Zappos Admits Pricing Mistake Cost It $1.6 Million; But Is Upfront About Taking The Hit Itself

from the such-is-life dept

For many years we've seen stories of companies making pricing mistakes at e-commerce stores. The news of those mistakes tends to spread very quickly, with lots of people piling on to order something for way less than it cost. Inevitably, the company realizes the mistake, and usually contacts everyone who ordered to let them know the order won't be fulfilled because it was a mistake. I actually have no problem with this, though some people think it's horribly evil. Either way, what seems to almost always happen is that the negative publicity that follows leads the company to change its mind and honor the original price. Sometimes, it actually takes a lawsuit to make that happen.

However, this weekend, it looks like Zappos had a pretty massive pricing glitch on its sister site 6pm.com. It lasted a few hours. But what's different this time is that once Zappos fixed things, it immediately decided that it would still honor the wrong prices, even though the mistakes would end up costing the company (now owned by Amazon) $1.6 million. Now, between Amazon and Zappos, the two companies have a ton of money, and continue making a lot of money every day. But, no matter what, a $1.6 million pricing error is still a big deal. Big enough that you would think that the company could potentially withstand any sort of PR hit to trying to not honor those prices (perhaps offering up some sort of gift certificate or benefit to those impacted, instead). However, for a company that bases its entire reputation on bending over backwards to make customers happy, it appears they quickly decided that it was best for their overall reputation to just eat the $1.6 million, and keep (or even boost) that customer service reputation.


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  1.  
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    bulmaro, May 24th, 2010 @ 9:14am

    OMG..

    "this world is for the brave indeed."

     

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  2.  
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    Seth, May 24th, 2010 @ 9:21am

    Funny, because their parent company (Amazon.com) usually doesn't honor these pricing glitches.

     

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  3.  
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    sehlat (profile), May 24th, 2010 @ 9:28am

    Good customer service is good marketing

    Advertising gets customers in. Good service keeps them there. That being said, if it's an obvious pricing glitch, piling on is greedy and rude, and the sort of behavior people condemn in large companies.

    Greed isn't pretty on the small scale, either.

     

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  4.  
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    Anonymous Coward, May 24th, 2010 @ 9:30am

    It speaks well of a company with a reputation of putting its customers "first". This has always been one of the halmarks of Mordstroms (it has been a long standing rumor that many years ago it accepted the return of an automobile tire) and some of the outdoor outfitters such as L.L. Bean. Locally, we have a supermarket named "Publix" that squarely falls within the category of customer "first, last, and always".

    If only this was the rule and not the exception.

     

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  5.  
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    Anonymous Coward, May 24th, 2010 @ 9:46am

    Good for them. Zappos really does go above and beyond, its what keeps me coming back.

     

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  6.  
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    senshikaze (profile), May 24th, 2010 @ 9:46am

    Re:

    customer service costs money, and money isn't cheap.

     

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  7.  
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    Anonymous Coward, May 24th, 2010 @ 9:52am

    1.6 million is probably less than the rounding error on foreign exchange at amazon in the last quarter. they probably gave away more free coffee to employees in that time too. it isnt any great things, sorry.

     

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  8.  
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    K, May 24th, 2010 @ 9:53am

    So why is there nothing on the net about the people who got these big deals? All I see is the big marketing that this "mistake" has gotten the site.

     

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  9.  
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    Rose M. Welch (profile), May 24th, 2010 @ 9:54am

    1.6 million? Really?

    I actually have no problem with this, though some people think it's horribly evil.

    I've never seen anyone call it 'horribly evil' or the like. I have seen people who look at it from the view of the consumer, who may have to wait a week or more for the refund they'll be getting instead of the item that they ordered. Your statement makes it sound as though everyone who disagrees is horribly unreasonable, which isn't the case.

    Indeed, when I managed a jewelry store, our policy was to stand by our pricing, even when there were errors, regardless of whether or not we were responsible for those errors. In other words, the buck stopped with us.

    I don't take the view that doing otherwise is 'horrible evil', but it is bad business.

    ...even though the mistakes would end up costing the company (now owned by Amazon) $1.6 million...

    Exactly how did they 'lose' 1.6 million dollars? Did they 'lose' it the way that the producers of The Hurt Locker 'lost' millions of dollars to illegal downloads?

