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January 09, 2012

Special Publications

S.W.O.T. Analysis on Direct Selling

Situation Analysis

The motivation to produce this document is very basic: There is much discussion about whether the direct selling model is temporarily challenged or simply going through what might be one of its best transformations. The new business environment is impacted by forces and competition that did not exist just five to 10 years ago. The speed of change has never been greater and its impact upon society has never been as profound.

Overall, the past four years reveal that aggregated revenues for U.S. direct selling have been slightly declining or flat. Current observations reveal some mature companies are doing very well and new growth companies are emerging, providing much optimism for the future of direct selling as a channel. However, a rapidly changing business landscape—impacted by quantum leaps in technology and major recessions in mature markets around the world—appears to have raised challenging questions for those seeking new ways to better serve an ever-evolving and much more informed consumer and prospective independent contractor.

In an effort to better plan for the future, businesses often assess their current state using an examination of Strengths, Weaknesses, Opportunities and Threats (S.W.O.T.). While we at Direct Selling News do not consider our role to be that of researcher, we do see ourselves as a catalyst to trigger awareness and share perspectives through our news stories and projects such as this analysis. We believe such projects will spur additional research by those capable of bringing the best findings to direct selling companies and the overall industry.

We see ourselves then as observers, and as a vehicle for the collection of perspectives. It is this combination that led us to the Direct Selling News S.W.O.T. Analysis and, ultimately, our redefining of the S.W.O.T. approach. We have chosen to eliminate the words “Weaknesses” and “Threats” in the S.W.O.T. methodology and replace them with “What’s important” and “The future.” No single thought or perspective determined the content of this document. Those who contributed did so because they wanted to be part of a process seeking answers important to all who choose to market their products and services through the direct selling channel of distribution. We appreciate the contributions, observations and perspectives of those within the industry who have supported individual companies through their services for many years.

Strengths

The direct selling industry can claim many strengths, beginning with its focus on products and personalized service delivered through presentations that are educational and often entertaining. Prospective recruits are offered an opportunity to engage in the free enterprise system with minimal financial investment, minimal risk, free training and the opportunity to earn in proportion to time and effort invested. No method of business stands taller than that of direct selling for what it offers people from all walks of life in terms of ease of entry into a business opportunity. This has formed the value proposition that has served direct selling companies for more than 150 years.

A product or service that is designed to be distinctly different from competitive products can be marketed more effectively when education, information and personalized presentation become the focus of the marketing and sales effort. This ability to educate and personalize a presentation to the consumer, or a prospective recruit, is what has enabled direct selling companies to thrive in spite of mass competition with products and services. This can be seen no matter what the category, be it skin care, scrapbooking, home care products, fashion, nutritional supplements and beverages, chocolate, candles or legal and financial services. All of the preceding products and services, and many more, have benefited from the personal interaction, education and presentation style used by direct sellers, whether with one-on-one or party plan/group selling methods. Focusing on this instruction and demonstration has also allowed direct sellers to overcome price objections, as well as present and exhibit specific features and benefits. The historical focus on education and presentation is definitely a major strength for the industry.

Another great strength of the industry is company-provided basic skill training and a focus on personal growth for individuals. We would strongly argue this support makes direct selling the most viable model for anyone keen on creating not only an income but an asset as well. Each company has its own process and methodology as to how they position their products/services and opportunity; however, the common value proposition throughout the industry is not in the specific product/service being offered but in how independent contractors use these products and services to create income and build businesses.

The business model itself has been determined by this assessment to be the industry’s best strength. The potential to earn money, along with ease of entry—and the offer of “privacy of consultation” regarding products, services and the business opportunity—are the industry’s most unique features. This strength is a distinct asset and is not found in any other tried and proven business model.

