Online shoe-and-apparel retailer Zappos gained popularity with Internet customers in part because of its generous shipping policies. How does the company do it while keeping costs manageable?
Here's a look at the inner workings of the shipping program at the Henderson, Nev.-based Zappos, which was bought by Amazon.com in 2009. It includes some features that you could consider adopting for your small business.
1. Build a close relationship with a reliable partner.
A decade ago, when Zappos was a much smaller company, it began working closely with its shipper, UPS. Zappos's purchasing manager Travis Moneta worked with Alex Trac, director of global account sales at UPS. The company ships exclusively with UPS, enabling the company to negotiate the best volume discounts, Moneta says. "If I had to pick only one point, it's to form a partnership," he says. In his view, any potential savings from sending some packages through other carriers wouldn't be worth the loss of consistency in customer experience and weakening the relationship with its carrier.
The company also encourages its vendors to ship goods using Zappos's UPS account. This additional shipping volume helps Zappos qualify for even more discounts. UPS helps Zappos manage returns with seven-day forecasts of incoming volumes through its free Quantum View Manage software, which small businesses can also use. This forecast enables Zappos to save on labor costs by scheduling only needed staff. "Every package has full visibility," Trac says. "Small businesses can use it for one, single package."
2. Think of shipping as a marketing cost.
Zappos considers its overnight shipping and generous one-year, free-return shipping policy a key part of its marketing plan to build customer loyalty.
For instance, Zappos ran a February 2012 Leap Day promotion that extended its usual one-year return guarantee to four years. It was a fairly painless promise to make, Moneta says, because the vast majority of customers return goods within the first few days of receipt. The cost of the few additional returns from the promotion has been budgeted as a marketing expense. Meanwhile, Zappos strengthened its reputation in customer service.
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3. Open a warehouse near your shipper.
When Zappos began in 1999, the company had no warehouse, and its shoe vendors shipped merchandise directly to customers' homes. While this saved on storage costs, it created an inconsistent customer experience in terms of delivery times and carriers. Some packages had to travel long distances to customers, depending on where the factory and the customer were located, increasing shipping costs that Zappos had to absorb.
In 2002, Zappos solved this problem by opening its own warehouse just 17 miles from UPS Worldport, the carrier's global air-freight hub at the Louisville, Ky., airport. Proximity to the four-million-square-foot shipping center and its central U.S. location give Zappos several advantages, including rock-bottom transportation costs in getting its packages to UPS.
If orders surge, another UPS shipping trailer can be delivered quickly. Additionally, Trac says, UPS picks up from Zappos hourly during peak times. But many other retailers get only daily UPS pickups, so a sudden order spurt can mean a day's delay while waiting for another shipping container.
Because UPS Worldport is nearby, Zappos can guarantee next-day delivery up until 4 p.m. Eastern, a promise few online retailers can make. That quick turnaround time builds loyalty to Zappos, Moneta says. The proximity of UPS Worldport also means early-morning delivery of returning merchandise, reducing the amount of time until customers see their credits for returned goods, cutting down on customer-service calls.
4. Encourage returns to drive sales.
During Zappos's month-long customer-service training, employees learn to encourage customers to order two sizes of shoes to make sure they end up with one pair that fits. While this policy drives up return volumes and costs the company in additional shipping, it reduces customers' hesitancy to place an order and results in more sales, Moneta says. "The bottom line is we really want to make the customer happy, and you can accomplish that through liberal return policies."
Zappos makes its free-returns process simple. Return information is prominently featured on the retailer's website, and it's simple to print a return label on the website to send goods back. Such simplicity and transparency are important. A study conducted this year for UPS by Internet-research firm comScore showed 63 percent of customers research return policies before they buy.
5. Deliver fast, return slow.
Zappos sends the majority of its deliveries overnight. But customers return merchandise by ground shipping, which saves Zappos money. Customers don't expect rush returns, Moneta says. Zappos also cuts shipping costs and improves its on-time delivery by encouraging customers to use UPS MyChoice, Trac says. This free scheduling tool allows shoppers to arrange deliveries for when they'll be home or divert them to their offices. That helps avoid the hassle and expense of multiple delivery attempts.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.