December 01, 2015
People Power: Direct Selling’s Path to Growth and Change
by DSN Staff
The direct selling channel is in a period of transformation. Innovation is driving growth in many companies, particularly some of the highly entrepreneurial upstarts that began operations in the 21st century. Consumer tastes and shopping preferences are evolving ever more swiftly, propelled by new technology. And there is a growing hunger for and acceptance of flexible, independent opportunities for entrepreneurship. Through it all, the power of personal connection weaves a unifying thread.
As 2015 draws to a close, we thought it fitting to step back and take a wide-angle view of the direct selling channel, where it stands in its transformation process and where it is likely to head in 2016. Direct Selling News’ analysis reveals a community of companies with abundant strengths and opportunities. There are some threats on the horizon, as there always are, and the speed of change continues to increase in areas that have strong impacts. But direct selling has sustained all manner of challenges through the years and has consistently performed as an outstanding channel of distribution for companies representing a wide variety of goods and services.
Hard to Argue with Growth
We have long maintained that one of the chief strengths of direct selling is the business model itself. The model contains distinct assets, including the potential to earn money, gain skills and development, and have access to quality products and services for oneself and one’s family, as well as sharing and selling them to others. It taps into the power of people, rather than the power of traditional advertising and marketing, to deliver products and services to the marketplace. And it has proven effective. From the earliest days of door-to-door sales of books, perfume, cookware and other household products, direct selling has gained traction in the U.S. and abroad. According to the World Federation of Direct Selling Associations (WFDSA), both global retail sales and total consultants reached record highs in 2014. Retail sales rose 6.4 percent (from $171.8 billion to $182.8 billion) and consultant numbers grew 3.4 percent (from 96.5 million people to 99.7 million people).
These most recent figures indicate a welcoming world of customers to the direct selling channel of distribution, supported by the nearly 100 million independent contractors across the world who find value in a direct selling opportunity. U.S. Direct Selling Association President (U.S. DSA) Joseph N. Mariano states, “People become involved in direct selling for many reasons, including a love of a company’s products and services, a way to supplement income, the desire for more work-life balance or a more substantial opportunity to build a business. Direct selling is increasingly seen as a modern, sustainable professional pursuit, and that means more opportunity for more people over time.”
The growth, in fact, has been steady. According to WFDSA, the industry has a three-year compound annual growth rate (CAGR) of 6.5 percent from 2011 to 2014. Twenty-three countries posted retail sales of $1 billion or more in 2014, including the U.S., where 18.2 million people participated in direct selling and generated $34 billion in retail sales. Another strong indicator of growth is what DSN calls its “$100 Million Club.” For the past two years, after the DSN Global 100 statistics are compiled, DSN has released a list of those companies from the Global 100 list that grew $100 million or more in a single year. In 2014, 16 companies achieved this milestone. The highest dollar amount was achieved by Mary Kay Corp, which reached a $400 million increase in one year. Possibly even more indicative of solid and sustainable growth, 69 percent of the companies that grew over $100 million in 2014 also had done it in 2013.
While we won’t have 2015 results for several months, there are strong indications that the channel continues to grow in the U.S. and around the world. DSN has identified 30-plus U.S.-based companies that are expected to close out 2015 with revenue that would place them in the upper middle-market range of $300 million to more than $1 billion. We expect this group to continue to grow, as two-thirds of the companies are younger than 30 years old and several are less than 5 years old. The youngest companies performing in this range include the following:
This high level of new company growth is a strong indicator that the companies, consultants and customers in this industry find value in its many aspects. Additionally, about one-third of the companies in this DSN analysis are tracking to break the $1 billion barrier by year end (or already have). These companies include:
- Team Beachbody
- It Works!
- Young Living
As economic trends drive toward the creation of new and different job opportunities, more and more start-up companies are capitalizing on the individual’s preference for flexibility and self-determination in work. These micro-entrepreneurs are functioning as independent contractors, and their rate of adoption is growing by leaps and bounds, according to two researchers—Harvard’s Larry Katz and Princeton’s Alan Krueger—who are tracking the share of the adult population filing a 1099 form with the IRS.
It is our belief that as this segment of the new economy continues to grow, the role of the independent contractor will continue to be more fully embraced, and the additional benefits attached to a direct selling opportunity might be more fully understood. We agree with Mariano, who states, “In an economy that increasingly values meaningful opportunities for independent work, it’s not surprising that direct selling continues to experience solid growth in the United States and around the world.” Indeed, of all of the independent contractor opportunities available, none provide a real pathway for substantial learning and development, recognition, and incentives to grow professionally and personally except direct selling.
Few, if any, traditional companies offer the range of skill training and personal development opportunities so widespread among direct selling companies. Once an individual signs on as an independent consultant, that person generally has access to a back office system that contains training material on such traditional skills as sales basics, time management, goal setting, presentation skills, handling rejection and so forth.
Both the disciplines of psychology and sociology tell us that once basic human needs such as food, shelter and safety are met, the desire to be more and do more begins to take shape in the human spirit. As a species, humans appear to have an insatiable desire to improve themselves and their circumstances. The direct selling opportunity is one of the few places, if not the only place, where economic opportunity and personal growth opportunity intersect, and where personal development programs are generally offered and funded by the parent company. Personal development has many aspects and nuances that encompass both formal and informal education such as gaining trade skills and soft skills, enlarging one’s view of the world and learning to welcome success. It’s one of the few places where the opportunity itself helps an individual become who they want to be.
