Peter Hopkins: Hi, I'm Peter Hopkins, president and cofounder of bigthink.com. I'd like to welcome you to another installment of our Input/Output series sponsored by Hewlett Packard. This is a series of discussion with technology thought leaders talking about the way that technology is changing our lives and offering their perspective from the vantage point that they occupy. Today it's a great pleasure to welcome Tony Hsieh, CEO of zappos.com, the largest online shoe and apparel retailer. Tony, welcome.

Tony Hsieh: Thanks for having me. I'm actually not cofounder. I joined about two months after it started.

Peter Hopkins: Okay.

Tony Hsieh: I've been with the company for 11 years.

Peter Hopkins: Yeah, and you had a very diverse role in that you were also one of its early funders, and you've come out with a new book. The book is called Delivering Happiness: A Path to Profits, Passion, and Purpose. Talk to us about how happiness comes into all of this. You know, it is the theme that you hit on really quite directly and yet not one—one would normally associate with selling shoes online. You know what is the connection?

Tony Hsieh: Yeah, well, so I guess maybe it would be helpful to backtrack a little bit. Prior to Zappos, I had cofounded a company called Link Exchange. This was back in 1996 during the first dotcom boom, and a college roommate and I started it out of our living room and grew it to about 100 or so people and ended up selling the company to Microsoft two and a half years later in 1998. But what a lot of people don't know or realize is the reason why we ended up selling the company, and it's because the culture just went completely downhill, and I remember when it was just 5 or 10 of us it was a lot of fun—kind of your typical dotcom, working around the clock, sleeping under our desk, had no idea what day of the week it was. And as we grew, we started hiring our friends, and I remember there was one friend of mine that was on a crosscountry road trip, and he stopped, and we needed help, and he actually never made his way back home, and that worked great until we got to about 15 or 20 people, and then we ran out of friends to hire, and so we then started hiring people that had all the right skill sets and experiences, but weren't necessarily great for the company culture, and we just didn't know any better to pay attention to culture, and by the time we got to 100 people I myself dreaded getting out of bed in the morning to go to the office, and that was kind of a strange feeling because this was a company I had cofounded, and so that is what led us to sell the company, and then afterwards both my cofounder and I, we left the company, left Microsoft shortly thereafter.

So as I started getting involved with Zappos, originally my role was just as an investor, an advisor, was also doing that with a bunch of other companies. I realized within a year that for me Zappos was pretty… Sorry, investing was pretty boring, and I really missed being part of building something. I felt like I was always standing on the sidelines, so Zappos, I really liked the people there and got involved fulltime, and I've been fulltime ever since, and for me the initial motivation was really what would make me happy and I wanted to… You know, if I was going to go into an office, I wanted it to be with people I would choose to be around even if we didn't have to work together. And so that was one of the major reasons why I decided out of all the different companies we invested in to work with Zappos, but over time it has kind of evolved where originally Zappos was all about just selling shoes online, and we decided to focus on customer service, which is all about making customers happy. And then over time we put more and more emphasis on company culture, which is all about making employees happy and so kind of took a step back and realized we're basically trying to make customers happy, make employees happy and also make our vendors and business partners happy, so let's kind of take a step back and just be about delivering happiness, hence, the title of the book.

Peter Hopkins: Right, and I was struck by a passage in the book. This is at the moment where you've sold Link Exchange to Microsoft for a very large sum. The company sold for a little over 250 million dollars. You suddenly became a multimillionaire at the very young age of 24, basically living this kind of modern dream of being the young tech entrepreneur and yet you write: "Why was I staying at Microsoft vesting in peace, trying to get more of it? I then made a list of the happiest periods of my life, and I realized that none of them involved money. I realized that building stuff and being creative and inventive made me happy. Connecting with a friend and talking through the entire night until the sun rose made me happy. Trick or treating in middle school with a group of my closest friends made me happy. Eating a baked potato after a swim meet made me happy. Pickles made me happy." And you really kind of hit on a very interesting tension in this new world that we live in where the ambitions are really to become kind of jackpot rich overnight and that is what we celebrate, and yet here you are having done that and it sounds like you couldn't have been less happy. How do you explain that to people who really do still view that as the ideal, that kind of Facebook, Google ultra-wealth overnight?

Tony Hsieh: Yeah, well what is interesting is they've actually… So when I was thinking to that, that was prior to really a lot of this research behind the signs of happiness that happened, and what they've found through the research is basically money is… If you're worried about putting food on the table or putting a roof over your head, that stress definitely will contribute to unhappiness, but once you have your basic needs met, then incremental money and, in fact, I think there was an article that came out a couple of weeks ago where they said any… What they found is anything above I think the number was $75,000 a year in terms of income, actually when they studied the happiness level of people that were making more money, they actually were less happy because they were… For whatever reason they were stressed about all the additional things that come with it and then other studies have also shown that people are… The happiness is much longer if you're buying experiences versus things, and so, I guess, I think kind of the default assumption that I had and that our society in general has is more money equals more happiness, and all the research has shown that that's true up to a point, up until you can get your basic needs met, but then really there is other stuff that has a much bigger impact on your happiness besides just money.