What’s Important

Basic direct selling business fundamentals are vital! Our collection of perspectives led us to what remains important to the overall industry as we pursued our objective to find out what transformations might be occurring as we continue the march into the future. Not surprisingly, our interviews and the perspectives of those who participated in this assessment were virtually unanimous in their belief that these fundamentals remain critical to future success for all companies and their independent contractors. The price/value relationship relative to products and services remains important, as does the uniqueness of product as viewed by both the independent contractor and consumer. Some services, such as energy and financial planning, may not be classified as unique from a product point of view. However, they are certainly unique when people can engage in the distribution through direct selling.

The personal relationship—a traditional attribute the industry has claimed as being a competitive advantage—remains an advantage even as the definition of the selling/buying relationship changes, in some cases, dramatically.

The rewards and compensation direct sellers earn remain important as well, but we did not find a “perfect” compensation plan. A compensation plan must be tailored to the specific company and even to the country in which it operates. Differing delivery methods also affect compensation plans. For example, independent contractors who carry inventory and deliver products to their customers might receive more benefit for their personal effort and interaction than those who utilize their company’s ship-to-customer programs. Compensation plans that reward the right behaviors are the ones that appear to drive growth in both the number of new independent contractors joining and also the number of consumers of the product or service. Rewarding all of the right behaviors, such as customer acquisition, recruitment of customers and business builders, personalized service, follow-up, and engagement in training and personal development, will continue to be very important.

Historically, starter kits have been considered the key component of “first impressions”—the activator of that feeling of “starting a business” and, ultimately, starting a whole new life. We find that the first experience of the direct seller is a very important factor in the belief and success, or perceived success, of the new participant. A starter kit that exceeds in perceived value the fee for entry is considered a competitive advantage for a direct seller, especially when compared to the cost of entry to more traditional business models. When a starter kit is priced appropriately for the market, it can act as a solicitation of commitment, which actually protects the retail profit potential of the independent contractor as some individuals prefer to remain customers rather than join a business. Franchising—thought to be the great new solution to business entry 25 years ago—cannot really compare for those who desire to try their skills at building a business because of the cost of typical entry. This difference in cost to start a business is viewed as a direct selling competitive advantage that can be leveraged very effectively in overall industry strategic planning and preparation for growth.

That is where training methodologies and processes come in. Skill training is essential, but our findings reveal a focus on personal development to be critical. The growing companies that we looked into all revealed a focus on personal development as being key to leadership development within their field organizations, as well as to the development of internal staff. The companies sharing information with us also believe personal development to be the most effective tool for retention and growth. One very successful company even described itself as a personal development program with a compensation plan.

Opportunities

The direct selling industry has served millions of individuals and companies worldwide and contains strengths offered in no other business model. Additionally, most agree on the fundamentals that should remain consistent, even in ever-changing times. This leads us to discuss the opportunities that lie ahead.

Our approach to this portion of the analysis is based on interviews and observations shared by those inside and outside of the industry. We sorted our collection of perspectives into internal factors and external factors.

Internal Factors

The internal factors assessed are the overall industry value proposition and the direct selling business model. We offer that the value proposition of the industry overall may not be as clear today as it was only 10 to 15 years ago, when no other channel of distribution provided the information, education and personalized experience a direct seller could offer. The total value proposition includes the product/service proposition, the business/earnings proposition, the service proposition and the ethical standard by which all are delivered. New and different competition—and an information age where the consumer and prospective recruit can access information and the experiences of others in seconds—may be creating new perceptions and definitions regarding the value of the direct selling experience.

The great opportunity for the entire industry is a well-defined and clearly articulated value proposition. When the value proposition is considered special and personal regarding the buying experience, customers will be easier to acquire and businesses easier to grow. Growing the number of customers served will always be a key component to overall business growth. The fact that revenues in the direct selling industry have been by and large relatively flat for several years may indicate that the number of customers served may be flat. Direct selling has always had an edge on the competition when it comes to personalized service and the buying experience; however, new competition and technology have changed the game. We can no longer take this edge for granted. A close review and examination of the consumer value and service proposition compared to that of other channels of distribution will lead direct selling companies to better and even more personal ways to enhance the proposition for consumers.

