June 2, 2005, 12:00 AM

Zappos: the fastest-growing Top 400 web site

How Zappos.com achieves triple-digit growth year after year

>Total online retail sales in 2004 grew 25% over the year before. But there were plenty of online retailers whose growth far exceeded 25%. And those sites with stellar growth from a percentage point of view weren’t just small sites gearing up. In fact, of the 50 web sites with the fastest growth in Internet Retailer’s Top 400 Guide to Retail Web Sites, fully nine were in the Top 100.

The largest site with the fastest growth was Zappos.com Inc., pure-play retailer of shoes and handbags. Sales in 2004 reached $184 million, up 163% from $70 million in 2003. But Zappos isn’t stopping there, says Tony Hsieh, CEO. “We’re expecting to hit $300 million this year and in fact we are on track to exceed that,” Hsieh says. If Zappos hits that number, it would amount to 63% growth this year.

Other sites in the Top 100 with remarkable growth include West Marine, after Zappos, the second-fastest growing site, with sales up 124% to $86.8 million, as estimated by Internet Retailer; Northern Tool and Equipment Catalog Co., up 110% to $100 million; Overstock.com Inc., which grew by 107% to $494.6 million; No. 9 Newegg.com, which added $500 million in sales for 100% growth; eBags.com, up 91% to $73.4 million, as estimated by Internet Retailer; Netflix Inc., up 86% to $506 million; Costco Wholesale Corp., up 66% to $376.6 million, and Scholastic Corp., up 60% to $200 million.

Focus on service

In terms of dollar growth, no one beats No. 1 Amazon.com Inc., which had sales growth of $1.6 billion in 2004. Next was Staples Inc., up $600 million; Sears, Roebuck and Co., up $540 million, as estimated by Internet Retailer; then Office Depot Inc. and Newegg, each up $500 million.

Hsieh attributes Zappos’ continuing strong growth to Zappos’ focus on service, which creates a coterie of loyal repeat customers. 60% of buyers today have bought at least once from Zappos in the past, Hsieh reports, up from 50% a year ago and 40% two years ago. Last year, 45% of customers had bought something in the prior 12 months, up from 34% in 2003 and 27% in 2002.

And they’re buying more. The typical repeat customer in 2004 bought 2.36 times vs. 1.96 and in 2003 and 1.74 in 2002.

As a result of those loyal customers, Zappos spends little on marketing, Hsieh says, relying instead on customer referrals and word of mouth. 30% of first time buyers today come to the site through a referral up from 20% 18 months ago, Hsieh says. “If you focus on providing the best service, people will talk about it on their own,” Hsieh says. Among the services that Zappos provides are free shipping, free returns and expedited shipping at no additional cost. “I’d rather spend the money on expedited shipping than on marketing,” he says. “That creates the best customer experience and results in repeat customers.”

It’s about the experience

Zappos has further expansion plans in the works-and not just increasing the sale of shoes. For starters, it has added handbags to its product mix. So far, handbags account for only a single-digit percentage of sales, Hsieh says. “But over time, they will be a major component of our business,” he says.

Products aside, Hsieh believes that Zappos can build its business on customer loyalty. ”We want Zappos to be not about shoes but about service and the experience we offer,” he says. “If we can do that, we can add whatever categories we want. That’s the plan going forward.”


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