The 5 Lessons Of 2004
Even in confusing times, business serves up winners and losers with plenty to teach us.
By Michael V. Copeland

(Business 2.0) – This was the year of the almost-recovery. Business bounced back—sort of. The long-awaited Google IPO debut was a smash—but failed to pull the rest of tech out of its funk. Consumers opened their wallets again—but focused their spending on pricey designerwear and other indulgences, buoying the purveyors of luxury goods while leaving most of the rest of the retail sector gasping. Smartphones and the applications that give them sizzle ignited a cellular boomlet—but the overall telecom industry continued to stagger.

Yet despite the economy's starts and stops, we can learn from the successes of 2004. Amazon, eBay, Google, and Yahoo solidified their positions as the Web's superpowers by spreading the wealth: Hundreds of thousands of people are pocketing a chunk of change by pushing product on their own sites for the big guys and taking a piece of the action. Elsewhere, merchants from Apple Computer to Wegmans supermarkets are proving that customer service pays off at the cash register, while others are finding that the smartest strategy is to devote more attention to "good" customers and offload the "bad" ones.

On the following pages, we outline the business lessons that emerged or intensified during the past year. Some of these will hold true in 2005. But the world is an unpredictable place: War, interest rates, and oil prices can blow the economy off course. And technology continues to change the rules, regardless of external forces. What will happen next year, and how will business respond? Check in with us in 12 months—we're taking notes.

LESSON 1

If you want to make money, make me money.

Benjamin Chiu just earned his master's in mechanical engineering, but he hasn't bothered looking for a job yet. He doesn't need to. The 24-year-old runs a website from his San Francisco condo that nets him upwards of $20,000 a month. Chiu is an affiliate for Amazon and dozens of other online stores. The best part? He doesn't actually sell anything; instead, his website, bensbargains.net, hawks laptops, backpacks, and karaoke machines and refers all buyers to the merchants' websites. Every click on a product and every sale that results is cash in Chiu's pocket—and the seller's. Everyone makes money off the deal, and that's why it works so well. Amazon, eBay, Google, and Yahoo sit atop the Web's food chain partly because they make everybody a salesperson. There are hundreds of thousands of affiliates like Chiu, who promote online auctions for eBay, flog products for Amazon and Yahoo, provide eyeballs for Google's AdSense, and collect for each sale or click they bring in. The millions the big boys pay out for these services are just a fraction of what they make from them. The beauty of the model isn't lost on the rest of the world: Hundreds of companies—from Macy's to Best Buy to Marriott to Citigroup—have now formed affiliate networks of their own.

[*] Estimates for 2004 based on financial reports and Business 2.0 research. [**] Gross profit after cost of sales.

LESSON 2

Luxury sells. Affordability sells. And the middle gets squeezed.

Shaky economy be damned, luxury goods flew out of stores this year at a rate we haven't seen since the bubble. Fashion's most gilded names—Burberry, Christian Dior, Gucci, Hermès, Louis Vuitton—enjoyed double-digit sales growth in 2004. Even the tonier department stores, until recently down on their luck, are now prospering. Nordstrom's same-store sales jumped 8.8 percent and Neiman Marcus's 12.5 percent, blowing away analysts' predictions. But it wasn't just clothes that brought out the credit cards. Shoppers spent on bling (Tiffany was up 10 percent for the year), pampering (Bliss spas and products up 41 percent), and R&R (Crystal Cruises up 25 percent).

The national splurge didn't enrich every seller, however. Those in the middle of the pack—Dillard's, Kohl's, May Co., Pier 1, Sears—have seen their same-store sales slip from last year. The reason? Upper-middle-class households—those with income above $50,000—might not be feeling the pinch of rising oil prices and stagnant wages, but everyone else is. And the consumers who are really feeling the bite are saving pennies by taking their business to the big discounters, filling the coffers of Costco, Target, and Wal-Mart, all of whose sales rose slightly in 2004.

[*] Total sales. Note: Year-to-date or most recent available same-store sales data.

LESSON 3

Smart service begets customers; smarter service gets rid of the bad ones.

