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Week 24, 2021 — Issue #156

How Zappos Works: Market-Based Dynamics, Customer-Generated Budgeting and the Triangle of Accountability

Ronda Churchill | Bloomberg | Getty Image

Each week: three ideas on and about the future of work. This week: three ideas on Zappos’ organizational model.

Zappos is a customer service company that just happens to sell… well, lots of things. They started with shoes but have since expanded into apparel and assessors etc. Their purpose is to “live and deliver WOW” which means that the products they sell are (almost) irrelevant. It’s the experience of buying those products that matter. And for Tony Hsieh, Zappos’ firebrand CEO, “customer-centricity” wasn’t just a buzzword to be bandied about in marketing. It meant something much, much more.

1. Market-Based Dynamics

So much more, in fact, that in 2017 it lead to the introduction of something called Market-Based Dynamics (MBD) — an organizational innovation that created within Zappos an ecosystem of small businesses. The rationale, detailed on Zappos’ own publicly available knowledge system, explained that MBD was ‘the next step’ in the company’s mission to deliver great customer service. The autonomy and empowerment enabled by MBD were simply a means to that end.

2. Customer-Generated Budgeting

Under MBD, Zappos’ teams began operating like small businesses, each with its own profit-and-loss statement. They’d essentially sell their skills and services to each other, as well as directly to external customers. Importantly, they got to keep most of this revenue for themselves which, in 2019, lead to the introduction of Customer-Generated Budgeting (CGB). Rather than having to jockey finance to secure their annual budgets, CGB enabled teams to earn said budget from customers.

3. Triangle of Accountability

But wait, there’s more: Teams at Zappos can engage in any type of business and spend money however they want. There’s just one caveat… or three, actually. Because whatever they do, teams must deliver on Zappos’ so-called Triangle of Accountability. That is, they must (1) differentiate their offering based on Zappos’ culture and core values; (2) they must deliver to Zappos’ exceptional customer service and experience; and (3) they must do all of this while also balancing their P&L.

Two things:

  1. Apart from shoes and customer service, Zappos is also known as the poster child for Holacracy (see w232019) — the organizational OS that the company implemented back in 2013. It’s important to note that MBD did not replace Holacracy. Rather, it improved upon it. In fact, MBD was designed to “redirect employees’ focus back to the customer (an oft-cited criticism of Holacracy is that it is too internally focused).” But I repeat: it did not replace Holacracy.
  2. There are obvious parallels between Zappos’ MBD and Haier’s Rendanheyi model (see w402020). Both are exercises in unbundling and decentralization. Both are singularly focused on the customer. And both use market economics as the glue with which to tie it all together. Interestingly and as Rachel Murch, a former member of the Zappos team that developed MBD, explains HERE: Zappos’ model was developed in isolation without prior knowledge of RDHY.

A special thanks to Rachel for helping fact-check the above. 🙏🏻

That’s all for this week.
Until next time: make it matter.



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