October 02, 2017
Defining Distributors versus Customers
by Heather Martin
With more than 40 years of direct selling experience under his belt, John Fleming knows just about all there is to know about this channel. But there’s one thing that still puzzles him, says the Direct Selling News former Publisher and now Ambassador: “I’ve never understood why anyone associated with the direct selling business model didn’t understand that without customers you can’t build a lasting business.”
John Licari, Chief Operating Officer of Detroit-based Total Life Changes (TLC), doesn’t understand it, either. TLC has emphasized customer acquisition from its beginning in 1999, he says, and while the company wants to make it easy for customers to become distributors, it knows the only way that will happen is if retail is king. “If you lead with the product, you have a chance to make a business out of it. But if you lead with the business opportunity, you might not sell the product. Then you have no business.”
The belief that retail sales are fundamental to a direct seller’s success is not new. Most network marketing companies have always operated on the principle that they will not survive if people don’t buy, use and keep using their products. What is new is that direct sellers have begun to carefully track retail customers and talk more explicitly than ever about the importance of acquiring them.
An Abrupt Shift
The conversation about retail ramped up suddenly five years ago. On a routine earnings call with investors in May 2012, an Herbalife executive made a routine comment that ended up costing the company $200 million in distributor refunds and led to a major corporate restructuring. Toward the end of the call an investor asked, “What is the percentage that is actually sold to consumers that are not distributors?” Herbalife President Des Walsh replied, “We don’t have exact percentage (sic)… because we don’t have visibility to that level of detail.” Those 15 words launched a regulatory firestorm that not only rocked Herbalife’s world, they forever altered the relationship between direct sellers and their end users.
The rub for Herbalife was that those words could have come from almost any direct selling executive. It had just never been standard practice for direct sellers to track retail customers because they weren’t selling straight to end consumers—that was a distributor’s domain. The companies themselves had always focused on helping their salespeople become successful business owners and develop opportunities to share product. “Even though companies weren’t tracking retail customers, they were supporting their independent contractors, who were doing their jobs by creating the direct relationships with consumers,” Fleming says. Besides, companies didn’t want to do anything that would make it look like they were intercepting distributors’ sales by dealing directly with the distributors’ customers.
But the Federal Trade Commission (FTC) saw Walsh’s answer as an indication that Herbalife was motivated more to amass large groups of distributors and less to create legitimate consumer demand for its products. In 2014, the FTC started digging into Herbalife’s business practices. Two years later in its settlement with the company, the commission ruled that 80 percent of Herbalife’s net revenue must come from customers outside of the compensation plan, which must reward distributors for “retail sales to customers and not on the recruiting of a downline of people who will buy the product at wholesale.”
While these rules were specific to Herbalife—as were the requirements in a similar settlement with Vemma Nutrition Co.—the whole channel took serious note of the rulings’ implications, and as the smoke from the settlements continues to clear, direct selling is fundamentally changing the way it operates.
Direct sellers are reframing and becoming more transparent about their company-distributor-customer matrix. They are distinguishing between those who purchase starter kits to become distributors and those who purchase product but have no intention of becoming business owners. To make those consumer purchases as easy as possible, direct sellers also are creating new channels that invite customers to browse and buy with no talk of joining or of an obligation to join the compensation plan.
“Direct sellers have always felt a special responsibility to their salespeople and customers,” says Direct Selling Association President Joseph Mariano. “So it only makes sense that the next step in the evolution of our business model is an even greater awareness of the ultimate consumers of our products.”
Industry leaders believe that the increased regulatory pressure is making direct selling a stronger, more viable business opportunity, Fleming says. “The whole direct selling community is going to be better for this new level of scrutiny that started with the question “How many ‘real’ customers do you have?”
The Real Deal
The bottom line is that direct sellers have always had plenty of real consumers who love their products. But “because of our primary relations with our salespeople, our relationship at times with our customers has been somewhat opaque,” Mariano wrote recently in DSN. The FTC settlements have prompted companies to lift this veil and define their buyers more clearly.
A strategy many direct sellers are using to align their practices with the new regulatory reality is to create different categories of retail customers. Perhaps the most popular is the “preferred customer.” Preferred customers typically pay the same wholesale price that distributors pay, but they don’t have to purchase a distributor starter kit or do anything else that enrolls them in the compensation plan. Typically, they just have to sign up for automatic product shipments and/or pay an annual fee.
Paul Adams, Senior Vice President of Strategic Marketing at SUCCESS Partners, says one of his clients has created a third buyer category, in which customers receive rewards, such as free product, for hosting home parties and referring new customers. Ed Jarrin, CEO of direct selling cloud platform Exigo, adds that more than 60 percent of those who use his company’s e-commerce technology have a preferred customer program—and many of them have a “referrer” classification, too.
It’s easy to put new customers and distributors into the right buckets under this evolving industry rubric. It’s a more involved task to categorize them retroactively. But direct sellers we talked to are not shrinking from this complex task.
LifeVantage has used a behavioral metric to sort through its database, says CEO Darren Jensen. In its first step toward segmenting distributors from other buyers, the company looked through its database for anyone who had enrolled as a distributor but who had “no business activity ever,” he says. Six months before their renewal deadlines, these distributors received an email from LifeVantage asking them to reassign themselves to the preferred customer category. They got follow-up emails three months later and again in the weeks, and days before the renewal deadlines. All of them reclassified themselves, Jensen says. “We’ve seen no pushback.”
Jensen says that in the next sorting phase, the company will contact distributors who have had some business activity but not for a particular period of time. If they don’t re-categorize themselves, LifeVantage will do it for them but will let them know that they can become distributors again at any point for no additional investment.