Apple recently discovered that 30 percent of the customers who sidle up to the Genius Bar in its retail stores for extra help make a purchase the same day. Service sells, and the lesson applies beyond the world of iPods and G5s. In the supermarket aisles, Wegmans is offering cooking demos, wine tastings, and cheese department managers who have actually gone to Europe to meet their suppliers. That's helped the stores flourish even in markets like Erie, Pa., Buffalo, N.Y., and Sterling, Va., where they go head-to-head with Wal-Mart. Revenue at the chain is up an estimated 9 percent to $3.6 billion—growth that's far ahead of the industry average. Similarly, Lowe's has been nipping at Home Depot's lead by offering a superior customer experience. Home Depot has responded by pouring hundreds of millions of dollars into training its salesclerks while it streamlines the payment process with self-checkout systems.

Of course, not all customers are created equal. The smartest companies are crunching reams of data from point-of-sale terminals, CRM software, customer-loyalty programs, and elsewhere to target the buyers who spend the most. IBM, for example, is combing through its data to identify which corporate clients to spend marketing dollars on, when, and for how long. (The point is to ensure that the cost of marketing doesn't exceed the predicted lifetime value of the customer.) Mail-order retailer L.L. Bean found that its most profitable customer is the one who buys for the entire household. Rather than peppering each household in its database every year with dozens of its specialized catalogs—for men, women, kids, and home—it's now focusing on those who buy across all its product lines. L.L. Bean's best customers now get 40 percent fewer mailings, sales are up 8 percent, and customer retention is climbing. ING Direct takes its favoritism even further: The online discount banker actually fires high-maintenance customers who cut into its margins with too many costly phone calls to the help desk. ING Direct's profits are expected to double to an estimated $250 million in 2004, proving that pickiness can pay off.

LESSON 4

The handheld is now the platform.

No one camped out on Santa Monica's Wilshire Boulevard this year for the latest PC. But a crowd spent the night outside a T-Mobile store for a chance to buy the Sidekick II, Danger's new $200 handheld. Smartphones were the gizmo of 2004. Consumers couldn't get enough of them, dropping $9 billion on the miniature multitaskers this year. The Treo 600 alone sold 661,000 units at $600 a pop, reviving the fortunes of the flailing PalmOne. Now we're spending a fortune downloading ringtones, tapping out text messages, playing games, reading e-mail, listening to music, sending photos and video clips, even checking eBay prices while at a garage sale. Cellular data services now account for about 9 percent of the monthly cell-phone bill, or $5 per phone—67 percent more than in 2003. During the next five years, that share is expected to rise to 30 percent, or $16. Multiply $5 per person by the 178 million cell-phone users in the United States—1.6 billion worldwide, vs. 676 million PCs—and you see why hundreds of millions of dollars went into developing mobile applications this year. The app that hits with even 1 percent of today's users, bringing in a dime from each of them a month, stands to make tens of millions of dollars from that tiny screen.

Most popular data services

Note: Estimated worldwide revenue, 2004. Sources: ARC Group; Strategy Analytics

Phones vs. PCs

Note: Projected unit sales worldwide. Sources: IDC; iSuppli

Global spending on wireless applications (in billions)

Source: Strategy Analytics

LESSON 5

You can do more with less.

Automation and offshoring met in a big way this year, and it was ugly for IT workers. The $1.7 trillion that corporations spent on software and hardware infrastructure between 1990 and 2000 is paying huge dividends in productivity: After creeping up about 1.5 percent a year in the late 1990s, productivity has gone on a tear since 2001, rising 14 percent. That means managers are getting more work out of fewer employees than ever before. Today's low-cost computing will only reinforce the more-for-less phenomenon by making it easier to invest in technology that further pumps up productivity.

At the same time, many of those who didn't lose their jobs to silicon saw them outsourced to developing nations. Of the 372,000 tech jobs lost between 2000 and 2003, an estimated 104,000 went overseas. Offshore call centers and coding farms are proving inexpensive and efficient—two good reasons to expect the trend to continue. And yet, that's not an entirely bad thing: In India alone, an influx of 785,000 new jobs will spur $420 billion in additional spending during the next four years. Who's taking advantage of the shift? Smart companies like Coca-Cola, Levi's, McDonald's, and Nike are all moving in to serve the burgeoning middle class.