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The anti-Amazon that's making money: Zazzle

Zazzle hats
Source: Zazzle
Zazzle hats

Amazon.com became the world's most valuable retailer by selling everything imaginable at virtually no profit. Jet.com raised hundreds of millions of dollars before launch, with the promise of undercutting Amazon's prices.

E-retailer Zazzle has spent the past decade—and made money—refusing to play that game.

Zazzle's trick: CEO Robert Beaver and his sons, Jeff and Bobby, focus on products that can't be found elsewhere, and thus face little to no pricing pressure.

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Design your own flask? Check. Customizable ping pong paddles? Got those too.

The Beaver family has been quietly building the company, raising limited amounts of venture funding, shying away from the press and doing something crazy by Silicon Valley standards: generating profit.

Now as the Redwood City, California-based e-retailer celebrates its 10th anniversary, it's ready to talk financials for the first time.

Zazzle told CNBC.com that it expects revenue this fiscal year of more than $250 million, representing 25 percent annual growth, a pace that could accelerate to 35 percent over the next few years.

The company's gross margin, or the profit left after subtracting the cost of goods sold, is a hefty 45 percent. Amazon just reported a quarterly gross margin of 35 percent, and much of that is due to the rapidly growing and very profitable cloud-computing business.

"People perceive there to be more value when they can't get your product anywhere else," said Robert Beaver, who started four prior businesses before creating Zazzle with two of his four kids. "We can only retain those kinds of margins if we continue to offer those kinds of products."

For Zazzle, that increasingly means items created by so-called makers, modern-day do-it-yourselfers with marketable crafts to promote. Messenger bag makers, woodworkers and artisan chocolate vendors are taking advantage of Zazzle's expansive customer base to get their niche products to the masses.

Zazzle isn't a marketplace like eBay or Etsy, where people just sell their products. The company has spent years designing its own robotic cameras, printing presses and supply chain technology to let consumers virtually personalize products.

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Items only get manufactured after they're ordered. Other than raw materials, Zazzle holds virtually no inventory and is still able to ship most packages in 24 hours.

"Every product on the Zazzle platform will be made to order," said Bobby Beaver, the older of the two brothers by one year. "The traditional commerce model is grossly, grossly inefficient."

Zazzle's alternative model is working for Ron Gallagher and his table tennis accessories business. Gallagher's company, Hampton Technologies, has been producing customized goods for 36 years from a small operation on New York's Long Island.

Zazzle headquarters in Redwood City, Calif.
Source: Zazzle
Zazzle headquarters in Redwood City, Calif.
"They have much deeper pockets." -Ron Gallagher, president of Hampton Technologies

Ping pong balls and paddles represent a newer business for them, but one that's growing in popularity. With Zazzle, the possibilities are endless. More than 200,000 patterns are available, and customers can take an existing design like an American flag or a soccer ball and embed a photo or a name.

Buy the paddle for around $30, and the order gets routed back to Gallagher's facility where the product is printed and shipped to the customer. Since launching on the site in June 2014, Zazzle has sold more than $154,000 worth of Hampton's paddles.

In addition to all the back-end technology, Gallagher can take advantage of Zazzle's marketing budget, brand and simple user interface.

"They have much deeper pockets," Gallagher said. "They have the expertise. This is what they do."

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Even at $250 million in revenue, a big number for an e-commerce start-up, Zazzle's business would qualify as a rounding error for Amazon. The Jeff Bezos-led Goliath generated close to $90 billion in sales last year, and Wedbush Securities predicts Amazon reeled in $1.2 billion on Prime Day alone.

Amazon has spent the past two decades sacrificing profit to grow, grow, grow. Its dominance in e-commerce is built on a consumer's ability to get everything from books, music and electronics to toiletries and increasingly groceries, all in a day or two. Fulfillment centers are popping up across the country to enable storage and fast delivery.

The Seattle-based company's operating costs are so hefty that when it reported second-quarter net income of $92 million, representing less than half a percent of revenue, investors bid up the stock 10 percent in a single day.

A Zazzle robot photographs a sneaker.
Source: Zazzle
A Zazzle robot photographs a sneaker.

Zazzle is a unique story in Silicon Valley. It hasn't been the raging, high-growth success that's turned droves of engineers into millionaires, but it's been profitable enough to survive and thrive over the course of a decade without relying on much outside capital, about $50 million in total.

