October 01, 2014
MONEYBALL: Buying the Behaviors That Bring Success
by Mark Rawlins (with research and contributions from Mitch Stowell and Kenny Rawlins)
For more than 30 years my company and I have provided commissions processing software for the direct selling industry. Through all those years—working with hundreds of companies—I have struggled to find a simple way to describe our basic theory of commissions. It was somewhat shocking when the answer came to me in a movie theater:
“Your goal shouldn’t be to buy players. Your goal should be to buy wins. And in order to buy wins, you need to buy runs.” —economist and statistician Peter Brand in the movie Moneyball
A lot of things immediately fell into place; it was surprising to me that professional baseball had gone through the same challenges 15 years ago that the direct selling industry is going through today. I immediately purchased and read Michael Lewis’ book Moneyball, and still recommend that all my clients read the book or watch the movie.
Moneyball tells the tale of the Oakland A’s 2002 baseball season. Due to the limited revenue brought in by their market, the A’s had only $41 million to spend on salaries that season. In order to compete with larger market teams such as the New York Yankees, who would spend over $125 million in payroll during the same period, the A’s chose to actively acquire players who were undervalued by the league. This strategy gave the A’s the building blocks for a 20-consecutive-game winning streak—the longest streak in American league history—and took them to the playoffs.
The key to the success of the A’s was to ignore traditional methods of finding and valuing players that relied on “gut instinct,” “star power,” and conventionally used statistics such as stolen bases, runs batted in, and batting average. Instead, they focused on identifying statistics that better measured a player’s ability to win games—demonstrating that things like on-base percentage were more valuable than homeruns. After identifying the specific skills required to win, the A’s began to acquire players who were undervalued in the marketplace, rather than players with the “super star” qualities often sought by other teams.
The A’s proved that statistical analytics can identify the skills and behaviors most directly responsible for success, and that the smart use of limited funds can level the playing field with more powerful competitors.
So how does this relate to the direct selling industry? I think it relates in two ways:
- Many companies feel that in order to be successful, they need to acquire distributors perceived as “rock stars”—people with known reputations for bringing in a lot of business—or keep their existing stars without looking at their actual contributions. These stars are expensive and may or may not be able to duplicate their past successes. Like ball players, these stars have careers that span a finite number of years. And while they may seem invaluable to one company, they may fail at another.
- Like a Major League Baseball team, a direct selling company has a limited amount of money to spend. In my experience, most successful companies spend 41–48 percent of revenue on commissions, and they continually struggle with the question of how much of this money should go to “rock stars” and how much should go to role players. (Revenue is calculated based on the method used by most network marketing companies, which is the wholesale price or the price paid by entry-level distributors.)
It’s clear that, like A’s Manager Billy Beane, we need to focus on rewarding behaviors instead of buying distributors in order to buy “wins.”
Why This Matters Now: The Evolved Business World
In our industry, there has never been a time that required a more fundamental shift in thinking than right now. Why do we need to think differently in 2014 than we have for the past 30 or 40 years? It comes down to two words: Internet and economics.
The Internet: Free Agency and Inflated Valuation of Top Sales Leaders
The Internet has changed the way the world conducts business, and this is especially true of direct sales. The rise of e-commerce has been a boon to the industry—people are now accustomed to ordering all kinds of products online and having those products shipped to them. A more subtle consequence of the Internet is that it has turned distributors into what are essentially free agents. Companies are now able to identify the leaders, or dream builders, within the industry and regularly recruit them, just as a sports team would recruit players. Dream builders themselves can use Google to learn about the products and compensation structures of other companies—and how much leaders in other companies earn. More and more, they are willing to switch teams when they see a more lucrative opportunity.
This competition for dream builders has inflated the earnings expectations of industry-best sales leaders, forcing companies to walk a fine line: They must compensate their dream builders enough to keep them, but not so much that they can’t compensate sales people and emerging leaders. After all, these “role players” can also use the Internet to better understand their own value—so it is important to remember that sales people are also “free agents” and can leave for better opportunities.
Economics: The 2008 Economic Reset
The bursting of the dot-com bubble in 2000 started to dampen expectations created by the booming 1990s, but the economic reset of 2008 seemed to firmly establish a shift in what Americans thought was possible and attainable in the future.
People living in this country have always found ways to make money, whether through manufacturing, technology or investments, but during the booming 1990s, that became an expectation—along with the expectation that it wouldn’t be particularly difficult. I remember a conversation with a vice president of sales back in the late ‘90s. He told me about a promising sales person who was a package delivery driver. When he approached the driver about “going full-time” for his company, he was shocked by the response. The driver told him that he was confident his company’s 401(k) would allow him to retire with over $1 million—so he wasn’t interested. This raised the question: “How can you attract people when truck drivers feel they will become millionaires through traditional methods?” This type of pressure drove many companies to drastically increase top leaders’ compensation at the expense of the role players. And at the time, it appeared to work; people didn’t worry about making a few hundred dollars a month—they thought they had the opportunity to get rich!
