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Five months after getting an entry level position at Oracle, Tony Hsieh quit. He linked up with his former Harvard University roommate, Sanjay Madan, and they started LinkExchange in 1996. LinkExchange had a relatively simple business model:
LinkExchange’s Target audience: Small companies with websites and small ad-budgets.
- LinkExchange offered their “target audience” a free service. To enroll cost absolutely nothing.
- Your company would then insert a code on its website.
- The code would cause banner ads to appear on your company’s website.
- Every time a visitor came to your site, you would earn a credit.
- After you earned 500 credits, your website’s banner ad would appear 500 times on other company websites within the LinkExchange network for free. In other words, your company would exchange links with other companies (i.e. Fidelity Investments has a banner ad on the Harvard Business Review site; image this on at the small business level).
LinkExchange’s Monetization Strategy: Grow the Ad-Inventory. A larger company will pay us to advertise across the LinkExchange network. In other words, suppose LinkExchange had 750 businesses that each averaged 15 impressions (ad-views) per day. A large company would never pay to place a banner ad on a small business site with only 15 daily impressions. However, they would pay LinkExchange to place a banner ad on each small business website in the newtork. That’s 11,250 daily impressions!
The LinkExchange business model was a huge success. In 1998, just two years after starting the company, Microsoft bought LinkExchange for $265 million. Tony Hsieh walked away with close to $40 million.
What Tony Hsieh did next is the focal point of his new book, “Delivering Happiness: A Path to Profit, Passion, and Purpose.” On this blog, I am going to do a Business Book
Review Audit! My Book Audit is designed to breakdown the business model and offer takeaways to other businesses. From an audit perspective, a good book is one that offers substantive business development content. I don’t care about feel good maxims or how these CEOs found their inner peace. Nor do I care about how the book reads. If I want to be entertained I’ll pick up a John Grisham fictional. Mr. Author, Tony Hsieh, are you going to tell me how you grew Zappos.com from no-sales to more than $1 Billion in ten years, or not? That is the question.
Review Audit: Delivering Happiness by Tony Hsieh CEO of Zappos.com, Inc.
After selling LinkExchange, Tony started a venture capital fund called, “Venture Frogs” which offered funds and consulting services to internet and e-commerce businesses. One afternoon, a guy named Nick Swinmurn pitched his online shoe store idea, “Shoesite,” to the Venture Frogs. Although Tony wasn’t crazy about the idea, he was blown away by the numbers. In 1998, Footwear was a $40 Billion industry in the United States and mail-order catalog sales made up 5% ($2 Billion). If people were buying shoes through the mail without ever setting foot in a store, they’d buy online.
Audit Finding: Innovation always springs from knowledge of industry and knowledge of customer. The mail catalog market was worth $2 Billion (industry defined!). In 1998, there were no dominate players in the Footwear e-commerce business and there were obviously people buying shoes without trying them on or actually seeing them in a store (customer identified!). Have you defined your industry and identified your customer?
Tony Hsieh agreed to fund the project. They changed the named to “Zappos.com, Inc.” and developed the operational model for their new business. (I want to add a real quick point that’s not covered in the book, but it may help your business appeal to more people. Always be cognizant of how you name things. On the internet, we see a lot of two-syllable named companies like Google, Apple, Kinkos, Facebook, LinkedIn, MySpace, Twitter, Zappos, etc. Many of these company names don’t mean anything, but they are very marketable and brandable).
The initial Zappos.com operation was built on a business model known as “drop ship.” Here’s how it worked:
- Zappos.com held no inventory.
- Footwear vendors would send a periodic inventory list to Zappos.com
- Zappos.com would compile the list and post the footwear brand data online for customers to see.
- Zappos.com would process the sales transaction online, and send the shipping information to the Footwear vendor.
- The vendor would then ship the shoes directly to the customer.