Peter Hopkins: And you have a great graphic in the book toward the end where you break it down into kind of three categories of happiness. They're almost hierarchies, if you will. At the bottom is pleasure, which you equate to the kind of short- term thrills of a rock star enjoying something in the instant. Then there is passion, which is something where you kind of say it's like being in the zone, getting connected with something beyond yourself, but then there is still a higher category purpose, which is really connecting with a broader mission, aligning yourself with a higher purpose. How have you seen your own evolution across these three areas of happiness, and how have those tracked across your life experiences?

Tony Hsieh: Well, so the three types of happiness that you just stated, pleasure, passion and purpose, really just came out of the whole research that has been done on the signs of happiness, and I think both for myself and probably for most people, our kind of default is to kind of try to chase after the pleasure type of happiness where what the research has shown it's great if you can sustain it. The problem is it's very hard to sustain unless you're basically a rock star, and so that's why I refer to it as the rock star type happiness, and what the research has shown is out of those three types, it's the shortest-lasting type of happiness. Basically as soon as the source of stimuli goes away, your happiness just plummets and drops right down to where it was before, but I think a lot of people including myself back then were trying to chase that, sustain that and then with the thought of if I ever… You know, once that's sustained on an ongoing basis, which the research has shown is next to impossible, then I'll worry about the passion part of it, and then if I ever get around to it, I'll worry about the higher purpose part of it because that feels like more kind of philanthropic or charity type of angle, but based on the research data, that third type, the higher purpose type, is actually the longest-lasting type of happiness. So the proper strategy should actually be to figure out that type first and then layer on top of that the passion type of happiness, and then anytime you experience the pleasure type, it's just kind of icing on the cake and it's definitely counterintuitive, and even if you take out the kind of, I don't know what you'd call it, like, philanthropic side of being part of something, like even if you approach it from a purely selfish perspective in trying to maximize your own selfish happiness, that actually is kind of ironically the best strategy for doing so.

Peter Hopkins: Now walk us through the experiences with Zappos and how you kind of began to identify the higher purpose of the company, because it wasn't right away. I mean, you saw something amazing. You saw… You had a belief in the potential of a company to sell shoes online, and you had a great understanding of the market opportunity. That's more business than anything else, but over time you began to identify this. How did that happen? Walk through the steps there.

Tony Hsieh: Yeah, well, yeah, so it's true. We definitely did not start out with, you know, a quote, unquote, higher purpose, and what is interesting is now we have books in our library. When you come visit our offices, you'll see we've got 30 or 40 titles in our library out in the reception area, and we give those books freely out to visitors and employees. But two of the books that not only do we give out, but we teach classes on to our own employees are Good to Great by Jim Collins and Tribal Leadership, and we actually partnered with the authors of Tribal Leadership, so you can download the audio version for free from the Zappos website, but, and I wish I had read both of these books prior to Zappos, but basically the authors researched and looked at what separated the great companies in terms of long-term financial performance from just the good ones or the mediocre ones, and they were actually surprised by their findings. They found that there were two important ingredients that the great companies had. One was the great companies all had very strong cultures, and the second one is actually kind of surprising in the great companies all had a higher purpose that wasn't just about being number one in market or profits or making money. And ironically, by having that higher purpose, it actually enabled those companies to make more profits in the long run, and so the subtitle of my book is A Path to Profits, Passion, and Purpose because for businesses you need all three of those in order to continue to grow the brand and the business. And I think too many companies in corporate America focus on just the profits, which if they forget about the passion and purpose part of it, it actually ends up hurting their long-term profits for the company, and so for us we kind of accidently stumbled onto this because I hadn't read the book. I don't even know if the books existed at this time.

And so in 1999 when Zappos started, it was all about let's just build the brand to be about shoes, selection. We're just going to be the market leader in shoes. And then about four years into it in 2003, we all kind of sat around and asked ourselves what do we want to be when we grow up. Do we want to be about shoes or something more meaningful? And actually at the time, the main motivation was we just don't want to be pigeonholed into just shoes, and so then we decided okay, let's build our brand to be about the very best customer service and customer experience and with the philosophy of we'll invest… take most of the money we would have spent in paid marketing and paid advertising and invest it into the customer experience and let our customers do the marketing for us through word of mouth. So a funny thing happened when we actually communicated this to our employees. We found that suddenly employees were a lot more passionate about the company, a lot more engaged, and when customers called, they could sense the personality at the other end of the phone wasn't there just for a paycheck but really wanted to provide great service, and when vendors came into our offices or visited us, they wanted to stay longer and visit more frequently, so all of these things had this kind of multiplicative snowball effect that really drove our growth a lot over the years, and it wasn't something that we expected. It is something that we just kind of accidently stumbled into, and then a couple of years after that we decided okay, let's build the… You know company culture had always been important because I didn't want to repeat the same mistake I had made at my previous company, but instead of just saying it's a priority, let's actually make it the number one priority of the company with the belief that if we get the culture right, then most of the other stuff like delivering great customer service or building a long-term enduring brand or business will happen just naturally on its own, and so over time it has kind of expanded from just shoes to customer service to culture and then now realizing the thing that ties all that together is delivering happiness.