The earnings proposition has always offered ease of entry along with control of time and effort invested, with no limitations to potential rewards. It is estimated that a very small percentage of independent contractors engaged in a direct selling opportunity will earn incomes that would be considered extraordinary. This continues to support the historical perception of direct selling, which has been seen as an opportunity supportive of short-term goals for income, recognition and achievement. Retention studies we referenced indicated that if distributors earn as little as $100 per month, close to 95 percent of those distributors are still purchasing product monthly at the six-month mark. As important as the preceding remains, the chance to become better recognized as the most ideal of home-based business opportunities—appealing to all segments in the population—is certainly viewed as very significant for many companies.

Unlike the earlier years of the industry where training methodologies were clear and prevalent throughout, overall there appears to be a lesser focus on business fundamentals and training systems. When we identified “what’s important,” we found training and development systems remain critical priorities to the success of any direct selling company. A huge opportunity for the industry overall is to more effectively promote the value of its training development programs, including life skills and personal development.

External Factors

External factors can activate business weaknesses and present challenges that may have been nonexistent only a few short years ago. This certainly appears to be the case when observing the external factors that may be impacting the direct selling model and contributing to the challenge of overall growth. It is quite easy to use the word recession when describing the challenges facing businesses, but the greater question is: Are there other contributing forces that need to be specifically identified as new strategies are formulated? When looking at external factors and venturing to determine impact on the direct selling business model, we find several forces obviously having a profound impact. We find technology, competition and major demographic and economic shifts changing at a speed far greater than possibly ever imagined.

Technology

The impact of technology on all business models has been enormous, and the direct selling business model has not escaped it. The Internet was first known to be a destination where information could be accessed through a website. Today, websites are more sophisticated than ever and only represent part of the Internet’s capabilities. A quick assessment of direct selling company websites indicates that direct sellers overall may be lagging behind the incredible speed of change we are experiencing relative to technology. What matters today is no longer just the website, but how capable and effective you are in delivering content through all of the new mobile applications.

It took radio 38 years to reach an audience of 50 million. Television took only 13 years. The Internet took only four years, iPods had that many users in less than three years and Facebook had them in only two years. MySpace has over 200 million registered users, but Facebook added that many users last year alone. In 1992 there were an estimated 1 million Internet-capable devices and today that number exceeds 1 billion. Google was founded just 13 years ago and today is recognized as the No. 1 search engine. Each month there are over 31 billion searches on Google. The second most active search engine is YouTube, providing not only written information but vivid visuals of whatever the subject might be. Clearly, we are living in fast-moving times relative to the exponential advancements in technology. More information is available at a click than what many of us could have found in months of research just a few years ago.

Today, 50 percent of the world’s population is under 30 and 96 percent of all millennials are estimated to have joined a social media network. If anyone thinks this is a younger generation fad, one need only observe the fact that the fastest-growing segment of Facebook users is females 55 to 65. Social media represents a permanent shift in the way people communicate and form relationships. Over 200,000 bloggers are also becoming the “new journalists” and approximately 35 percent post opinions on products, brands, services and even opportunities. Still more interesting is that 25 percent of all searches on the world’s top brands are linked to user-generated content. We uncovered research indicating that 78 percent of consumers trust peer testimonials and only 14 percent trust advertisements. This means that online communicators are being perceived as experts until proven otherwise.

The Internet has created the “self-empowered consumer,” enabling an individual to actually remodel business. The same thought could be extended to the prospective distributor who can quickly gain access to the information, reputation and experiences of those who have been part of the company. Direct selling companies that monitor and manage their Internet presence will benefit from the speed at which information now flows. Those who do not will find that others will manage their brand for them. Then they will be competing with the world’s new journalists, who include anyone with a device capable of accessing the Internet and allowing for social media participation.

In fact, developing strategies around online relationships is playing to the strengths of direct selling. The combination of social media technology and the direct selling business opportunity, packaged in smart tools and applications, remains a huge opportunity for attracting new distributors and customers.