Personal development at its most effective is not a course or even a series of courses. It’s a lifestyle, an adopted point of view from which the rest of life is then put into focus. For this industry, the concepts of self-improvement are built into the very foundations of the model, as an independent contractor won’t rise to the top and become a leader without bringing a team along. That team will only hold together long-term as long as it cohesively exhibits the basic tenets of personal development: teamwork, initiative, leadership, self-discipline, a positive attitude, and not least of all, the desire to be better and do better in all things. Within a direct selling team, the mantra to grow personally and then to help others grow personally is foundational.
Public and Regulatory Scrutiny
Over the past few years, regulatory scrutiny of direct selling companies has intensified, and 2015 was no exception. In the U.S., we have seen mainstream media coverage of the channel include a number of critical accounts. Multi-level marketing has even earned some brief, and unflattering, mentions as part of the presidential campaign. Much of the criticism surrounding the business model stems from income claims made when companies and/or their independent contractors set forth a get-rich-quick mentality. This may take the form of videos, photography, speeches or other marketing collateral that emphasizes as common what only the top 1 percent of independent contractors may reach within a company’s compensation plan.
The claim that everyone who takes up the opportunity can live a lavish lifestyle is not only misleading, it’s completely unnecessary. The opportunity here lies in full disclosure of the earnings opportunities of consultants at all levels. In the online study by Harris Poll commissioned by DSN in 2014, 85 percent of current sellers reported a good or excellent experience as an independent contractor for a direct selling firm. Additionally, 70 percent reported that they had spent 15 hours or less on their business activities, indicating a part-time status. Furthermore, 27 percent indicated they earned less than $1,000 in the year, and an additional 51 percent made between $1,000 and $49,999. All of these statistics considered together paint a picture of independent contractors, most of whom work part-time hours and earn part-time to lower full-time money, and yet are completely content with the opportunity and their part in it. We know that in reality a very small percentage of those working as independent contractors will earn the incomes that would be considered extraordinary; however, the opportunity is available to all who put in the time and effort. This is perhaps the least understood premise of direct selling—the availability of the opportunity.
The second largest area for improvement lies in product claims. The regulatory bodies put in place by the U.S. government have very specific rules and laws around what can be said about a product and its attributes. The Federal Drug Administration (FDA) and the Federal Trade Commission (FTC) are charged with protecting the public interest by prohibiting companies from making unsubstantiated claims about products, and attributing medicinal, healing or curing properties to any substance that hasn’t undergone medical testing and review. Our responsibility as an industry is to understand these rules and ensure that the independent contractors representing our products and services also understand and abide by them.
Direct selling companies, unlike most retailers, have two simultaneous constituencies to satisfy: the independent contractor and the end user. In most companies, the independent contractor is often an end user as well, which is a subject of some debate. This practice of an independent contractor participating in a compensation plan by selling to others and also purchasing the products or services for themselves is often referred to as personal use. The U.S. DSA recently took a bold move in support of personal use with the publication of a report it commissioned by New York City-based NERA Economic Consulting. Moving forward, it will be important for the direct selling community to continue to highlight the value and legitimacy of the passion distributors feel for the products and services they represent.
Indeed, the rest of the marketing world now seems to be catching up with what direct sellers have always known: the best marketing revolves around the customer’s needs, not the company’s. There is, in fact, no more customer-centric approach to selling than when you are a customer yourself, an idea direct selling companies have espoused for decades.
Perform a simple Google search on the words “customer centric marketing,” and you’ll receive over 3 million responses of articles from magazines like Forbes and consulting white papers from firms like McKinsey in support of making the customer the center of the buying and selling universe. Yet many people who work at retail companies don’t buy what they sell. Within the direct selling universe, the opposite is true—most independent contractors do buy for themselves what they sell to others.
Call to Action for 2016
We must tirelessly continue to draw distinctions between legitimate direct selling companies and those entities that truly are fraudulent bodies that victimize consumers. We cannot and should not defend all companies that self-identify as direct selling companies, as it is the low barrier of entry that attracts both legitimate entrepreneurs as well as crafty fraudsters. Rather, we must continue to define and promote healthy business practices, provide guidance to those seeking it and call out wrongdoers. It is only by raising the standards ourselves, practicing rigorous self-regulation and continuing to educate the public that we can free the good companies from the public’s poor perception of the direct selling channel. As Ben Franklin noted, “an ounce of prevention is worth a pound of cure.” This is advice we would do well to take.
Establishing a clear culture for the field that includes expectations for customer service levels as well as operating principles around how to sell and present the products and services can go a long way toward mitigating some common consumer complaints, and thus positively influencing the public perception.
Basic, foundational principals for any company include offering a quality product that creates value for consultants and customers alike. It is also critical to establish ongoing and clear communication with the field about what can be said about products and services, thus educating the independent contractor about problems with making unsubstantiated claims, whether it is about the product or the earnings opportunity.
Additionally, incorporate excellent customer service for both consultants and consumers, including buy-backs and return policies that leave everyone you touch praising you, not complaining about you. Invest in support and training for your independent contractors so they feel better about their entire experience.
The direct selling model has transformational properties, providing opportunity without regard to social standing or education. The model has a positive social and economic impact globally, offering people from all walks of life benefits that cannot be found in any other economic model such as low cost of entry, training and backing by a larger parent company. Many have drawn parallels between a direct selling opportunity and a franchising opportunity, but without the restrictive and most often prohibitive cost of a franchise. Additionally, no franchise will return 90 percent of the purchase price to a dissatisfied business owner.
We are now the generation entrusted with ensuring the longevity of this exceptional business model, and we must as an industry collectively rise to the occasion. The people involved are worth the effort.