    It seems reasonable to assume that 1.6 million is the number of dollars that the items would have cost if purchased at full price, or that it's the number of dollars that Zappos, Et Al would have made if the items were purchased at full price, or some other version of the old 'lost sales' argument.

    The true number of dollars lost would be the cost of the items, minus the amount paid, which would be $49.95 in this case. I haven't seen any sort of information that leads me to believe that Zappos is using this number, as opposed to an inflated one intended to garner sympathy and publicity for what was simple good business.

     

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  10.  
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    chadsford, May 24th, 2010 @ 10:15am

    "I've never seen anyone call it 'horribly evil' or the like"

    You would have if this story was about how Zappos didn't honor the mistaken price. In fact I remember a story not too long ago where this happened and the comments were filled with people who were crying foul.


    "Indeed, when I managed a jewelry store, our policy was to stand by our pricing"

    Brick-and-mortar stores are a different story. You might get a handful of sales before someone realizes the mistake and corrects the price. And at that its usually that someone forgot to take the sale price tag off an item that is no longer on sale. But in an online situation where the transactions are processed by computers and not a sales person, a simple typo could lead to thousands of orders at unreasonably discounted prices before anyone gets wise to whats happening.

     

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    Mike Masnick (profile), May 24th, 2010 @ 10:29am

    Re: 1.6 million? Really?

    I've never seen anyone call it 'horribly evil' or the like

    In some of the past threads on this topic, people got pretty heated with people feeling entitled to the lower price, and accusing me of helping big companies try to pull "bait-and-switch" scams.

    Your statement makes it sound as though everyone who disagrees is horribly unreasonable, which isn't the case.

    Certainly didn't mean to imply that everyone who disagreed felt that way. But there are some people who are quite vocal on this.

    Indeed, when I managed a jewelry store, our policy was to stand by our pricing, even when there were errors, regardless of whether or not we were responsible for those errors. In other words, the buck stopped with us.

    Sure, and that's a perfectly reasonable policy to take. But, as others have noted, you're much more likely to catch that quickly at a store. In the online world, where news and transactions can spread in a split-second, thousands of people can get in on a "deal" before anyone notices.

    Exactly how did they 'lose' 1.6 million dollars? Did they 'lose' it the way that the producers of The Hurt Locker 'lost' millions of dollars to illegal downloads?

    That's a fair point. I had actually assumed from the text that he was literally talking about the cost of goods sold, minus the false retail price. I did not think he meant the difference between the false retail price and the accurate retail price. However, if it's true that it's the latter, then, you are right and the $1.6 million could be a lot lower.

    It seems reasonable to assume that 1.6 million is the number of dollars that the items would have cost if purchased at full price, or that it's the number of dollars that Zappos, Et Al would have made if the items were purchased at full price, or some other version of the old 'lost sales' argument.

    Indeed. Again, I had assumed he based this on COGS rather than correct retail price, but you could be right.

     

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  12.  
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    kirillian (profile), May 24th, 2010 @ 10:58am

    Re: Re:

    Yes, but customer service also breeds loyalty, a rather intangible, but extremely lucrative characteristic. It's a decision that has to be made. I know, growing up in Texas, some businesses just plain go out of business if the customer service isn't up to par (there are good examples of those that don't...but anecdotal experience tells me they are the exception)...

     

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  13.  
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    Rose M. Welch (profile), May 24th, 2010 @ 12:18pm

    Re:

    So you believe that once sales pass a certain volume, the rules change?

    I disagree. There may have been a smaller number of errors, resulting in a lower amount of losses, but that's just to scale. Several thousand dollars to us is the same as several million to them.

     

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  14.  
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    Rose M. Welch (profile), May 24th, 2010 @ 12:23pm

    Re: Re: 1.6 million? Really?

    ...you're much more likely to catch that quickly at a store. In the online world, where news and transactions can spread in a split-second, thousands of people can get in on a "deal" before anyone notices.

    So you believe that once sales pass a certain volume, the rules change?

    I disagree. There may have been a smaller number of errors, resulting in a lower amount of losses, but that's just to scale. Several thousand dollars to us is the same as several million to them. Several customers to us is several thousand customers to them, and so on.