And it's really interesting because once we came up with okay, it's going to be delivering happiness, and this was in 2009, then that opened up a whole new world of possibilities for us, and so now we had this program called Zappos Insights. It's actually its own separate website and entity within the Zappos family, and so if you go to ZapposInsights.com, there is anything from a monthly video subscription service to one-day and two-day seminars that we actually host here in Vegas, and people from all over the world fly in and we help them figure out how to create their own strong cultures, and it has been really neat because we've seen… Well, first of all, it's just neat because it's its own separate business. It has nothing to do with selling shoes online, but it's also really neat because this whole idea of happiness as a business model we're now spreading beyond just to Zappos employees and Zappos customers. We're helping other companies go make their customers happier, make their employees happier and there is this we can focus on making customers happier, focus on culture to make employees happy, and they're reporting that in a down economy, the revenues are up. Their profits are up, and they even sent us before and after pictures of their offices to show the change in culture, and so it's just really neat seeing this idea of happiness as a business model working in other companies and other industries. It's not just a Zappos thing, and it's not just an Internet thing.

Peter Hopkins: Right, no, and you've hit on two really interesting things there. First, and kind of more immediately, is that you guys have defied some of the classical economics in the digital realm, which is that everything needs to be automated. It's about less human contact. It's about numbers in the instant. We can measure everything, and, therefore, we can really improve margins. Walk through the economics of Zappos because, you know, in reading the book I heard a lot of things like, well, we're not going to really hold our call center folks to these rigid standards. We're going to liberate them. Let them spend the time they need. We're going to give them better benefits. We're going to surprise our customers with upgrades, and we're going to make sure that everything works in a way that even when they're not getting an upgrade, it's still going to be faster than our competitors. All of this to somebody who is dealing with old-school business, just the numbers start to rack up, and that doesn't sound like what most people know to be the new way of doing business, so how does this all add up in the end, and how do you then measure the benefit when so much of it is kind of long term?

Tony Hsieh: Yeah, and I think it is hard sometimes to measure the benefit of any one thing you do, and I think if you approach it that way it's… You know, the way we really think about it is, what it is going to be like in the aggregate and over the lifetime of the customer, and so a perfect example of something that doesn't make sense in the short term, but does in the long term is if you call us and you're looking for a pair of shoes and we're out of stock for your size, everyone is trained to look on three competitor websites to see if they can find it there and if they do direct you to that competitor. Obviously, in the short term we're going to lose that transaction, that sell, but we're not trying to maximize for every transaction. We're trying to maximize the customer experience and build that lifelong relationship with customers and not only… That's not only great from a loyalty perspective, but it's stuff like that that drives a lot of the word of mouth, which so from our point of view, yes, a lot of the things that we do, free shipping both ways is really expensive, surprise upgrades to overnight shipping is expensive, phone calls where we actually just found out our longest phone call was seven and a half hours long. We just set that about a month ago, and so all those things are expensive, but we really just, while on a P&L maybe that falls under, I don't know, cost of goods or some other line, but we really view those as our marketing costs. It's we are investing in the customers and then relying on them to do the marketing for us through word of mouth and so that… so then we don't need to spend all this money on more, I guess, normal methods of marketing, and so we've grown from no sales in 1999 to in 2008 we hit a billion dollars in gross merchandise sales, and even despite a down economy over the past 24 months we've continued to grow. Our Q1 net sales this year are up almost 50% year over year in a down economy, and a lot of people ask us what did you do in the past 24 months, and it's not anything we've done over the past 24 months. It's what we did prior to that, really all the things we've just been talking about that may be hard to justify in the short term, but we're reaping the rewards of because we've always done that.

Peter Hopkins: Right. One of the themes I've heard time and again, and this actually ties into how business operates on a kind of brand global scale broadly, is that so many business leaders struggle with the short-term pressures, particularly public companies. Now Zappos was not a public company. It was insulated by virtue of that, and it has now been acquired by Amazon in a way that promises to protect its independence, but do you have advice for other business leaders who are asking themselves, you know, they're listening to you and saying, "This is all well and good, Tony, but I have to deal with the market." "I've got to go justify my existence to institutional shareholders almost on a daily if not minute-by-minute basis." What can they do to tap into some of the opportunities that you guys have really shown are viable and really profitable?

Tony Hsieh: Yeah, I mean ultimately I guess that is what business is all about, right, about learning to balance the short term, medium term and long term, and I think it's when things are going well, it covers up a lot of mistakes and bad decisions because you're growing so quickly, and when really those are the times when you really should be investing more in the long term, and I think for us we've basically just always invested in the long term while trying to make our short-term targets as well. So yeah, there is no easy answer, but ultimately that is what business is. You need all of the above. It's not just, well I can't afford to do that, and the other thing is a lot of the stuff actually doesn't have to be expensive. Focusing on company culture, for example. It doesn't cost anything to say hi when you pass someone else in the hallway, whereas most corporations if you pass you avoid eye contact and so on.

Peter Hopkins: Now the other interesting aspect is in building this culture is that you've really tapped into a new change, a new set of expectations among the younger workforce, the Millennials. What is your outlook on this group of people? They have a certain… They want to live life a little differently. They look at themselves differently in relation to companies. You have created a culture that treats them differently and treats the entire workforce differently. Do you have advice for how to really engage and unleash the potential of these people as you have done given that they're the Facebook generation and so forth?