The drop-ship model is advantageous in that it is easy to set-up and administer. You don’t have to hold inventories or worry about shipping, per se. Most importantly, the drop-ship model allows you to establish relationships with vendors and learn about consumer preferences and buying habits. Nevertheless, drop-shipping is easy to replicate and very susceptible to vertical integration (that’s when your suppliers stop supplying you and go directly into competition against you through acquisition). Also, drop-shipping is too dependent upon the accuracy of the vendor’s inventory list and shipping ability. If the vendor’s inventory list was inaccurate or their logistics sucked, Zappos.com would ultimately suffer and lose customers, not the vendor. (Drop-Shipping is a great way to Soft-Open a internet retail business).
In 2002, Zappos.com opened a warehouse in Kentucky, located in the eastern central part of U.S., so that they could ship shoes to the Boston, Chicago, New York, Washington D.C., Philadelphia, and Miami demographic within 2-business days. Their warehouse was located near a prominent UPS distribute Hub. By 2003, Zappos.com was generating more than $60 million in annual revenues. The company decided to stop the drop-ship segment of their business, which accounted for 25% of sales in 2002, because it wasn’t sustainable long-term. Zappos.com saw logistics as a key success factor for their business. Before terminating their drop-ship segment, Zappos did something very interesting that I think should be commonplace for retailers. Zappos.com setup an extranet, a dedicated website, where vendors could get real-time inventory levels with pictures, sales information, and profit analysis directly from Zappos.com. The extranet allowed vendors to see what Zappos.com was working with; therefore, they could offer more brands and submit timely proposals based on Zappos.com’s needs.
Audit Finding: Accounts payable turnover (total supplier purchases/average accounts payable) is a liquidity ratio that managers use to quantify the rate at which suppliers are paid in a given period. If your company’s account payable turnover is falling from period to period, that means you are taking longer and longer to pay your suppliers. Conventional wisdom says, “Good job, always pay your bills on the last day due unless you have an incentive to pay earlier (like 1/15 n 30).” However, holding out on your vendors doesn’t really help you in the long run. Vendor Relationship Management (VRM) is important and your vendors should be viewed as partners. Paying earlier and being transparent, open, and honest with your vendors will help your business. Do you take your vendors to lunch to pick their brains about different products, changes in the industry, and better purchasing terms?
In 2004, Zappos.com moved their business headquarters from San Francisco to Las Vegas, Nevada. People in the San Francisco Bay Area didn’t like the idea of working in a call center. However, the “call-center” was a key success factor for Zappos.com. They encouraged people to call. Traditional call centers used metrics like Average Handle Time, which measures the average time it takes to resolve the customers issue and end the call. Conventional wisdom says, “the faster the better.” Average Handle Time doesn’t build lasting relationships with your customers. Zappos.com’s call center employees are trained to talk to you like you are a friend of theirs, they’ll discuss your interest, and brainstorm with you about Lady Gaga styles or those sneaks Lebron James had on last night. Call them right now at 1-800-927-7671 and see for yourself. They also changed the name of their call center operation to the “Customer Loyalty Team.” The name “call center” has all kinds of baggage and negative connotations attached to it. When I say “call center” does pleasurable customer experience and quality service come to mind?
Audit Finding: Your Company should cherish every opportunity to enact with your customers and represent your brand. The people that answer your phones should be enthusiastic and helpful. If you called Zappos.com right now and asked for a product they didn’t have in stock, the reps are trained to check at least three competitors to help you get what you want right now! If you ask a Zappos.com rep for a pizza, the guy will ask you for your location, and then look up the best pizza spots in your area. TRY THEM! Every company doesn’t have the time or resources to entertain customers in this manner, but does your company care at all? How much does your company invest in customer service?
In 2008, Zappos.com generated more than $1 Billion in Sales Revenue. In 2009, Zappos.com was acquired by Amazon.com for $1.2 Billion. Zappos.com’s success is based on their investments in the following areas:
- Customer Service
- Company Culture
- Employee Training and Development.
In my opinion, Delivering Happiness is a must read for any business that is serious about exceling in this day and age. Social media is here folks and word of mouth is everything. Bad service will spread like wild-fire and one customer can destroy your brand with a single twit on twitter. Tony does a wonderful job of using real examples like company emails and employee testimonials to get his points across. Does “Delivering Happiness” tell you how Tony Hsieh grew Zappos.com from no-sales to more than $1 Billion in ten years? Yes it does.