     

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  15.  
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    Rose M. Welch (profile), May 24th, 2010 @ 12:25pm

    Re: Re: Re: 1.6 million? Really?

    To be clear, I'm not trying to assume that you believe that, but it seems like that's what you're trying to say. Please correct me if I misunderstood you. :)

     

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  16.  
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    Mack, May 24th, 2010 @ 12:31pm

    Re: 1.6 million? Really?

    You are far too thoughtful to be contributing to this blog. :-)

     

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  17.  
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    Darryl, May 24th, 2010 @ 12:48pm

    It's the law !

    At least in Australia, if you list a price, you have to sell it at that price.

    It's illegal to 'bait and switch' in Australia, so it might be good for them to accept their losses. But if it was here in Australia, they would not have any choice.

     

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  18.  
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    Rose M. Welch (profile), May 24th, 2010 @ 12:53pm

    Re: Re: 1.6 million? Really?

    Also, (apparently I can't put my thoughts into one comment today...) I agree that a number based on the cost of goods sold would be reasonable, but I've seen too many situations where spin won over reason to assume that they're being reasonable here.

     

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  19.  
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    nasch (profile), May 24th, 2010 @ 1:16pm

    Re: Re: Re: 1.6 million? Really?

    It's not really about scale, although that does play into it. You could run a small online storefront, and word could get out quickly about a pricing error (less likely than with a major site like Amazon, but still word can spread fast) and you could sell out your entire stock at 10% of the price you intended before you even knew anything happened. In a physical store, the first time somebody expects to pay 50 dollars for a 500 dollar necklace, you are aware something is amiss.

     

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  20.  
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    nasch (profile), May 24th, 2010 @ 1:19pm

    Re: Re: Re: Re: 1.6 million? Really?

    I'm not sure I made my distinction clear, but in both cases I'm not talking about scale, but speed. Amazon could make thousands of incorrect sales, which would be comparable to dozens for your small online store. However, with bricks and mortar it is more likely to stop at one, whether it's a hole in the wall jewelry store, or a huge Best Buy.

     

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  21.  
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    Rose M. Welch (profile), May 24th, 2010 @ 1:54pm

    Re: Re: Re: Re: Re: 1.6 million? Really?

    I disagree. If sales associates think a category is on sale, they'll likely process those sales all day long, until someone comes in the next morning and notices it.

    That seems to be exactly what happened here, except the misinformation went to a digital system, rather than a human one. :)

     

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  22.  
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    Rose M. Welch (profile), May 24th, 2010 @ 2:11pm

    Re: Re: Re: Re: 1.6 million? Really?

    My physical store has a software system that's similar to many systems, in that it has built-in fail safes. For instance, when each item is entered, the COGS is entered, as well as the retail price and the lowest price that we'd take for it. Anything lower than that lowest price requires an override.

    If similar safeties were built into the Zappos system, this wouldn't have happened. This isn't an isolated incident - the only thing that makes it really news-worthy is Zappos' positive response to it.

    I guess what I'm trying to say is that I sympathize with Zappos, but the fact that it happened in the first place and went on so long is their fault, and absolutely could have been prevented, just as it can be prevented in a brick-and-mortar store when people with sense are paying attention.

    With that in mind, I don't see why their customers should be punished for their regrettable lack of foresight.

    I want to say that in my store, as in many stores, our prices and tags are created by a computer program, so glitches are possible - and have happened before. In both cases, I caught it when I came in. Once it was after a few hours, once it was three days. Neither time did we punish the customers by demanding that they return the jewelry or pay a higher price, even when we still had the jewelry in our custody.

    The second time, the sales associates spent the day busily and happily overriding the system, sure in their knowledge that a certain category was being eliminated and that's why we were offering such deep discounts. :P Once again, we didn't punish the customers, even when we could have.

     

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  23.  
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    Mike Masnick (profile), May 24th, 2010 @ 2:15pm

    Re: Re: Re: 1.6 million? Really?

    So you believe that once sales pass a certain volume, the rules change?

    That's not what I said. What I said was that it's much more likely to catch it *because a human reviews the purchase* before it's completed. That's not true in the online world.

     

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  24.  
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    Rose M. Welch (profile), May 24th, 2010 @ 3:08pm

    Re: Re: Re: Re: 1.6 million? Really?

