh says, , “At Zappos, our higher purpose is delivering happiness. Whether it’s the happiness our customers receive when they get a new pair of shoes or the perfect piece of clothing, or the happiness they get when dealing with a friendly customer rep over the phone,. o~ th.e happiness our employees feel about being a part of a culture that celebrates their indi – viduality, these are all ways we .bring happiness to people’s lives.” Zappos’ success and innovative business model have caught the attention of many other companies. The company has appeared on several prestigious lists including Fortune’s “Best Companies to Work For,” Fast Company’s “50 Most Innovative Companies,” BusinessWeek’s “Top 25 Customer Service Champs,” and Ethisphere’s “World’s Most Ethical Companies.” Zappos’ business model is so successful that the company offers tours and workshops, which cost $5,000 for two days at the company’s headquarters. The company also created Zappos Insights, an online service that allows subscribers to learn more about Zappos’ business practices through biogs and videos. These programs have high profit potential for the company because they are built on what Zappos already does best. As the company continues to gain recognition for its efforts in creatmg Case 13: Zappos: Delivering Happiness 459 a vibrant and transparent corporate culture and business model, Zappos’ success among its varied stakeholders looks promising. Questions for Discussion 1. How would you define Zappos’ target market, and how would you describe its strat – egy to serve this market? 2. Has Zappos’ emphasis on customer satisfaction contributed to its profitability? Explain. 3. Has Zappos developed long-term customer relationships that provide a competitive advantage in the purchase of shoes and other products? 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