THE BLOG
05/26/2010 07:49 am ET Updated May 25, 2011

Over the past 10 years, Zappos.com, the company where I am CEO, has grown from almost no sales to over \$1 billion in gross merchandise sales annually, driven primarily by repeat customers and word of mouth, while simultaneously making Fortune Magazine's annual "Best Companies to Work For" list two years in a row. My first book, "Delivering Happiness: A Path to Profits, Passion, and Purpose", will be released on June 7, 2010. Below is an excerpt that describes the lessons that I learned from playing poker and how I apply them to the business world.

I'd played a little bit of poker in college, but like many people, I always just considered it to be a fun form of gambling and had never bothered to actually study it. Back in 1999, poker was not yet a mainstream activity. Most people had never heard of the World Series of Poker, and TV networks like ESPN were not yet broadcasting poker tournaments to the masses.

One night while battling insomnia, I randomly came across a Web site that served as a community hub for people who played poker regularly. I was fascinated by the amount of analysis and information about playing that was freely available, and spent the entire night reading different articles about the mathematics of poker.

Like many people, I had always thought that poker was mostly about luck, being able to bluff, and reading people. I learned that for limit hold 'em poker (which was the most popular type of poker in casinos at the time), none of that really mattered much in the long run. For every hand and every round of betting, there was actually a mathematically correct way to play that took into account the "pot odds" (the ratios among the amount of the bet, the number of chips already in the pot, and the statistical chances of winning).

With the exception of poker, almost all games in a typical casino are stacked against the player, and in the long run the casino always comes out ahead. I was intrigued by poker because in poker you are playing against other players, not against the casino. Instead, the casino just takes a service fee for each hand dealt (usually from the winner of each hand).

In a casino, each poker table seats up to ten players. As long as at least one of the players is not playing in the mathematically optimal way (and usually it's several players that aren't), the players who are playing correctly will generally end up winning in the long run.

Learning the basic math behind limit hold 'em poker was not actually that hard. I bought and studied a book called Hold 'em Poker and started going to card rooms in California several times a week to practice what I was learning from the book. (Although California is a generally no-gambling state, card rooms are allowed because poker is not a game against the house.) Within a few weeks, I felt that I had mastered the basics of the mathematics behind playing hold 'em.

Understanding the mathematics behind hold 'em and playing against players who didn't was like owning a coin that would land on heads one-third of the time and tails the other two-thirds of the time, and always being allowed to bet on tails. On any individual coin flip, I might lose, but if I bet on tails a thousand times, then I was more than 99.99 percent guaranteed to win in the long run.

Likewise, when playing a game against the house such as roulette or blackjack, it would be like being forced to always bet on heads: Even though you might win any individual coin flip, if you did it a thousand times, you would be more than 99.99 percent guaranteed to lose in the long run.

One of the most interesting things about playing poker was learning the discipline of not confusing the right decision with the individual outcome of any single hand, but that's what a lot of poker players do. If they win a hand, they assume they made the right bet, and if they lose a hand, they often assume they made the wrong bet. With the coin that lands on heads a third of the time, this would be like seeing the coin land on heads once (the individual outcome) and changing your behavior so you bet on heads, when the mathematically correct thing to do is to always bet on tails no matter what happened in the previous coin flip (the right decision).

For the first few months, I found poker both fun and challenging, because I was constantly learning, both through reading different books and through the actual experience of playing in the field. I started to notice similarities between what was good poker strategy and what made for good business strategy, especially when thinking about the separation between short-term thinking (such as focusing on whether I won or lost an individual hand) and long-term thinking (such as making sure I had the right decision strategy).

I noticed so many similarities between poker and business that I started making a list of the lessons I learned from playing poker that could also be applied to business:

Evaluating Market Opportunities

• Table selection is the most important decision you can make.
• It's okay to switch tables if you discover it's too hard to win at your table.
• If there are too many competitors (some irrational or inexperienced), even if you're the best it's a lot harder to win.