New and portable hardware, from smartphones to iPads, are game changers with respect to how consumers expect to be presented to and engaged. These tools are also impacting the perceptions of prospective distributors; therefore, company research as well as product and tool development must keep pace. Otherwise, direct selling companies may not be perceived as being in tune with changing expectations and behaviors.

The pervasive use of new technology tools and their global reach present new and different challenges for companies, from brand protection and corporate reputation to communication strategies. Knowledge engineering is a term emerging in academia. Those who master their communication skills through the new technologies will be the new knowledge engineers. This new speed in the transfer of knowledge can have both a positive and negative effect, and direct selling companies appear to be well-positioned to capitalize on the positives.

Social media functionality makes it possible for companies to utilize a new way of communicating with both their consumers and those who represent their products and services. Virtually every major traditional company can be found on Facebook, including all branches of the U.S. military. When visiting Second Life, another virtual community, we also found all major corporations and the military to be present as well. Career pathing, tours, meetings and training can all be conducted in a totally virtual environment, yet with the look and feel of participation in a live event.

The question becomes, What does it all mean for direct selling companies and the way business is conducted? We contend that the definition of personal interaction has changed, but the value of personal interaction remains the same—or becomes even more important. This is where direct sellers can gain new competitive advantages. An iPad may enable a more effective presentation delivered over the Internet, which increases the speed of communication and extends the reach of the user of the tools. However, a great presentation delivered electronically, or with the support of an incredible application, still needs the personal skill, ethics, trust and respect of the presenter to be most effective. This is where direct sellers appear to have a huge opportunity.

To become and remain most effective, direct sellers must match their great strength in developing relationships with new technologies. This combination will enhance the personal connections so critical to satisfaction, recruitment and retention of both the consumer and the seller. The importance of ethics in the selling relationship relative to a presentation of the business model, and/or the product or service, has been a longstanding focus of the industry and may well become one of its most important and valued competitive advantages.

Competition

The new competition for direct selling may very well be e-commerce from online retailers. The expansion of e-commerce has changed the selling landscape. It is estimated that e-commerce will top $300 billion in revenues in the United States alone in 2012. Market share is shifting from traditional forms of commerce such as retail stores to more online forms that challenge everyone engaged in the marketing of a product or service. Procter & Gamble, long known for its commitment to its retail store partners, launched its e-commerce business (direct to the consumer) in April 2010, which is certainly considered a game changer. E-commerce allows anyone to have much of the look and feel of a direct-to-consumer relationship. Those utilizing e-commerce as their exclusive channel of distribution are setting a new customer service standard and becoming the new benchmark. Tony Hsieh, CEO of Zappos.com Inc., has been quoted as saying, “We strive to put your order on your doorstep in 48 hours but do not be surprised if you get it in 24.” Zappos also offers free shipping, even when goods have to be returned for any reason. We see this new form of personalized service as a wake-up call for direct selling, and a tremendous new opportunity as the new tools are embraced and implemented in creative ways.

Personalized service has always been one of the greatest distinctions associated with direct sellers. A new and more sophisticated form of personalized service is the fresh opportunity for direct sellers that the e-commerce competition is unlikely to match. A company can never provide the personalized service that an army of independent contractors who are closest to consumers can provide. The definition of personalized service is changing, but its importance remains a potential competitive advantage, and we believe this to be a great opportunity for the direct selling model.

External competition, as fierce as it may be, will not determine the future of direct selling. Direct selling companies, we believe, have the opportunity to more clearly establish the direct selling model as being the best blend of people, technology, personal communications and relationships. In one interview, we found that a direct selling company had actually acquired an e-commerce company for the purpose of learning how to better utilize technology, not specifically for the purpose of diversification or revenue increase.

Competitors, whether mature or new, appear to invest far more than direct selling companies into research and alignment with predictors of the future. This appears to be another great opportunity for direct selling. Any individual company, no matter how large, may find it difficult to take on research to any significant degree by itself. The questions are many and we cannot see any one company being able to come up with all of the answers.