Tony Hsieh: to get asked that question a lot just because the things we focus on I think are pretty universal human wants or needs. It's just that I think maybe 50 years ago people just had less mobility in terms of being able to job hop, but I don't think we would if it was 50 years ago still be doing the same thing and really focusing on employee happiness. I think it was more 50 years ago companies didn't have to and they could still get away with it, whereas our point of view is if employees can be happy and feel like they can be themselves in the office. You know there is so many people in corporate America where they're a different person at home on weekends versus what on Monday when they're in the office and they leave a little part of themselves or a big part of themselves at home, and I think that was definitely true 50 years ago, and maybe what the Millennials are kind of bringing into the forefront is maybe they're just saying they want to be the same person, and if not they can…We live in a world where they can afford to job hop. It's much easier. So yeah, I don't know if it's specific to Millennials, but everyone wants to be part of something bigger than themselves that they believe in, and everyone would ideally want to be passionate about whatever work that it is they're doing, and so… and everyone wants to feel connected to people, and so I don't think those are specific to Millennials. Those apply to everyone.

Peter Hopkins: Sure, and now that you have taken this beyond just Zappos...I mean, you've written this book. You're on a multicity tour going across the country introducing the ideas, having conversations, having social events that actually are inspired by your experiences at Zappos and even before. Have you begun to see any broader themes identify ways of helping others and, through these seminars as well, identify their own approach to inspiring purpose and passion in whatever business they may be in, whether it's refrigeration or online shoes or something completely different, how do you tell them to look at what they're doing and ask themselves the same questions you've asked yourself?

Tony Hsieh: Well, it's been really interesting. We've been on a…So we're in the middle of a 23-city bus tour that is taking three months, and you can see all the list of cities wherein if you go to DeliveringHappinessBus.com, but what has been really interesting, and we have a separate website kind of as a follow up to the book at DeliveringHappinessBook.com, and there is a section called "Join the Movement," and we're just having people submit their stories of if the book or discussion on the website has inspired them to either follow their passions or focus more on making customers happy or employees happy and so on, but a lot of the stuff actually hasn't even…We've definitely heard a lot of feedback from other entrepreneurs and businesses, but what surprises us is also we've been hearing from churches and school systems and where we had a teacher that told us that they passed the book out to their faculty and within two weeks the whole vibe of the school changed, which I thought was really cool and certainly not anything that we thought would be affected from the book, and so I guess we don't necessarily… The Delivering Happiness team is actually a team of about 15 or 20 of us. It's basically its own separate startup, and we don't have a clear vision of exactly what this happiness movement will end up, and a lot of it is being generated by people that are inspired and doing their own thing from all different industries including businesses, and over time the website will be evolving, and really that is how we're learning what is resonating and what is not with different people, but it has definitely been… We've only gone in seven cities so far, and just in those seven cities it has been really interesting. One of the cities we went to was Iowa City, and at University of Iowa the book is now required reading for one of the classes and we've heard that for about three or four other universities and schools, so who knows what is going to happen with it.

Peter Hopkins: Now as you look at all of your varied accomplishments with Zappos before, and now that you're kind of almost transcending the company itself and taking its values and helping spread them more broadly, how do these things all stack up? What is your outlook? Is this now, this new part of your world, this spreading this message, has this become the kind of higher purpose?

Tony Hsieh: Yeah, definitely and I think not only for myself personally, but also for Zappos and also for the book team, and so the theme of the tour we have this 50-foot bus that sleeps 12 people. We're going across the country, but it's wrapped, and on the back is "to inspire and be inspired," and just hearing all these stories and how you know it's the book is just planting a seed, and then people are doing things that we never thought would happen, and that has just been really rewarding.

Peter Hopkins: Now on these travels, are you hearing some of the echoes of the current economic moment because, as you said, happiness is how you need a certain baseline and then you can…then it's really about self-reflection and building a purpose. However, as we all know very well, many people are now not meeting that baseline, and they must bring this up to you. What do you say to them when they say "I want to get to where you're talking about, but I'm not even at the threshold?" Is there advice? Is there insight for them in this book about how to even make it to that point or build an opportunity that could lead them there?

Tony Hsieh: I think it really depends on each person's specific situation, but what we generally hear the most about is not that people really can't afford to follow their passion. It's they kind of have engrained in their mindset. "Well, I have to do this," and what they say the book has helped them do is actually realize that the ultimate goal of everyone, whatever… you know people have different goals in life, but ultimately the purpose of achieving that goal is they believe it will make them happier, and there are so many people that, for example, will work really hard in a job they hate for two years so they can go on this two-week vacation, dream vacation, when people like Tim Ferriss in 4-Hour Work Week basically woke up one day and was like "If I want to travel then I'll just travel," and you can do it for much less than what your assumptions are, so I think a big part of the book is really question what your assumptions are in terms of what you have to do, and a lot of people realize I don't have to work in this job that I'm miserable at every year or every day, and I don't have to live in, for example, New York City where it's super expensive, and if I live somewhere else that is less expensive and could pursue my passion, like, I can afford to do that.