    That is definitely true, but in both cases, information is key. In this case, the system believed that the price was correct. In a case with human beings, all it takes is for the humans beings to believe that the price is correct.

     

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  25.  
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    CrushU, May 24th, 2010 @ 4:08pm

    Re: Re: Re: Re: Re: 1.6 million? Really?

    I'm sorry, I've gotta call BS on that. :)

    The one and only time I've yet seen a price mishap was in my favor. I purchased an item that I believed was on sale because it had a sale tag on it. The person ringing it up noticed immediately, saying 'Hey, this sale ended three days ago... Where did you find this?' I showed her, she found the couple of items that still (mistakenly) had tags on them and took the tags off. I got the sale price of the item.

    I cannot believe that a human being would not notice a pricing discrepancy... Make sure you aren't employing robots? ;)

     

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  26.  
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    Jamie Carl (profile), May 24th, 2010 @ 4:37pm

    Zappo?

    I don't know who Zappo are, but I'm not going to look them up and see if there is anything I can buy from them.

     

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  27.  
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    Rose M. Welch (profile), May 24th, 2010 @ 6:41pm

    Re: Re: Re: Re: Re: Re: 1.6 million? Really?

    Not at all. :) What you're assuming is that the human is alert, has all of the correct information for the entire store, and cares.

    When I started working as a teenager, I worked in the jewelry department, then in the home department, of a J.C. Penney's. The sales were what they told us the sales were, based on departments. It was easy for someone to tell someone else the wrong percentage, or for someone to mix up the departments, resulting in alot of price mishaps. I never would have known if my information was wrong, because all of our instructions were vocal, and we had alot of one-day sales.

    In addition, at the beginning of every shift, I had to go find ten random items and look them up in the system (an old DOS-based thing) and write down the item number, description, original price and sale price on a form. This was so someone could correct all of the pricing errors in the computer, that I wouldn't have known about. I would have happily scanned the item and sold it at the price it rang up, or, if the customer could prove that the item was in a sale category or looked like it was in a sale category, for the sale price.

    This store, as every Penney's did, employed at least one person whose sole responsibility was fixing all of the incorrect prices out there, in one small department store. I did notice that the jewelry department had a much smaller amount of pricing errors, but they also had a fraction of the inventory, and a more competent manager. :P

    Further, not only have I been responsible for whole groups of people who made repeated pricing errors, and seen software glitches that created pricing errors, but I see pricing errors happen all the time, in a large variety of stores, especially with sale items.

    Indeed, pricing errors are so common that most stores offer you the opportunity to look at the prices as they ring up your items, so you can alert the clerk when the price is wrong and they haven't noticed. :) I have three kids and shop alot of sales, so I'd say catching a price error is weekly for me, even if it's something as little as a sale item that rang up full price.

    I cannot believe that human beings are anything close to infallible.

     

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  28.  
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    Costa Rica Real Estate (profile), May 25th, 2010 @ 3:46pm

    Mixed approach

    1.6m is a lot of money. I would approach this a bit differently if I was Zappos (or a company that cannot financially afford this kind of blunder).

    I would send a nice polite email to all people who took advantage of the wrong price saying something along these lines: "Hey, we made an honest mistake and mispriced it, bla-bla. We kindly ask you to click here to cancel your order, but there is no obligation, bla-bla. We would greatly appreciate it if you help us out and cancel it. It is totally our fault and if you would like to keep your order, we will honor the price."

    I bet you that by being humble and appealing to the sense of decency will work and a big percentage of people will feel ashamed and cancel the order. I would go out on a limb and say it would be 70-80% and majority of people are decent and see themselves that way.

     

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  29.  
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    teknosapien, May 25th, 2010 @ 5:33pm

    Wait

    is this the Bizzaro universe - company actually doing the Right thing?

     

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  30.  
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    CC, May 28th, 2010 @ 12:42am

    Re: 1.6 million? Really?

    Exactly! I am pretty sure the loss was much less than what they "admitted to". They are clever to turn this into a commerical opportunity. If people buy it, it is totally worth the "error"!

     

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  31.  
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    accept online payments, Jun 11th, 2010 @ 10:21am

    Interesting

    It's good to see that they are actually taking the initiative to do the right thing.

     

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