Marketing and Branding

• Act weak when strong, act strong when weak. Know when to bluff.
• Help shape the stories that people are telling about you.

Financials

• Always be prepared for the worst possible scenario.
• The guy who wins the most hands is not the guy who makes the most money in the long run.
• The guy who never loses a hand is not the guy who makes the most money in the long run.
• Go for positive expected value, not what's least risky.
• Make sure your bankroll is large enough for the game you're playing and the risks you're taking.
• Play only with what you can afford to lose.
• Remember that it's a long-term game. You will win or lose individual hands or sessions, but it's what happens in the long term that matters.

Strategy

• Don't play games that you don't understand, even if you see lots of other people making money from them.
• Figure out the game when the stakes aren't high.
• Don't cheat. Cheaters never win in the long run.
• You need to adjust your style of play throughout the night as the dynamics of the game change. Be flexible.
• Be patient and think long-term.
• The players with the most stamina and focus usually win.
• Differentiate yourself. Do the opposite of what the rest of the table is doing.
• Hope is not a good plan.
• Don't let yourself go "on tilt." It's much more cost-effective to take a break, walk around, or leave the game for the night.

Continual Learning

• Educate yourself. Read books and learn from others who have done it before.
• Learn by doing. Theory is nice, but nothing replaces actual experience.
• Learn by surrounding yourself with talented players.
• Just because you win a hand doesn't mean you're good and you don't have more learning to do. You might have just gotten lucky.

Culture

• You've gotta love the game. To become really good, you need to live it and sleep it.
• Don't be cocky. Don't be flashy. There's always someone better than you.
• Be nice and make friends. It's a small community.
• Share what you've learned with others.
• Look for opportunities beyond just the game you sat down to play. You never know who you're going to meet, including new friends for life or new business contacts.
• Have fun. The game is a lot more enjoyable when you're trying to do more than just make money.

Aside from remembering to focus on what's best for the long term, I think the biggest business lesson I learned from poker concerned the most important decision you can make in the game. Although it seems obvious in retrospect, it took me six months before I finally figured it out.

Through reading poker books and practicing by playing, I spent a lot of time learning about the best strategy to play once I was actually sitting down at a table. My big "ah-ha!" moment came when I finally learned that the game started even before I sat down in a seat.

In a poker room at a casino, there are usually many different choices of tables. Each table has different stakes, different players, and different dynamics that change as the players come and go, and as players get excited, upset, or tired.

I learned that the most important decision I could make was which table to sit at. This included knowing when to change tables. I learned from a book that an experienced player can make ten times as much money sitting at a table with nine mediocre players who are tired and have a lot of chips compared with sitting at a table with nine really good players who are focused and don't have that many chips in front of them.

In business, one of the most important decisions for an entrepreneur or a CEO to make is what business to be in. It doesn't matter how flawlessly a business is executed if it's the wrong business or if it's in too small a market.

Imagine if you were the most efficient manufacturer of seven-fingered gloves. You offer the best selection, the best service, and the best prices for seven-fingered gloves--but if there isn't a big enough market for what you sell, you won't get very far.

Or, if you decide to start a business that competes directly against really experienced competitors such as Wal-Mart by playing the same game they play (for example, trying to sell the same goods at lower prices), then chances are that you will go out of business.

In a poker room, I could only choose which table I wanted to sit at. But in business, I realized that I didn't have to sit at an existing table. I could define my own, or make the one that I was already at even bigger. (Or, just like in a poker room, I could always choose to change tables.)

I realized that, whatever the vision was for any business, there was always a bigger vision that could make the table bigger.

"Delivering Happiness: A Path to Profits, Passion, and Purpose" is Tony Hsieh's first book, and will be released on June 7, 2010. The book can be pre-ordered on Amazon. For more information about the book, visit: http://www.deliveringhappinessbook.com