Collaborative efforts among companies would appear to be one of the great opportunities for the industry overall. As difficult as this may sound to direct selling companies—all of whom take pride in uniqueness of product, service, compensation plan and even culture—the common value proposition is the uniqueness of the business model. No different than the franchise industry, which found a way to collaboratively promote the basic attributes of the model through the International Franchise Association, direct selling companies might benefit from an even stronger collaboration in support of the business model. With the business model, prospective customers and independent contractors can choose from the most diverse products and services offered by any proven business model in existence.

Major Shifts

New opportunities for growth also come from major shifts impacting the industry. The shift in power from supplier to consumer is a result of the vast amount of information consumers can now access so easily. This new info-powered consumer still needs to feel their source of information is trustworthy, is concerned about their desire for personal satisfaction, and desires a relationship in addition to the product or service being purchased. Direct sellers will experience a competitive advantage far greater in the new world of tomorrow if, through the use of these new tools, they are able to remain steadfast in their commitment to deliver the highest standard of ethical behavior and trust, and a relationship far more personal than that of any company.

The shift in power from men to women can be a new advantage as well. Unlike 20 years ago, today there are more women in the workforce than men, and there are more women who are breadwinners in the family. The industry is still composed of approximately 82 percent women, but they are time-starved as a result of being responsible for family, household and often career. The opportunity for the industry overall may be in becoming more appealing to men while continuing to support the needs of those who have been the foundation to the business model for over 150 years. Ironically, the first direct sellers were men exclusively.

Demographic shifts are certainly increasing the pool of potential recruits for those who identify with ethnic segments in an authentic manner. All segments in the marketplace are becoming more complex. Companies have to deal with the older generation, boomers and now Gen Y, requiring well-thought-out succession plans.

The upside of the U.S. recession for direct sellers may be in its severity. Since the 1960s, the U.S. economy created between 17 million and 20 million jobs each decade—up until the 2000s. Clearly this job creation activity is no longer happening; in fact, the job pool is shrinking. All segments of the population have been impacted. Seniors have lost much of what was thought to be a secure retirement, triggering a renewed interest in what opportunities are available. The middle-aged unemployed are looking at never being employed again in the traditional manner, and the youngest in the population are looking at a continuing shrinkage of jobs over the next several years.

The U.S. market may also be perceived as challenging in that many mature direct selling companies are experiencing their strongest growth in other markets around the globe. This may create a perception, among some, that the direct selling model is better suited to Third World markets where socioeconomic norms are more like the U.S. market of 20 to 25 years ago. We found this perception to be very interesting, especially when we look at the traditional marketing strategies of major brands. The major brands maintain a strategic focus on the U.S. market and do not appear to waiver even though technology dictates the use of new methods for reaching targeted audiences.

We also found what may be a shift in the role of the direct seller. Many independent contractors who prefer to use the networking term have taken advantage of the business model because it makes possible the consumption of products and services desired at a discounted price. The networking version of the business model also rewards and compensates for recruiting others who desire the products and services of a particular company. This activity is not a “selling” activity as we might have described direct selling 15 years ago, and it is becoming more and more popular with all direct selling companies, even those generally categorized as personal selling or party plan. This, we believe, contributes to a “blurring” of any specific categorization of a direct selling company and provides the overall industry with new ways to engage more people, especially those who may think they have an aversion to selling. Even the basic definition of selling is changing.

The Future

Based on our findings, the future and success of direct selling as a way of distributing goods and services looks very promising. The business model is not easily compared to any other. The more than 150 years of growth and evolution may be just the beginning. Providing individuals with an opportunity to take products and services directly to the consumer—with the support of a parent company—is perhaps more desirable today than in any other time in history.

During the past 12 months, the U.S. unemployment rate has fluctuated between a high of 9.9 percent and a low of 8.8 percent. The most recent breakdown (men, 8.6; women, 7.7; teenagers, 24.5; whites, 7.9; African Americans, 15.5; Hispanics, 11.3; and Asians, 7.1) has remained rather consistent.