Also, get a copy of the Zappos.com culture book at http://www.zapposinsights.com
How I did it: Gunter Pfau of Stuzo (a Dachis Group Company)
Background: A rising tide lifts Gunter’s boat…
Facebook is a utility. It is a tool that brings people together around a common experience, interest, problem, or cause. The key to Facebook is the social graph. Similar to a decision tree, a social graph is a series of nodes and connections. The nodes are the individuals and the connections are the friendships. By connecting with your friends on Facebook you assemble a social graph, and you can distribute any kind of information through your connections. Social graphs are assets, and collectively, they represent the core business of Facebook. Facebook functions like an operating system, but instead of managing a computer’s hardware resources, it manages the social graphs, and provides a set of common tools/services for other web application developers.
Mark Zuckerberg & F8 Recap The Facebook platform launched in 2007. Mark Zuckerberg wanted Facebook to be to cloud applications what Microsoft Windows was to software applications over the past two decades. Facebook briefly stopped making applications and focused on enhancing its platform for developers. On May 24th, 2007, Facebook launched F8 (pronounced FATE), which was a media extravaganza “coming out party,” where Zuckerberg clearly differentiated Facebook from other social media companies as a platform (web-based operating system).
F8 was a success of monumental proportions –within six months, there were 250,000 registered developers operating 25,000 applications on Facebook. The top 5 Facebook applications are Zynga, Playfish, Causes, CrowdStar, and Rock You! (They’ve raised a combined $359 Million USD in investment capital). Zynga, makers Farmville and Mafia Wars, generate about $200 million in annual revenues. According to Facebook statistics, there are currently more than 500k applications operating on Facebook, created by millions of developers from 190 different countries.
As F8 would have it: Gunter creates Stuzo…
A few of those Facebook applications were created by Romanian born entrepreneur Gunter Pfau, and his team of developers at Stuzo. Gunter started Stuzo shortly after graduating from Temple University in December 2005. He changed the business model several times over the succeeding years, but he ultimately found his niche on Facebook. Stuzo was so successful marketing through social media, that they drew the attention of The Dachis Group, a team of social business designers that help global brands engage their stakeholders. The Dachis Group purchased Stuzo in November of 2010. Gunter Pfau is now one of the key members of the Dachis Group management team.
The road to success wasn’t easy for Gunter. He fled communist Romania with false documents that his family used to enter Austria. In 1987, his father moved the family to Philadelphia –Gunter was just 9 years old. Gunter worked his way through the Philadelphia school system and enrolled at Temple University in 2002. He majored in Finance and Entrepreneurship.
As a Temple student, Gunter saw how the bookstore would sell a textbook for $150.00 at beginning one semester, buy that same textbook back at the end of the semester for $20.00, and then resell it for $115.00 at the beginning of the following semester. It was an absolute racket. As an entrepreneur, Gunter saw an opportunity to cut out the middle man and give Temple students a website where they could buy and sell textbooks directly with each other. New products and services are an entrepreneur’s proposed solution to a recognized problem in the market. Stuzo was Gunter’s solution to the Temple textbook shakedown.
When Stuzo entered the market in 2005, eBay’s Half.com was the dominate player in the national used textbook market. Locally however, the market was divided between Temple University and Zavelle Bookstores, two brick and mortar fronts on main campus. Gunter positioned Stuzo as a campus bookstore alternative. Stuzo’s point of difference was that students could use their service to make transactions on campus.
In order to register on Stuzo.com, students had to have a valid Temple University email address. Stuzo provided three ways to buy or sell a book on Temple University’s main campus:
Students could …
- meet at an agreed upon location
- use postal services
- use Stuzo Spot, a drop off and pick up station designed for anonymous transactions
Gunter charged a nominal fee for using Stuzo Spot. Credit card users were charged $3 for transactions less than $50 and $5 for anything greater than $50. Within 3 months, Stuzo had more than 1000 registered users and 600 books posted. Gunter poured a ton of money into Stuzo.com and even maxed out a few credit cards. He would stand outside of the Student Activity Center (Temple’s largest bookstore) dressed as a mascot, promoting Stuzo and handing out book markers. In order to increase traffic, Gunter rebranded Stuzo as an on-line marketplace where students could buy, sell, and trade anything directly on campus. Nevertheless, cash-flow and sustainability were still big problems. Sites like Half.com and Amazon had much larger customer bases and cheaper book listings. The only unique component to Stuzo.com was that it offered students the “meet up option.” Yet over time, Gunter realized that his model just wasn’t going to work.
