LinkExchange’s Target audience: Small companies with websites and small ad-budgets.

1. LinkExchange offered their “target audience” a free service. To enroll cost absolutely nothing.
2. Your company would then insert a code on its website.
3. The code would cause banner ads to appear on your company’s website.
4. Every time a visitor came to your site, you would earn a credit.
5. 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.

Business Book 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:

1. Zappos.com held no inventory.
2. Footwear vendors would send a periodic inventory list to Zappos.com
3. Zappos.com would compile the list and post the footwear brand data online for customers to see.
4. Zappos.com would process the sales transaction online, and send the shipping information to the Footwear vendor.
5. 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:

1. Customer Service
2. Company Culture
3. 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