Peter Hopkins: Right, and as a resident of New York, I completely understand that sentiment. One other thing that you touch on that I think is probably a part of this and also a part of the angst and anxiety of this moment is that things are changing so quickly, and that is for companies. That is for individuals. We're living in a more, you know, in a faster-paced world driven by the technology that makes Zappos possible. You have an outlook on cultures of change and how institutions and individuals need to think about change. Can you lay that out? How do we embrace rather than fear this kind of swirl of constant change that we now face?

Tony Hsieh: So one of our core values at Zappos is to embrace change, so for us it's just built into the culture, and I think for organizations in general it's pretty important to have something like that as part of their culture because there is a quote from Darwin that it's something like, "It's not the fastest or most intelligent of the species that survives. It's the one that is most adaptable to change." And I think the same is true for businesses as well, and if you look back on the history of giant businesses, corporations that have kind of lost their way or gone bankrupt or whatever, it's because they were stuck in their old ways, and for us I think we've… So we have 10 core values total. One of them is to embrace and drive change. One of them is to be adventurous, creative and open-minded, and one of them is to be humble, so I think if you combine those three, it's kind of I think for us really encapsulates this idea of just because something worked yesterday doesn't mean that is what we should be doing tomorrow, and just always be open minded and not set in your ways, and be ready to adapt and change and basically ask the question "why not" as often as possible.

Peter Hopkins: Now how has this played out for Zappos in the context of the Amazon purchase last year? Just for context, Amazon purchased in all-stock transaction Zappos valued at 1.2 billion, and around that there was a lot of discussion that you had to have with your colleagues after the fact to explain what this was all about to give them a sense of what was going on, and one of the interesting things you mentioned was that Zappos has a lot to teach Amazon in much the same way Amazon has a lot to teach Zappos about different things. You said that Amazon really can teach us a lot about technology and being the very cutting edge. We can teach Amazon a lot about culture and how it can really **** to its benefit in a range of ways. Explain that for the audience and also talk about the experience in the last year. How has that played out thus far?

Tony Hsieh: And so as a precondition for even exploring the acquisition start… because most Amazon and I guess corporate America in general acquisitions are the plan is to integrate the company being acquired into the parent company, and eventually the company becomes…The identity becomes lost, and we said, as a precondition, we would only consider it if Zappos could remain independent, and we would continue to grow our brand, our culture and our way of doing business our way, and so from our… And they remained true to their word. From our point of view, it's as if we swapped out our board of directors with a new one, and, yes, there is definitely a lot we can learn from each other. Amazon, I think, really takes more of a high-tech approach. We take more of a high-touch human approach, and we're not, I guess, trying to necessarily change each other, but we recognize that there is also a lot we can learn from each other, but the way it has worked from our perspective is now it's as if Amazon is this giant consultant company with lots of resources and knowledge that we can tap into as little or as much as we want to and we leave it up to each individual department or subdepartment to decide how much they want to do that. So for something, like, on the warehousing side, for example, the way we run our warehouse is pretty different from the way Amazon runs their warehouses. There is a lot of sharing back and forth because there is a lot of learning. You know, there is some areas that they are better at than we are and vice versa on the warehousing side, but then there may be other departments where they just do a quick phone call once a quarter, just check in, and it's much less interaction, but we really leave it up to each of our department or subdepartment owners at Zappos.

Peter Hopkins: And I was saying to you before the interview started that our last interview we had Jason Fried at 37signals. Actually, they have a relationship with Amazon and Jeff Bezos in particular, not Amazon per se. Was anything about Jeff Bezos and his particular view of been, which is very interesting, that helped you get over the hurdle of making this marriage, or was it really just about the essential aspects of the two companies?

Tony Hsieh: Well, we actually have this document called the Five Tenets Document that we use internally, and basically it spells out that we're going to remain independent and the only decisions that Amazon can basically overrule Zappos on are ones that are legally necessary, so one example would be that we, prior to the acquisition, one of our core values is about being open and honest, so we were very open in sharing our financials and so on with whoever, but now that we're part of a public company, there are certain FCC regulations where we can't be as open as we were before.

Peter Hopkins: And how do you see…? What is the vision now in terms of the growth trajectory of Zappos in relationship to Amazon? Amazon obviously is and wants to continue to be the leading global online retailer. Zappos is the leading retailer, online retailer, of a certain subsection of goods. How do these two entities…? Where do you see these two entities going, and what do they look like in relationship to each other?

Tony Hsieh: Yeah, in terms of because we are so independent from Amazon, I don't know actually much of what their internal plans are, but I can tell you from Zappos's perspective. We started out in footwear and now doing over a billion dollars in gross merchandise sales there, and in the U.S., apparel is four times the size of the footwear market, so in theory at least, that should keep us busy until we hit five billion, and then I'm sure the footwear category will continue to grow during that time as well. So we've got plenty of work cut out for us for at least the next several years just focusing on expanding into clothing.

Peter Hopkins: And do you see yourself still at the helm and kind of leading this group?

Tony Hsieh: Yeah, I am still CEO of Zappos and have no plans to leave, and actually it's interesting because we actually structured the deal, so it was not like most normal deals. Most deals, I guess—whether it's Amazon or another company—they have a retention pool or bonus that they give to the top 5 or 10 executives and in order to keep people in the company. But for me, personally, I actually asked not to participate in the pool, and we actually spread the bonuses amongst all our employees. And my salary prior to the acquisition was 36,000 a year and it still is now, so and that's the only…So there is really nothing keeping me at Zappos except for making sure that I'm happy. So in a weird way that actually gives me more leverage over Amazon in terms of they have to worry about making me happy because I don't have any golden handcuffs or anything, and what makes me happy is feeling like we have our independence, can make our decisions at Zappos.

