Internet Entrepreneur Tony Hsieh

Zappos—derived from the Spanish word zapatos, meaning shoes—is the world’s largest online shoe retailer. The company owes its success to Tony Hsieh, current CEO and its first investor who took the “almost nothing” venture to $1 billion annual gross in ten years. But Hsieh’s ambition is to clone Zappos’s famous customer service culture outside of merchandise retailing.

Spotting and capitalizing on business opportunities seemed to come naturally to Tony Hsieh. At the age of 12 Hsieh sealed photos between a sheet of plastic and a metal disk and advertised his “button-making” business in a kid’s directory. While other kids were spending their allowances on action figures, Tony was earning several hundred dollars a month of his own money.

As a Harvard undergrad Hsieh sold whole pizzas out of his dorm. Harvard peer Alfred Lin was Hsieh’s No. 1 customer. Lin bought two whole pizzas from Hsieh, took them upstairs and resold them by the slice. Lin was destined to become CFO of Zappos.

In 1995 Hsieh graduated with a B.A. in computer science and went to work as a software engineer at Oracle. The entrepreneurial itch soon got the better of him. He started up LinkExchange so small websites could advertise for free on thousands of other web sites. In 1998 24-year old Hsieh sold LinkExchange to Microsoft for $265 million.

A year later, Hsieh met Nick Swinmurn who, while walking through a mall in the search for a pair of shoes, was struck the idea for an online shoe store. But Swinmurn had one major problem—no investor would touch it, not even good-friend Hsieh.

“I almost deleted the voicemail,” Hsieh says of Swinmurn’s pitch. “I didn’t think consumers would buy shoes sight unseen, and Nick didn’t have a footwear background… But right before I hit delete, Nick mentioned the size of the retail shoe market—$40 billion.” Hsieh initially climbed aboard as an advisor. In two short months he found himself investing $500,000 in, which was later changed to

From the outset Zappos aimed to become the largest online footwear retailer. But two or three years in, Hsieh and Swinmurn dug deep and reevaluated their initial goal. They decided to make Zappos a customer service company “that just happens to sell shoes.” They expanded the warehouse to 77,000 sq. ft. and stopped having manufacturers ship directly to customers. “It was a scary time,” recalls Hsieh. “Drop shipping was 25 percent of revenue.”

In 2006 Swinmurn left and Hsieh became Zappos’s CEO. On July 22, 2009 announced the acquisition of in a $1.2 billion deal. Hsieh made the unusual choice of staying on at Zappos.

Zappos’s service-first strategy demands that it run the warehouse 24/7 so shoes can ship quickly. There have been reports of products arriving at the customer’s doorstep 8 hours after the order was placed. Zappos has a virtually unmatched 365-day return policy with free shipping both ways. And if a customer is looking for a pair of shoes that isn’t in the Zappos stock, employees help customers find what they are looking for at competitor websites.

To Hsieh company culture is the most important part of the Zappos brand. In January 2004 he decided to move the customer service headquarters to Las Vegas. “We were having a hard time finding good customer service people in San Francisco,” he explained. “Las Vegas has a lot of call centers and lots of people who want to do customer service as a career.”

“We want people who are passionate about what Zappos is about—service. I don’t care if they’re passionate about shoes.” Hsieh claims he had to turn down some major players because they didn’t fit in with the Zappos culture. A list of ten core company values reminds employees what it means to be part of the Zappos team. A few examples: “Create Fun and a little weirdness”, “Be adventurous, creative, and open-minded”, “Deliver WOW through service”.

With their slogan “Delivering happiness at Zappos”, the “do whatever you can to please the customer” mentality has given employees allowance to go above and beyond—for example, sending a bouquet of flowers with a customer’s order. Even though Hsieh recognizes this extra expense, his aim is to win over repeat customers with the Zappos “wow” service, while attracting new ones by word of mouth.

This generous spirit is shown toward employees as well. Free lunch is provided for all employees to encourage interaction. Karaoke competitions are held during break. Dance Dance Revolution is available in the lobby. Zappos is so proud of its working culture that free tours are offered to the public at the Las Vegas location. Email Hsieh beforehand and he will even arrange to have a Zappos shuttle pick you up from the airport.

Hsieh firmly believes that a focus on excellent company culture is the fix for all corporate problems. “Businesses often forget about the culture, and ultimately, they suffer for it because you can’t deliver good service from unhappy employees.”

But Hsieh doesn’t want Zappos to be known as the shoe retailer forever. In its quest for constant expansion the company has already branched into clothing and other merchandise. He hopes to soon offer the Zappos customer service to cater to needs outside of merchandise retail. Don’t be surprised if you see a Zappos Airlines in the next twenty years.

“For me part of it is about seeing what we can accomplish here at Zappos, but also seeing what we do here that can change other businesses and the world in general—whether its through inspiring other companies to deliver better customer service or to focus on their own company culture.”

Making Fortune’s “Best Companies to Work For” list, along with Google, has given Hsieh’s philosophy a measure of validation. His Delivering Happiness: A Path to Profits, Passion and Purpose is scheduled to release June 7th 2010. You guessed it: it tells how a Harvard grad found happiness and meaning in a business-oriented world.