Zappos was an e-commerce retailer that specialized in the marketing and distribution of consumer footwear. Traditionally, the value proposition of e-commerce retailers is to lead on price. Because an e-commerce transaction is for the most part limited to visual communication, the consumer assumes greater risk in the exchange compared to a brick-and-mortar retail transaction which allows the product to be evaluated using all five senses. To compensate for this risk, online retailers usually offer prices that are not sustainable by brick-and-mortar retailers due to higher overhead costs and geographic limitations to market growth.

Research by economist Ofer H. Azar found that consumer perception of value is weighted more toward relative price than intrinsic worth. For example, if a widget has a retail price of $100 and is sold to a consumer for $90, the consumer will feel they have obtained value. If they later see the widget available for $50, their perception will change, and they will suddenly feel cheated despite the fact that the intrinsic worth of the widget and the amount they paid for it has not changed.

Relative price has allowed businesses like Walmart and Amazon to dominate market share by accepting a lower profit margin in exchange for higher revenue. While the capacity for relative price to generate value is well established, Zappos offered an interesting alternative. The value proposition in e-commerce marketing requires that the consumer feel compensated for assuming the transaction risk. Valuation of transaction risk is to some degree quantifiable because the risk level varies depending on the product. If the product is a DVD, the transaction risk is essentially zero because the quality of the product will be the same whether it is purchased from a store or online. With apparel, the transaction risk is much higher because product quality, comfort, and relative size cannot be effectively determined through visual communication. As a footwear fashion retailer, relative price is likely to be less effective at communicating value for Zappos than it would be for an online business selling packaged goods. Instead of using relative price, Zappos developed a revolutionary alternative which was to share the transaction risk with the consumer.

By instituting a 365-day return policy and free, or nearly free, shipping on purchases and returns, Zappos essentially assumed all of the financial risk associated with the transaction. The customer risk was limited to the mild inconvenience of needing to return the item by mail. As a result, Zappos’ bottom-line earnings were similar to financial results seen from lead-on-price retailers like Walmart and Amazon. Their profit margin shrunk substantially; however, they were able to achieve profitability due to accelerated revenue growth.

While research supports the Zappos strategy, its success was far from guaranteed. Communicating the value of relative price is fairly straightforward because the cost savings are realized at the point of sale. Communicating the value of shared risk is considerably more nuanced because there is also a risk that Zappos might fail to deliver on its promise. Zappos attributes the company’s success in large part to a marketing strategy focused on customer delight. Zappos took drastic measures to change its company culture from a technology company to a customer-focused retailer that just happens to operate online. They moved their headquarters from Silicon Valley to Las Vegas and restructured their staff from top to bottom with employees who understood and were on board with the company’s new mission.

Through customer delight, Zappos was able to build the trust necessary to remove the perception of default risk associated with its value proposition. That trust manifested in higher customer retention and positive word-of-mouth marketing.

Conclusion

Zappos shows that e-commerce retailers can and should consider alternatives to relative price when formulating a value proposition. However, additional research is necessary in order to do an apples-to-apples comparison of relative price to shared risk. Zappos reportedly said its customers took “full advantage of its generous returns policy,” and despite seeing exponential revenue growth, the company’s profit margin was limited to just 1 percent before the business was sold to Amazon in 2009. While the long-term financial performance of the Zappos shared risk proposition is yet unknown, the takeaway for marketing professionals is that inability to compete with the likes of Walmart and Amazon in terms of price does not necessarily mean the inability to compete in terms of value.