LifeVantage’s commitment to retail sales is underscored by its decision to change its distributor incentive plan, which used to reward salespeople more for recruiting other salespeople than for bringing in new customers. Now, they receive the same benefit for recruiting both, Jenson says. At TLC, customer recruitment takes center stage in promotions like the one that awarded a trip to a Jamaican resort to new representatives who brought in 100 new customers in their first 100 days as salespeople.
Even before customer acquisition became the No. 1 topic of conversation among direct sellers, AdvoCare was recognizing that a portion of its distributors were really just wholesale customers, says Allison Levy, Executive Vice President and Chief Legal Officer. So that’s how AdvoCare categorized them. “We’ve been working on segmentation for a long time,” Levy says. In September 2016, the company launched its preferred customer program in part to more clearly classify these wholesale buyers. The reclassification is “still evolving,” Levy says. “We still have a lot of distributors who are distributors in name only,” she says. “It just takes time.”
Levy says AdvoCare’s next step is to help its distributors “better track and trace their customer sales,” so that the company has data on retail activity at every level. It seems Herbalife had plans to drill down to this same level. In an August 2016 investor presentation, it laid out its intention to “verify retail sales by requiring receipts, [which] will require administrative work for the company and its Members, but [which] technology options will simplify.”
Technology is making this channel transition easier than it would have been a decade ago, executives say. Advancements in e-commerce allow direct sellers to market directly to and track customers who want just the products.
For example, Raleigh, North Carolina-based Touchstone Essentials has revised its online shopping portal so that buyers can make purchases without ever seeing a check box that could enroll them as a Member (distributor). “By separating the back office from the shopping experience we create an environment where our customers feel very comfortable, as though it’s a traditional e-commerce-style shopping experience,” says Chief Operating Officer David Isserman.
Selling directly to customers doesn’t cut Touchstone Members out of the transaction, though. If a shopper isn’t already connected to a Member, the company will choose a Member to get credit for that sale, based on geography, customer goals and other criteria, Isserman says. TLC operates the same way—although only about 1 percent of TLC’s retail buyers come unattached to an independent business owner. “We feel that could grow to 5, 8 or 10 percent in the next 24 months,” Licari says. “We’re definitely looking forward to that number going up.” When it does, it will only benefit existing distributors.
Mobile technology and social media are driving much of the channel’s ability to reach new customers. TLC will soon launch an app that captures a shopper’s profile—much like Amazon’s app does—as well as his or her distributor’s information. “You don’t have to remember your independent business owner’s name; the app knows who you are and who your IBO is,” Licari says. At Touchstone, a shopper who lands on a Member’s website is tagged as a lead for that Member. The shopper then gets targeted ads on his or her social news feeds and will be redirected to the Member’s site after clicking on an ad.
Back-end technology is changing in response to the new environment, too, Jarrin says. As direct sellers increasingly target retail customers, Exigo has been developing reporting tools that help clients define specific customer profiles and measure the effectiveness of promotions. For example, a report could tell a company if a certain age group is drawn more to one campaign than another or if a promotion gets more traction in the Southwest United States than in the Northeast. “Having the ability to create profiles, or member types that have certain benefits, that gives a client very simple and direct access to create a promotion and watch behavior,” Jarrin says.
What Does It Look Like to Do the Right Thing?
Direct selling veteran and DSN Ambassador John Fleming says he never would have wished for the uncertainty and fear the channel has felt the past couple of years, as regulators, investors and skeptics scrutinized direct selling. But he is heartened by how resilient network marketers have been and how willing they are to evolve and become better versions of themselves. “The direct selling model is better positioned than maybe ever before,” he says. “I have so much respect for these companies that are doing the right thing.”
Here are four best practices to adopt based on the lessons the channel has been learning:
A Bright Future
Experts say this operational shift probably feels seismic, especially to legacy companies, but early indications are that the channel is accepting segmentation.
“Our Members are thrilled that they’re being rewarded with business that they wouldn’t otherwise have gotten,” Isserman says of the automatic link the company makes between new retail customers and existing distributors. And Touchstone’s retail customer base is expanding steadily, says owner Eddie Stone, who prefers not to publicize hard numbers but says the company has “five times as many retail buyers as Members.”
AdvoCare distributors also are supporting the new normal, Levy says. “Over the last 12 months, it has been really enthusiastically received, and they’re excited about it because it helps them clearly present what we offer. But this was a very big shift for us, structurally. It does take time to absorb and embrace it.”
At LifeVantage some distributors were leery at first, Jensen says. Because LifeVantage used to be a strictly retail company, some of the field representatives were wondering if the company was going to swing back in that direction. “Once it was fully explained and we got our distributor leadership on board, we haven’t had any major pushback.”
Adams says this new regulatory environment will create other new standards, as well. For example, direct sellers will have to get used to more measured revenue increases. “This industry is known for ‘hockey stick’ growth,” he says. “Organic growth
may not be as exciting at first, but it’s more sustainable.”
It seems that regardless of how long companies have been doing business the old way, the new way is gaining momentum. “What I’ve seen happen since these FTC rulings is a concerted effort to put in place true blue customer programs,” Adams continues. “I’m thrilled. Because frankly it has to be about selling a product and creating
Levy is excited about this new era. “I like higher standards,” she says. “Segmentation gives us a better ability to help our sales team and reach our customers more easily, more efficiently and more directly.”
Perhaps Jensen sums up the channel’s optimism the best when he says, “Not only will we comply with this new reality, we will thrive under it.”