How Zappos turned an experiment into a $2 billion business

If you’ve read Lean Startup by Eric Ries, you might know the story of how Nick Swinmurn founded Zappos in 1999. Back then, the footwear market was $40 billion in the US alone, but sneakers were almost solely sold in brick-and-mortar retail stores.

Not only these stores provided the opportunity to have a touch of shiny new shoes, but many of them also had a unique vibe with music, helpful staff, and sometimes even perks such as a skate or streetball playground. Once I even entered a store with its own in-house barber! They were simply the place where people met and relaxed. Everyone thought it was impossible to emulate this experience online.

Nick’s experiment was one of the finest MVP methods called Wizard of Oz ever done. He went to the store, took pictures of the sneakers, and put them in his e-shop. When somebody made an order, he would go to the store, buy the shoes, and send them to the buyer.

If Nick wanted to do it properly, he would need to buy large stocks of sneakers of all types and sizes upfront and set up the infrastructure and distribution. By doing all of this manually, he reduced these initial costs to the bare minimum, even though it made him quite busy delivering everything himself. He also cut his margins pretty much to zero.

Quite soon, however, he got his hypothesis validated. More and more orders were coming, and he eventually set up a proper e-commerce business. Nick was ambitious and wanted to scale up as soon as possible, so he met with Venture Frogs, Tony Hsieh’s investment company, to pitch them their vision. Showing them the numbers from this experiment, Nick bought Tony into the idea by investing $500 million.

This investment paid of. Today, Zappos is one of the largest online sneaker retailers in the world, with over $2 billion in revenues.

Nick also learned very early on that the most important criteria of his clientele are speed of delivery and the quality of customer service. He set up everything in his new business to deliver this to the highest standard, so even when larger online retailers entered the sneaker market, they had it very hard to beat the fast-growing Zappos.