Peter Hopkins: And are they supportive of this whole movement, this happiness movement and your efforts above and beyond Zappos in Las Vegas, Nevada?

Tony Hsieh: Yeah, they're support…I mean, I don't think they know too much in detail about it. I'll probably have conveyed more information in this interview than they're aware of, so.

Peter Hopkins: FYI, Jeff Bezos. Let's move on now to the host of questions we've gotten from the audience, because they had some really smart questions. I think we've done a good job. You've done a very good job kind of setting the stage, and the folks who wrote in clearly have read the book and in some cases listened to the audio book.

Tony Hsieh: Which, by the way, the audio version is much, much harder than I thought it would be because it's way more energy draining than speaking onstage.

Peter Hopkins: And you did the audio track itself.

Tony Hsieh: Yeah, I recorded it myself, and it actually took—I think–it turned out to be 7 or 8 hours, but it took something like 30 or 40 hours of recording. And because I wanted to do it myself and there is also some third parties that read their parts; but one of the biggest mistakes I made during that process was I decided to record it out of my house, and so there is…it was me basically on a microphone and then sound guy and then this director from LA that was listening in and had an earpiece on, and so I would say a sentence and then every three sentences or so he'd be like reread that sentence, or—you know–make it sound more whatever and the tough thing was you don't realize how much noise, ambient noise there is in your…like the dog barking, neighbor's dog barking or a truck going down…or planes flying overhead. And so literally like every five minutes or so we'd have to stop, sit around, wait for the plane to fly away and then start again, and you just lose a lot of the momentum and energy. Anyways, so I'm glad I did it, but definitely would do it in a studio next time, not at home, and but even then it's just very hard being on for…

Peter Hopkins: Thirty hours. Did it have any benefit just in terms of your stage presence thinking about how you deliver a line with intonation and…?

Tony Hsieh: Yeah, it gave me a whole new appreciation of whoever reads books on tape for…The other weird thing is I actually discovered like there were some words that I just could not pronounce. I can't remember off the top of my head, but there is definitely words where I've only in my entire life seen or written it, used it in the written form and then I also discovered there was one sentence where I had five words in a row that began with the letter W, so it was a tongue twister.

Peter Hopkins: Yeah, you also can't pop your Ps when you're speaking into the microphone. Go to the first question here, which is from–speaking of difficult things to pronounce—at Amy Nichols [ph] and she writes, "This is in reference to a very interesting and much discussed aspect of your hiring practice where you have employees do a training, a rigorous training where they learn everything about the company, and then at a period you give them a bonus to potentially walk away where you pay them you through that time, but then a bonus on top of that." And she asks, "How often do new hires take advantage of this $2,000 offer to quit Zappos?"

Tony Hsieh: Yeah, on average it's about 2 or 3% of people take it, so there are some classes where each class is 20 to 40 people, so some classes nobody takes it, and some classes 2 or 3 people might take it. And we started this a few years ago, and it actually started out at $100 dollars, and we keep actually upping the offer. It's at 2,000 now, and actually at the end of the training, which is four weeks, we up it to $3,000 and extend it beyond that. And we keep upping it because we feel like not enough people are taking it, and the original motivation was to get people that…We don't want people at Zappos that are there just for a paycheck, and we're headquartered out of Las Vegas. Starting pay is $11.00 an hour for a call center, so it's a pretty significant chunk of money, and our thought was we want people that really believe in the company and really want to be with the company for the long term. And the biggest surprise was actually from the people that didn't take the offer because they still had to go home after their weekend and talk to their friends and family and ask themselves, Is this a company that I really believe in, that I really want to commit myself to? "Is this a company whose culture I want to be a part of and contribute to?" And when they decide to turn down the easy money, when they come back to the office on Monday, they're that much more passionate and engaged and committed. And that has been, by far, the biggest benefit.

Peter Hopkins: Now are there other milestones in the process of developing with the company where there are these decision points or other things that you're looking at to evaluate or decide beyond this kind of early inflection point?

Tony Hsieh: Inflection point meaning?

Peter Hopkins: Well, just are there other points? Are there…? You know, other companies have major evaluations or other ways where there are these milestones throughout the period.

Tony Hsieh: You mean for an employee?

Peter Hopkins: For an employee, exactly.

Tony Hsieh: I guess we're actually trying to think of it less as milestones and more as…and performance reviews is maybe a good example because I think in most companies, performance reviews are this annual thing that everyone hates going through, and it's kind of a waste of time. And so we're actually in the process of shifting from these annual performance reviews to this idea of having an employee kind of dashboard almost for themselves, so they can always see how they're doing, not just specific job performance-wise, but also from a cultural perspective what their teammates think of how well they represent each of the ten Zappos core values, so that is actually—I guess—moving away from milestones and more toward this kind of idea of continuous ongoing feedback.

