Direct selling is in the throes of a hot new business trend, and the companies who are jumping onboard say the benefits outweigh the risks.
Did You Notice The Shift?
Barriers have disappeared and customers are engaging like never before. In fact, the current digital and technological change is so great that it will completely change the way we work, play and interact. More and more, the companies we work for and buy from are choosing to live in the cloud, thinking twice about the infrastructure and traditional systems that can bog down growth and tie up profit margins.
More and more companies are turning to third-party suppliers to help them fulfill orders or complete operative functions. They are discovering that by embracing this new trend and releasing their grip on every single facet of operations—like outsourcing IT, third-party logistics and distribution—they reduce overhead, more quickly adapt to market fluctuations. They also become easily and readily compliant with state and federal regulations and stay ahead of their competition.
As technology advances and strategic partnerships with skilled suppliers flourish, the gate keepers of the industry are dwindling in number. Now almost anyone can play.
But it wasn’t always like this.
As technology advances and strategic partnerships with skilled suppliers flourish, the gate keepers of the industry are dwindling in number. Now almost anyone can play.
But it wasn’t always like this.
The Toyota And Honda Effect
When the Big Three automotive giants (Ford, General Motors and Chrysler) were getting taken to the woodshed in the late 80s and 90s by Toyota and Honda in their own backyard, analysts took notice. How could these Japanese car companies, who were working with the same manufacturing suppliers as the Big Three, be winning awards for reliability, perceived quality, all the while decreasing manufacturing costs? Each automotive powerhouse was drawing from the same resources and yet Toyota and Honda were deemed far superior—better industry ratings, better customer satisfaction and better prices—but how? The answer could be found in the way Toyota and Honda regarded their suppliers.
The Big Three viewed suppliers as competitors, a necessary evil. One CEO of a supplier to the Big Three even went as far as saying that, in his opinion, Ford seemed to send their employees to “hate school” before they interacted with suppliers, according to the Harvard Business Review. Big Three employees were instructed to award jobs to the lowest bidders and operate with an extremely confrontational mindset. Suppliers, they presumed, were an obstacle to cost-reduction and should be cast aside at a moment’s notice if another supplier with a better price came along.
Toyota and Honda took a drastically different approach and received drastically different results. They were interested in investing in the long‑term benefits of lasting relationships over short-term cost savings. Both companies built supplier keiretsu, close-knit networks of suppliers that continuously learn, improve, and prosper along with their parent companies, a practice which spawned many books on the Japanese automakers’ business philosophy and analyzed Toyota’s and Honda’s commitment to co‑prosperity. It wasn’t that Toyota and Honda weren’t fierce to negotiate with or demanding in both quality and delivery, but the long-term relationship between the two parties superseded their minor squabbles.
When Toyota and Honda chose to invest in their supply chains, they developed an incredibly loyal system of manufacturers that valued the partnership. Having empathy while simultaneously holding each other to high standards, knowing that both sides were doing their best to provide high quality at the lowest price possible, means that the atmosphere between the two wasn’t hostile, but rather cooperative—an important working culture for companies that need each other to thrive.
For Toyota and Honda, saving a small percentage by switching to a competing supplier every time a lower bid popped up on the horizon wasn’t worth negating the trust developed between the two channels over time, and suppliers rewarded them for it. Such an incredible business advantage couldn’t be contained inside the automotive industry for long.
Fast forward two decades and direct selling businesses are increasingly relying on the same valued supplier relationships to help them reduce costs, improve quality and develop new processes and products to better serve their customers and distributor salesforce.
The Virtual Movement Comes To Direct Selling
Startups in the direct selling industry, which were previously limited to the independently wealthy or highly connected, now face fewer hurdles than ever with this new trend. Employees can office from home, outsourced manufacturers can make the enormous upfront investments in machinery, and specialized, experienced forms can handle customer service.
Ten years ago Terry Lacore, CEO of b:hip Global was the first in the direct selling space to see the many cost saving advantages that a virtual company would have over a traditionally run business. First to go was the need for a physical corporate headquarters. Next, it was finding trusted suppliers to handle many operational duties that traditional companies like to keep in house. He even started a company solely based on helping other companies do the same.
“Trusted suppliers get to know you and your company’s needs as they form a relationship with you.”
—Heidi Whitehair, CEO, Innov8tive Nutrition
Today, outsourcing a major chunk of business processing to trusted suppliers has become the hot new business trend for many organizations. In some cases, like Lacore, these companies have done away with the traditional expensive and expansive corporate headquarters altogether, choosing instead to rely on a virtual, cloud-based model, without the hierarchical organizations, infrastructure and operations that come with a conventional business. And like the Japanese car companies who led the way, some of these companies are enjoying incredible results, growing to as much as $50 million a month in revenue.
In a recent Direct Selling News cover story, Le-Vel (established 2012), who is virtual to its core with 2017 revenues topping $500 million, 55 employees and no corporate office, talked about the importance their cloud infrastructure plays in being lean and mean. “You just can’t operate efficiently and effectively when you’re that lean without having the right technology, like our custom cloud infrastructure,” says Drew Hoffman, chief operating officer and chief legal officer.
Outsourcing these business functions has allowed increasing numbers of companies in the direct selling space to manage their time and money better, freeing them to spend more time on what they do best.