The dual shocks of the bursting of the dot-com bubble and the collapse of the housing bubble have caused the vast majority of Americans to reset their expectations. Belts have been tightened, and people seem to realize they have to make money the old-fashioned way. As a result, successful direct selling companies now focus more on a balanced approach to compensation between the top leaders and the sales people.
As I talk to other industry professionals, everyone seems to intuitively understand that the industry fundamentally changed in 2008. We’re living in a new world that requires new ways of competing. One positive impact of the change is that there are now more people seeking ways to make supplemental/non-traditional income—the very thing that our industry has always been good at providing! So, how does a company go about adjusting to this new reality?
Getting the Highest Return on Your Investment
Going back to my “aha” moment from Moneyball, the goal is not to buy players; the goal is to buy the behaviors that create success. But what are those behaviors, and what are the metrics you can use to measure them? One thing that helped baseball was the availability of sabermetrics, a methodology created by dedicated individuals who had studied baseball and created a precise set of metrics that could be used to identify how specific activities contribute to creating wins.
We do not have the same type of universal statistical information for direct selling; each company has to identify the behaviors that create their success and establish metrics to track them. Let’s look at a simple example of how to do this.
One thing we know from experience is that people who buy from your company break down into four basic categories. (Graph 1, below, shows the sales people category broken into two groups—regular and hyper-recruiter.)
- 60–70 percent are customers who sign up in order to buy the product. They will not enroll anyone else, and their continued ordering depends on satisfaction with the product.
- 20–30 percent are social enrollers who like the product so much that they talk about it to friends and relatives—some of whom will also sign up.
- Approximately 10 percent are sales people.
- Significantly less than 1 percent are sales leaders and dream builders.
Within the context of these percentages, let’s visit two behaviors and look at some simple, concrete metrics you can use to measure how effective your compensation plan is at rewarding those behaviors.
In Graph 1, notice that although 10 percent of your distributors are sales people, only about 20 percent of those sales people are what we call “hyper-recruiters.” On average, these hyper-recruiters account for only 2 percent of a company’s distributors, yet they recruit up to 40 percent of the people who join that company. So imagine what could happen if you could bump that number up to 3 percent.
If we define a hyper-recruiter as a sales person who recruits 10 or more people, we can use a simple x-y graph to look for a correlation between earnings and organizational volume (OV). By color coding people who exhibit this behavior versus those who don’t, we can see whether a compensation plan is rewarding the behavior of hyper-recruiting. Graph 2 compares two groups: regular sales people and hyper-recruiters.
The graph shows a strong correlation between earnings and hyper-recruiting, showing that the compensation plan effectively rewards this behavior.
Another key behavior to incentivize is non-high-leg volume, that is, the percentage of OV from all legs of a distributor’s down line except the largest one.
While OV tells you how much business a given distributor built, non-high-leg-volume tells you the ability of that person to replicate success. If a high percentage of OV comes from only one leg, it means that the distributor recruited a good person who built the business. But if the distributor has four successful legs, it shows that he or she understands how to be successful and actively build a business.
Again, it’s easy to create and use simple x-y graphs (See Graph 3) to find the correlation between earnings and organizational volume—color coded for non-high-leg volume—allowing you to see the effectiveness of your compensation at rewarding this behavior.
As with baseball statistics, some distributor behaviors may seem, on the surface, to be essentially the same thing. If we look at organizational volume (OV) as being analogous to batting average, non-high-leg volume would be like on-base percentage. While there are similarities, the two behaviors can produce remarkably different results.
Moneyball is about using metrics to identify and buy the specific skills and behaviors required to win. Because even simple metrics like those shown in these graphs can make a real difference in revenue, it’s surprising how few companies take advantage of statistical analysis to make sure they’re rewarding the behaviors that will create their success.
Unlike baseball, each company will have a unique set of behaviors/metrics that matter only to them. This prized intellectual property can be assembled over time, and should include:
- The behaviors that are important to your company’s success
- The metrics you use to measure those behaviors
- The metrics you use to measure the effectiveness of your compensation plan at buying those behaviors
Remember, we’re not trying to buy perceived “super stars”—we’re trying to buy actual, measurable behaviors. And at the end of the day, distributors need to see how their efforts at providing those behaviors will translate to increased earnings.
Mark Rawlins is Founder and CEO of InfoTrax Systems and author of the recently published book, From Commission Plan to Compensation Strategy: Success for Today’s MLM Enterprise. Mitch Stowell is Vice President of Commissions Consulting, and Kenny Rawlins is Director of Commissions Operations, both of InfoTrax Systems.