Peter Hopkins: Right and total transparency. Now here is another question from Alex Martin at Dante Biz [ph]. He asks, "Are there two or three things we can do, presumably the audience at home, to grow our ideas, passions and ideas to help the world kind of in the context of business. So how should people be thinking about their business, their role in business and kind of aligning it with this higher purpose?"

Tony Hsieh: I would say involve your employees, and I'm constantly surprised by—there is so much hidden talent and passion amongst our employees and stuff that you would just never know until you get to know people on a more personal level, which is why we try to encourage a lot of bonding outside the office for our employees. You know it might be someone that…For me, personally, there is someone that works in merchandising, but over time found out that she ran logistics for the Olympics in Beijing, like having so completely different things and I think the same thing. If you just ask employees what they think the higher purpose should be or bounce ideas off of them or let employees know okay, this is our higher purpose. Now we need your ideas to help make that happen. I think you'll be pretty surprised by the quality and quantity of the responses if employees feel like you truly care about their opinion and you're going to do something about it.

Peter Hopkins: Now in these responses, in this dialogue with employees, do you ever find something out about them that causes you to reevaluate their standing in the company, whether it's their relationship to the culture or the nature or their ideas or how they look at the whole thing? I guess the question is one of the things we constantly hear about feedback is that some, many folks, many companies, people don't feel free to give it because they're worried about the consequences. But as an employer you might learn some very interesting things in this transparent dialogue. How do you deal with that? How do you protect them while also learning from what they're telling you?

Tony Hsieh: For us a lot of that is definitely we want to try to foster that environment inside the office, but a lot of it is just casual conversation outside the office when everyone is feeling more relaxed and you're not…the conversations aren't okay, now let's talk about this. It just happens sometimes and sometimes it doesn't, but when it does those, are some of the most real interactions.

Peter Hopkins: Here is another one. This is from at Ella Dire [ph]. "Tony, please share your most creative and inexpensive ways that a startup, such as through a digital application, can reach customers." You kind of talked about it. This is the notion of how to leverage with the word of mouth. What do you think works best? What has worked best for Zappos?

Tony Hsieh: I definitely think that especially when starting out there is this temptation to like try to sign up as many, whatever, customers, users, whatever you want to call them as much as possible, and we certainly had that mentality when we started at Zappos. And we bought a billboard behind the giant stadium to try to advertise Zappos and market to new customers, but I think a much better use of time and resources is to really focus on your existing users or customers and figure out what changes can you make in the website, the service, the product, whatever to get them to come back more often to generate that repeat business. And once you kind of figure out that formula then, when you get new customers,the whole thing just kind of grows exponentially. But I would say rather than focus on trying to get a lot of customers to market yourself, really focus more on the actual product or service itself and existing users to like what would make them happier, what would make them come back more and more times or in our case buy more often.

Peter Hopkins: Now here is another interesting question, which kind of looks at this from a slightly different angle. This is from username R Doubles [ph]. "Are any of Zappos' success in serving consumers in any way applicable to B2B?" I mean, you talk to a lot of business leaders out there. Is this just reserved for the consumer domain or can these things be used?

Tony Hsieh: I actually think B2B has a much bigger advantage because for most B2B, it's actually fewer customers than B2C for the same amount of revenue or profit, and so you can actually invest more time in relationship building and making it a lot more personal and so on. And versus it just wouldn't make economic sense for us to call each one of our customers— say, once a month—to say how is it going. But if you're selling $10,000 equipment to offices, then a phone call once a week to whoever is in charge of purchasing—that is, you know, and then going to lunch with them or whatever is definitely one way you can build up that personal emotional connection, and what we believe is that once you have that personal emotional connection, that is when the loyalty really comes in.

Peter Hopkins: Now whether it's B2B or B2C, are there other companies out there that you think that Zappos has learned from or that you think also have insights to share in this notion of how to better engage the consumer, be it a business or an actual individual?

Tony Hsieh: Well, so one…This is a West Coast chain, but one company that I really admire and I actually don't know how it works on the inside is In-N-Out Burger. So great product, and every place I've gone great service, friendly employees—happy employees—and I think that is partly true because I think they're family owned and they're not trying to expand as quickly as possible, maximize growth and profits, but they're being true to themselves. And I think that is ultimately who is going to win in the long run. Apple is another company. On the product side, they're not trying to jam every feature in every product, but really they know who they are, and they're staying true to that and I think that is true for Apple. That is true for In-N-Out, and that's true for us.

Peter Hopkins: Now here is a question from Kathy Larkin [ph] at Kathy Web Savvy PR, which I think is a good one, and it speaks to the challenges of how do you preserve values as you grow. Zappos is a big company now. What tips can you give small companies for customers via technology, and how do those tips change as they get bigger? As you use these tools that they've said to really grow, what are the new insights they need to be aware of so they don't lose the core values, but they adjust them to the new conditions of being big?

Tony Hsieh: Now I think the most important thing is just if you hire people whose personal values match the corporate core values, and not just the stated ones but the ones actually in practice. Then that's definitely the easiest way, and, if anything, you know, we didn't roll out our core values until 2005, so six years into it, and if I could do it all over again, I'd do it from day one because it's actually the smaller you are, the easier it is to do it. And so my advice would be to start really, you know, depending…I don't know how big they are, but the easiest way is if you're just starting out, just figure out your own personal values and then just make those the corporate core values. But if it's a smaller group then make sure to engage the employees. And then the other thing that we found when we rolled out our core values was there was not everyone bought into it and fit into it, and so the key is making sure you manage those people out, and what we found is once that happened, then the people remaining really became a lot more passionate and engaging, committed to growing the organization around our culture and core values.