Stuzo becomes a social product development company…
Gunter is an earlier adopter. If you were to Google him right now, you’ll see that he’s already using every emerging social technology available to the public. The day that Facebook opened on Temple’s campus, Gunter created a profile page and began to follow social media very closely. On May 24, 2007, Gunter saw an opportunity to take Stuzo to greater heights by building social applications on Facebook’s new platform.
Gunter hit the Facebook platform with three marquee social applications.Sports Fan was an app that connected sports fans from around the world so that they could talk about their favorite teams. My Heritage brought family members together so they could try and retrace their roots as far back as possible. Compliments gave friends a way to express their emotions about an experience by using text and cool graphic icons.
Gunter and I have a mutual friend named Victor Feinman, a software developer. In preparation for this blog post I asked Victor, “what makes Gunter such a unique entrepreneur?” He responded without hesitation, “Gunter is an executer! He can turn his ideas into products and get them to market faster than anyone.” Gunter’s speed and executive skills were made evident with the immediate success of his social applications. By the end of 2007, Gunter’s three apps had more the 1.5 million Facebook users.
Stuzo becomes a social media services company…
Gunter continued to push Stuzo further and further into the world of social media. Right from the start, it was obvious to Gunter that Stuzo had what it took to tap the power of Facebook’s social graphs. Stuzo knew how to bring people together. But the question was: “What is our monetization strategy?” You see, every entrepreneur is by definition an innovator. Innovators, simple put, find new commercial uses for existing concepts. He rebranded Stuzo as a creative technology and social media company, and began offering services to global brands. From an on-line bookstore, to marketplace, to social products development, to social media design and consulting, Stuzo kept on evolving.
In 2008, Gunter started managing contest and promotions for global brands on Facebook. Stuzo developed and launched the FIRST EVER promotion on a Facebook Fan Page. Their Doritos’ promotion generated nearly 800,000 video views, tens of thousands of comments, hundreds of thousands of votes, and millions of page views. Stuzo’s approach was unique in that they used social media in conjunction with traditional outlets from day one. They could develop social apps, design promotions, and create content that fit together nicely with their client’s brand message and overall marketing strategy. According to
Gunter, a successful promotion has three components:
- Media Spent
- The Prize behind the Promotion
- The Brand of the Company (Cool and Attractive Brands)
Stuzo drove millions of users to their client’s Facebook fan pages and company sites. According to Gunter, nearly 100% of their clients became repeat customers. Stuzo’s revenues quadrupled in one year.
In November 2010, Stuzo was purchased by the Dachis Group. After just four years (and four strategic shifts in the business model) Gunter had grown Stuzo into a marquee player in social media, while most marketers, including some bigwigs on Madison Avenue, were still trying to figure out exactly how to leverage social graphs. This is a story about an entrepreneur! This is how he did it:
- New products and services are an entrepreneur’s proposed solution to a recognized problem in the market. An entrepreneur is, to some degree, a problem solver.
- “Gunter is an executer! He can turn his ideas into products and get them to market faster than anyone.” –Victor Feinman
- Be Flexible. Gunter changed his business model four times. In business, you have to evolve and make adjustments as you learn more about your industry and your customers.
- Working smart is all about time management and allocating resources. You have to understand your strengths and weaknesses as an entrepreneur. Try to optimize your time by focusing on value-added task.
- Gunter has a legendary work ethic. He doesn’t let his intelligence get in the way of actually finishing something. There are a lot of highly intelligent, but very lazy people out there. Go Hard.
Special thanks to Gunter Pfau. Thanks for doing the interview, God bless you bro. Pros to Victor “some guy” Feinman, thanks for reaching out and organizing everything. David Kirkpatick, AWESOME WORK, with The Facebook Effect. It is a great read …..very substantive. Thanks for reading guys: kept Gunter on your radar, he’s doing big things!