Dear Zappos.com Customer,

A few weeks ago, we sent out an email to our investors, employees,
vendors, and business partners, giving them an update on Zappos
and what we’ve been up to over the past 12 months.

We had a few people suggest that we send out a company update to
our customers as well, since many of our customers might be
interested in what’s been going on behind the scenes at Zappos.

If you are not interested in the company update and would just
like to start shopping for shoes and handbags, you can ignore the
rest of this email and visit our web site by clicking on the link
below:

http://www.zappos.com/n/z/ref/60221a1.html

AOL Users Click Here: Zappos.com

Otherwise, please read on!

It’s been a fun and exciting ride trying to keep up with our
growth while still maintaining our fanatical focus on providing
the very best customer service and the very best online shopping
experience.

I still remember when people thought we were crazy for treating
our customers so well by offering things such as free shipping,
free return shipping, a 365-day return policy, and 24/7 customer
service. A lot of people couldn’t understand why we would put our
toll-free customer service number in the top left corner of every
page of our web site, instead of hiding it like most other web
sites do. And a lot of people couldn’t understand why we keep
trying to improve our warehouse operations to get the shoes out to
our customers as quickly as possible.

Well, it’s because we think our company will either live or die by
the service that we offer, and our goal is to be the absolute best
service company in the world, and to build the best
service-oriented company culture in the world.

Last year was one of our most exciting years ever. Some
highlights from the past 12 months include:

- We grew our customer base to a total of over 3 million paying
customers, meaning that approximately 1% of the US population
has bought from us.

- We outgrew our first Las Vegas office (30,000 square feet) and
have now moved into a new location 10 minutes away (65,000
square feet).

- We broke ground and have completed construction on most of our
new warehouse, which will add an additional 625,000 square feet
on top of the 280,000 square feet of our current warehouse.

- We grew our total workforce from 500 to 700 people
(approximately half are in Las Vegas and half in Kentucky).

- We increased the number of brands offered on our web site to
over 600, and the number of unique styles to about 90,000.
While we added many great partners this year, one of the most
requested brands from our customers joined our family in 2005,
with the addition of the Nine West Group. Having the brands
that our customers are looking for makes it a better experience
for everyone.

- We implemented a new training program so that all new hires in
our Las Vegas office must first go through 4 weeks of Customer
Loyalty training (answering phone calls from customers) and 1
week of training in our fulfillment center, regardless of what
department they were actually hired for. We believe that by
doing so, it forces all of our employees in Las Vegas to truly
understand and appreciate the value of providing great customer
service.

- We were ranked in Inc. Magazine’s annual list of the 500
fastest-growing private companies in the United States for the
second year in a row (we came in at #23 for 2005).

- We were selected as E-Tailer of the Year by Footwear News.

- Our production team processed its one millionth image for
display on our web site.

- Our package volume with UPS increased such that approximately 1
out of every 900 packages delivered worldwide by UPS was a
Zappos package.

- Our revenue from repeat customers has increased such that on any
given day, over 60% of our sales are from repeat customers.

- We continued our strategy of running the business at close to
break-even in order to maximize our growth, which we have been
doing for the last several years.

Although many challenges still lie ahead, we hope to continue
growing quickly in 2006.

Over the past 6 years, our growth has been primarily driven by
repeat customers and word of mouth. We will continue to build our
brand and our culture around providing the very best service,
because we believe that our most effective marketing comes from
our customers.

In terms of paid advertising, we’ve been happy with the results of
our print advertising, and will continue to invest more in that
area. We will also start experimenting with some TV and radio
commercials.

Later this year, we will be expanding our fulfillment operations
into our new 625,000 square foot warehouse, which is located right
across the street from our current warehouse. This should give us
plenty of room to grow for the next several years.

While we have plenty of room in our warehouse to grow, I think our
biggest challenge will be continuing to build our service brand
and protect our service-oriented culture.

Our internal saying still holds true:

“We are a service company that happens to sell shoes.”
(And now handbags.)

We believe that if we can build the Zappos brand into something
that our customers associate with the absolute best service, then
eventually we can sell other product categories as well.

Our internal WOW philosophy is simple: We want every interaction
with every customer to result in the customer saying “WOW — that
was the best experience I ever had.”

But our WOW philosophy extends beyond just our customers. It’s
also the philosophy that we use to guide how we treat our
employees, our vendors, and our other business partners. We
believe that doing so is the only way to build an enduring brand
and long-lasting company.

This company has been built by our partners, in every sense of the
word. Our customers, employees, vendors, business partners, and
investors are all partners in building the Zappos business. We
would not exist today if any of these groups were missing. So to
all of our partners: thank you for your support and partnership in
2005. We look forward to accomplishing even greater things
together in 2006!

Click here to visit Zappos.com now:

http://www.zappos.com/n/z/ref/60221g1.html

AOL Users Click Here: Zappos.com

This is the first time we’ve sent a company update to our
customers, and we are trying to decide if we should continue to
send out a company update every 6-12 months. If you really
enjoyed or really disliked reading this company update, please let
us know!

PS: If you live near Las Vegas or Louisville, be sure to check out
our jobs page at:

http://www.zappos.com/n/z/kw/jobs/ref/60221g1.html

Thanks for taking the time to read this update!

—————-
Tony Hsieh
CEO – Zappos.com