(The company has actually been around for closer to 15 years, but the Zazzle website was launched publicly in 2005.)

An eventual IPO is likely. Robert Beaver said Zazzle won't "stay private forever," though he expressed no urgency to sell shares. Another private financing round is still a possibility, he said.

"It's a company not built to flip, but built for the long haul," said Bing Gordon, a partner at venture firm Kleiner Perkins Caufield & Byers, and a Zazzle director. Kleiner's initial investment 10 years ago was led by John Doerr, who made a fortune backing Amazon and Google.

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Gordon, one of the first employees at video game developer Electronic Arts, also knows a little something about e-commerce—he's an Amazon board member.

While Amazon and Zazzle are both vying for dollars as more shopping shifts to the Web and mobile, the type of customer is very different. Zazzle's real competition is with other companies focused on personalization like CafePress, Teespring and Vistaprint. Zazzle, though, is going way beyond apparel and business cards.

"Zazzle's opportunity is mass uniqueness," said Gordon. "In a world of T-shirts only it seemed kind of simple. But when they started getting to sneakers and skateboards and iPhone cases and custom stitched embroidery, it got more and more complicated."

Most of Zazzle's own stuff gets manufactured at its factory in San Jose, California. The company has a T-shirt brand as well as a deal with American Apparel, and it has relationships with paper suppliers and other raw materials companies so it knows the whole supply chain behind a coffee mug or package of stationery.

The big growth opportunity is outside of Zazzle's own facility, with its vast network of makers. There are currently 150 makers utilizing the platform, and Zazzle has paid out a total of $50 million to those businesses, which include bag maker Rickshaw Bagworks and iPad case creator DODOcase.

This year, Zazzle is rolling out a platform so that any maker can sign up and tell their story to consumers.

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"What those makers have lacked is a significant distribution for small-scale products," said Jeff Beaver, the company's chief product officer. "The breadth of what's possible on Zazzle is getting exponentially larger."

One problematic issue for Zazzle is negative employee reviews.

According to Glassdoor, Zazzle has a rating of 2.3 out of 5 stars, based on 48 reviews from current and former employees. That's below the Glassdoor average of 3.2 for the more than 400,000 companies the website tracks, and worse than the ratings given to e-commerce counterparts Amazon, eBay, Etsy, CafePress and Zulily.

Glassdoor ratings: E-commerce companies

Company
Rating (0-5)
# of reviews
Amazon.com 3.4 5,600
CafePress 2.7 81
eBay 3.5 1,400
Etsy 3.7 26
Zazzle 2.3 48
Zulily 2.6 275

Much of the criticism surrounds the challenges of working for a family run business and the difficulty outsiders say they have in being heard.

Still, Kleiner's Gordon says the company rarely loses top talent.

"Employee recruiting, development, promotion and retention is very much aligned with the best companies in the Kleiner portfolio," he said. (A spokeswoman for the company said: "We're always open to feedback and looking at ways to improve the culture. We do read the reviews, we are taking the feedback, we are aware. It's a conversation we're having internally.")

For Zazzle partners, it's all about selling more specialized products. Chocomize, for example, makes chocolate bars with bacon, Himalayan sea salt and gold flakes, and allows customers to create their own candy bar with 600 million possible combinations.

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Based in Queens, New York, Chocomize is a robust business, with more than $1 million in annual revenue, and Zazzle is still a very small part of it, bringing in only $7,000 last year.

Fabian Kaempfer, who co-founded Chocomize in 2009, would like to see sales on Zazzle increase as a portion of overall revenue. But he can't control what the site decides to promote, so he has to continue looking for other ways to drive growth.

Zazzle's customized ping pong paddles.
Source: Zazzle
Zazzle's customized ping pong paddles.

"I definitely like to be in charge of my own destiny," said Kaempfer. "If you have that many vendors, you can't expect that you're going to be their top priority."

It's true that chocolate bars aren't the first thing the casual shopper sees at Zazzle.com. The home page caters more to the consumer looking for luggage tags, tote bags and wedding invitations.

For Gallagher, however, ping pong paddles have been such a big hit on Zazzle that he's thinking about what else he can put on the site. He expects to soon start listing tailgate tables and rubber stamps.

"Zazzle is a very important partner," said Gallagher. "It's not like 50 percent of our business or even close to it, but hopefully it will be some day."