The Direct Sales Option – Part I

Direct Distribution Can Pay Off

During the next few months we are going to take a look at the Direct Sales industry and its viability as a home-based business. This industry is on pace for record growth, as is typical during tough economic times. Can you be successful in Direct Sales? How does the industry work? What is it really?

Oil tycoon J. Paul Getty once stated, “I would rather be paid 1% of 100 peoples’ efforts than I would 100% of my own effort.” This statement sums up the philosophy of Direct Selling better than any I have ever read.

So what is Direct Sales? According to the Direct Selling Association (www.dsa.org), the industry is defined as the sale of a consumer product or service, person-to-person, away from a fixed retail location. There are 67.6 million people worldwide generating over $110 billion in sales and as the name indicates, over 70% of the sales activity occurs face-to-face.

The practice of Direct Selling is as old as time but only in the past thirty years has the industry seen significant growth; in the past decade, sales in the United States have more than doubled to $30 billion with over 15 million people participating. More impressively is the fact that 74% of the population has purchased a product or service from a Direct Selling company. And, we have witnessed savvy investors and large companies begin to make significant investment into the industry, including icons like Warren Buffett.

There are five main reasons why a person joins a Direct Sales company to represent its products or services:

  1. To meet and socialize with people/recognition
  2. Offers flexible work schedules
  3. Good way to earn extra income
  4. Effective way to own a business
  5. Earnings are in proportion to efforts

With all this success, why does this industry continue to operate with such a cloud hanging over it? Two major reasons are education and disclosure. A study of franchising will find a similar track of experiences and perception issues. Today franchising is widely accepted because the industry became federally regulated with knowledge of best practices and mandatory disclosures.

Amazingly, Direct Selling still operates today without the federal standards of disclosure that helped to eliminate the perception issues and fraudulent activity of franchising. This allowed the emergence of some great companies. Amway won a significant ruling in the 70’s that set the standard of 70% of a salespersons’ (distributors’) volume must be generated by customers. Unfortunately, the enforcement of this rule by the industry and the FTC has been haphazard at best, and no other enforceable guidelines have been mandated. Another site to review, which will help educate you on the opposite side of the industry, is www.PyramidSchemeAlert.org. Determining the legitimacy of a company without proper regulation and disclosure is the toughest factor for a person looking to join a Direct Sales company. So here are four things that can help you recognize a pyramid from a legit Direct Sales company. A pyramid will:

  1. Have very little product sold directly to the general public and the salesperson (distributor for the company) will find it difficult or impossible to earn a net profit from retail selling;
  2. A distributor’s purchases count as consideration to join the company along with required monthly purchases frequently called “auto-ship” programs;
  3.  A significant portion of a new distributor’s purchases are paid as compensation to others as a recruitment bonus;
  4. Recoupment of investment is based on recruiting, not retail sales.

A legit Direct Sales company – and there are many – will readily provide the basic information and strictly enforce the representations that its salespeople make.

The two main issues revolve around the price of the product and the necessity to recruit new distributors. The philosophy of Direct Selling is that you are eliminating the “middle man” and the overhead of traditional retail sales. So then why is the product so much more expensive? Do not buy into the typical answer of “our exclusive manufacturing process,” or the “quality ingredients,” or the “patented formula” – these are covered up answers to the truth. Either there is not enough volume to manufacture the product cost effectively or, in most cases, the cost is derived from what the company determines they want to pay out in the compensation program. These inflated costs virtually eliminate the retail customer base.

Secondly, the true philosophy of Direct Selling is that the company needs to recruit new distributors and the distributors need to service customers. Because growth in young companies is being measured by recruitment of distributors, distributors become the main recruiting source and the highest percentage of compensation is rewarded for this activity. Over-priced products and a focus on distributor acquisition, not customer acquisition, creates perception and legal issues for companies. Disclosure is the answer and it will help you make a good decision.

Next month we will take a look at how you can identify good companies. In the meantime visit www.brevardcounty.com/blogs/business to continue the discussion.

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