Peter Hopkins: This one is from T.J. McCue [ph] who writes, "Is there a customer service challenge that really challenged you, a specific incident where you really had to get personally involved in the interest of resolving it and to really help the team resolve a problem that they hadn't faced before?"

Tony Hsieh: In general, we try to…not even me, but just we try to empower our frontline employees to just make the right decision and do whatever they feel is right for the customer, so we don't have rules of "if this happens, then you have to get supervisor approval" and so for the most part it never really makes its way up to me because we take that mentality. We'd much rather…What is interesting is usually most companies bring these escalation rules for approval because they don't want the frontline employee to, you know, say someone bought a $50 shoe and refund them $1,000. And the reality is it's usually the opposite problem that we have. We find that our frontline employees are too protective of the company and we actually have to…especially if they come from other call centers, we have to un-train that mindset and teach them to be more generous with our customers.

Peter Hopkins: And on that point, how have you found that those who have moved on from Zappos, those who have been trained in your unique ways and your cultures, how has it affected their experience going elsewhere and taking your teachings? Has it helped them? Has it kind of stymied them by sending them into an environment that just is completely unlike where they came from?

Tony Hsieh: I don't know from the…What I found actually most interesting is I'll randomly get these emails from employees that left two or three years ago or more, and they'll talk about how they actually adopted the Zappos core values as their own personal values just in life, even though they moved to the other side of the country, and how that has actually helped them act differently than they did prior to that, so those are really, I think, interesting and rewarding stories. In terms of actual other offices, I think, yeah, I just haven't heard. Yeah, I don't really know.

Peter Hopkins: This question from Robert Brady deals with you as an author and kind of the notion of capturing these experiences as they come and turning them into something that is more formal and can be delivered, and I recall this from the interview we did with Jason Fried, who wrote a book called Rework. And that was the composite of just blog posts about their own experiences in their product with the audience. How did Delivering Happiness come about as a written work? How did you begin to think "I can actually compile this into something that can be published and distributed?"

Tony Hsieh: I think it was one of those things where, just over time, was something that I wanted to do anyways and thought it would be a great way of sharing. From the outside, it might seem like Zappos was this overnight success, but the truth is we made a lot of mistakes along the way, learned a lot of lessons along the way. And prior to Zappos I had made a lot of mistakes and learned lessons personally along the way, and so part of the reason for writing the book was to hopefully help other entrepreneurs and businesses make fewer mistakes. We got lucky a lot of times and stumbled into things that ultimately ended up being good for the business, but they weren't necessarily thought out in advance. And so that is part of the reason, and part of it is also just to help encourage other people and companies to think differently. And maybe I think there is a lot of people that assume you have to choose between maximizing profits or making customers or employees happy, and really part of the message of the book is you can actually have it all: make the customers happy, make employees happy and have that drive business profits and growth. And so it has been pretty rewarding hearing back from other businesses that are starting to adopt this whole "happiness as a business model" idea.

Peter Hopkins: Right, and this question sort of touches on it, and I'm curious to hear your answer about his one. Zappos is really, you know, it stands as a lesson in what the digital business doesn't have to be. It defies a lot of the conventions and the kind of orthodoxy that surrounded it, but in building it you must have learned something about the new customer, this anonymous person online who is clicking and buying things who has, I think, probably informed a lot of our misapprehensions about what this new digital business is all about. Are there things that have surprised you about these people, about consumers as they click and they consume online? What has defied your expectations in dealing with them and serving them?

Tony Hsieh: I think, not so much now, but definitely in the early days, what surprised me was just how quickly word of mouth can spread online and how, even though they don't have to, how customers, once they're happy, put in effort to let their friends know about it. And there has been so many blog posts about Zappos, for example, where, I mean, they're long, and it's like it took them an hour. It clearly took them an hour to write, and there is no…you know we're not…They're not getting paid to write this blog post. We're not paying them, and yet they're so passionate about the service they received or their experience that they felt like they should spend an hour writing an essay and then sharing it with the world. And so I think just that type of mentality has been pretty surprising to me.

Peter Hopkins: Now we have just less than a minute left, but is there anything that Zappos's customers can look forward to, any new changes on the horizon or things that you're adding to the experience?

Tony Hsieh: Well, we'll be launching an iPad app very soon, and, yeah, our main focus is really just making a big push into clothing. And so getting our customers to, I guess, even realize that and the mindset of the exact same thing that worked for shoes is just order a whole bunch, try them on and we'll pay for the ones that don't fit.

Peter Hopkins: Tony, I can't thank you enough. This has been terrific.

Tony Hsieh: Thank you.

Peter Hopkins: I want to thank everybody at home for joining us. Once again, I'm Peter Hopkins, cofounder and president of Big Think. It's been an interview with Tony Hsieh, CEO of Zappos, and we look forward to having you join us next time. Bye. Tony, this was terrific. Thank you again. I really appreciate…