None of the preceding stats include the number of new people opting for the direct selling business model. Could this model be the one that now emerges as the ideal solution to the needs of people from all walks of life—a way of life where people learn new skills, grow professionally and earn in accordance to time, effort and effectiveness? Mary Kay Cosmetics recruited 125,000 new consultants in the month of April alone. This is a most powerful statistic that represents 125,000 people who not only have an opportunity to engage in the distribution of products and services but also have the freedom to set their own parameters with the support of company-supplied marketing, training and tools. Mary Kay is only one company of an estimated 2,000 using the direct selling business model in the United States. The top 20 companies are estimated to have started in excess of 500,000 new independent contractors during the month of April.

Could the external factors impacting the pace of life and the financial security of so many people be the very forces that will redefine the importance of the direct selling business model? History reminds us of another business model that found its moment in time. That model is called franchising. During the 1930s, the model began to attract many entrepreneurs who desired the support of a parent company and proven systems that would lead to quicker success. It worked, and today franchising is a business model used in more than 70 industries, generating over $1 trillion in U.S. sales alone.

The current environment is challenging the franchise model, where the entry fee can be anywhere from a few thousand dollars to over $1 million, which is hardly the investment opportunity the average person can make. Direct selling, however, has historically invited all segments within the population to a business opportunity. There are no great barriers to entry, and the direct selling company one might select provides the training and guidance needed to achieve success. Well-defined skill training with a focus on personal development ensures the growth, confidence and self-esteem of the participant, which is essential to success in sales and organizational development.

In summary, the core value proposition is the business model. The potential to earn money, along with ease of entry, the opportunity to have a relationship with the business owner and the offer of “privacy of consultation” regarding products and services are the industry’s common features. Collectively, these features combine to provide a perfect example of how a free-enterprise opportunity can be offered to the masses.

The opportunity to attach to causes embraced and promoted by most of the companies becomes another reason for choosing direct selling. Many of the products and services sold by direct sellers generate financial support for great causes, including breast cancer awareness, childhood obesity, hunger, and so many other causes. In fact, direct selling companies may be the leader in charitable statistics of companies that give back in significant proportion to revenue generated. Direct selling is truly an industry with a heart and the companies that give back so graciously are also providing their independent contractors with another opportunity not easily found in traditional business models—the chance to affiliate with a good cause.

In recognizing the DSN Global 100 for 2010, the top 100 companies alone represented over $66 billion in wholesale revenues, and $100 billion in customer value delivered through 43 million persons who have chosen direct selling. The business model thrives when those who participate build businesses and share with others how they too can do the same thing, creating a positive social and economic impact on families and communities.

The training, personal development, income possibilities and values gained from building a business using the direct selling business model are needed more than ever. In spite of a shrinking job base and the negative conversations so prevalent in the media about our nation’s debt , people from all walks of life still hold to that hope and dream of freedom—freedom to become whatever one’s vision might be. This is what the direct selling model offers. Perhaps the business model of direct selling is simply on the threshold of its greatest moment.

We think so.


We acknowledge the contributions of the many thought leaders and business experts who have assisted in the creation of this document. We would like to specifically recognize the following people for their substantial commitment and involvement in both time and insight.

ACADEMIA
Dr. Larry Chonko
Thomas McMahon Professor in Business Ethics
The University of Texas at Arlington

CONSULTANTS
Tony Jeary
Owner/Founder
Tony Jeary International

Mark Rawlings
CEO
InfoTrax Systems

Bob Woodward
Founder & President
Bob Woodard, Inc.

Paul Adams
Senior Vice President
Strategic Marketing
Video Plus

INDUSTRY
Judy Jones
Insights, Lead Consumer and Market Insights, Amway Corporation Chair, USDSA Industry Research Committee

Charlie Orr
Executive Director
Direct Selling Education Foundation

John Fleming
Publisher
Direct Selling News