For Prüvit (established 2015), a virtual company whose revenue reached $213 million in 2017, that means some of their departments are located in different parts of the country in order to stay in line with their efficiency-based philosophy. “We feel you don’t need a 300,000-foot campus and have every department under one roof,” says Prüvit CEO Brian Underwood. “We would rather redirect those profits back into research and development as well as feeding the community and creating positive experiences, which is what we do best.”
But more importantly, these virtual companies feel comfortable handing over entire departments’ worth of business processes and functions because they have forged partnerships with trusted, valued suppliers, who have become literal extensions of their businesses.
That trust, says Heidi Whitehair, CEO of Innov8tive Nutrition, is essential in order to meet the demands of her growing business, whose reported revenue is almost $500,000 per month. “Trusted suppliers get to know you and your company’s needs as they form a relationship with you,” Whitehair says. “It keeps things running smoothly as they begin to depend on your business as much as we depend on them to meet our expectations. Once that relationship is developed, they’re more willing to work with you when things come up, like unexpected deadlines or situations. We’ve called a vendor at 9 p.m. on a holiday weekend with an issue and he got his team on the situation immediately, and it was resolved within an hour. At the end of the day, reciprocal trust is most important.”
What part of your business would benefit by bringing in a supplier to help your team be more efficient? The current need for most companies is to analyze your business operations and identify which areas form the core of your business (the things you do well and want to keep in house), and others areas you need help with:
• Manufacturing
• Warehouse and fulfillment
• Marketing support materials
• Customer service
• Accounting, HR and finance
• IT and back office
• Branded merchandise
• R&D and product development
The Co-Prosperity Movement
Delegating time-intensive business functions to highly skilled suppliers provides the breathing room to focus on unique skill gaps, like training team members on best practices, getting up to speed with new technology or customer service response that many organizations overlook. Distracted by the tyranny of their towering to-do lists, many businesses can’t find the time to analyze which areas of their operation would be better served by handing it over to a trusted supplier. As a result, customer and distributor service often suffers, and potential business is lost.
But delegating outside of company walls—whether physical or virtual—can spark anxiety among executive teams. Legacy thinking would normally dictate that trusting suppliers with knowledge of certain parts of your business represents a risk from the CEO’s perspective, including loss of control, loss of strategic capabilities and increased dependencies. But for the CEOs who are living in the world of suppliers and proprietary knowledge, they say the risks are minimal and limited.
Much like the leaders of Toyota and Honda, PrimeMyBody (established 2015) CEO Paul Rogers believes holding suppliers to a high level of communication and never taking the relationship for granted is essential for success. “Suppliers have already sunk cost into something I need so it just makes financial sense,” Rogers says. “The next and more important step is to build a relationship above and beyond the contract. I trust but verify. A supplier having knowledge of my business is not a risk because my business is so much more than just the supplier. Suppliers are a piece of the pie but I know how to make the entire pie.”
For third-party companies like the ones Rogers works with, PrimeMyBody isn’t the only one in the partnership with skin in the game. The suppliers’ livelihoods depend on the success and health of their client’s business. If one succeeds, the other does as well. If the client stumbles and takes a financial hit, so too goes the supplier. PrimeMyBody’s monthly revenue of $4 million and growing is a real-world example of the value found in trustworthy outsourcing.
Andy McWilliams, CEO of revital U (established 2017) was looking to at a cloud-based infrastructure to help control initial capital expenses. “Not only did it allow us to allocate money where we needed it most, it made us better managers because we have instantaneous data at our fingertips to help us make better decisions,” he says.
In the beginning, it was hard for him to let go of those duties that a traditional business would keep in house, but the angst he felt was lessened by the fact that he had more time to do the things he and his small team are really good at. “Finding good partners to help us grow will always be part of our business plan going forward.” he says.
For Cara Brook, founder of Maskcara Beauty, the direct selling world can be so unpredictable from one month to another as far as getting orders out the door. And having trusted suppliers makes all the difference as far as giving her company the flexibility it needs. “Our supplier partners have taken so much of the load off of us,” she says. “It has freed our corporate team to focus on the magic of Maskcara, and not be bogged down with the details that take so much time and energy away from the creative aspects that we need to stay focused on.”
Maximizing Revenue Per Employee (RPE)
The virtual movement is also about maximizing revenue per employee, an important financial ratio used to gauge the success of a young, growing business. Since the largest expense for all companies are their employees, the more revenues that can be generated for each employee the greater efficiency for the company. It shows what companies are getting in exchange for human expenses.
RPE is not only a key indicator that reflects a company’s ability to sustain growth, it also measures productivity and how efficiently a company operates with their given resources. And greater efficiency means you are doing more with less, which translates to expanding margins and improved profitability. RPE has been an important metric for the growing tech industry for years and is becoming an increasingly important measure of being on the right track.
Being virtual and lean is less about whether or not you have a corporate office, and much more about allowing you to focus on what you do best and letting your supplier partners handle the rest.
Experienced executives may question how companies can make an appropriate net profit while outsourcing so many of their key functions and processes. However many of these virtual companies have a ratio of $5 million to $10 million or more in annual revenue per employee.
Partnerships Will Become More Critical In The Future
Being a good leader means knowing where you shine and leveraging those abilities. It also means being aware of your own skill gaps and hiring for your weaknesses. If your staff is stretched too thin or you just don’t have the in-house knowledge and adequate resources necessary to grow and improve, having partners who you can trust to deliver on time and on point can make all the difference to your bottom line. And research supports it as well. In fact, according to a Whitelane Study, 89 percent of clients who have outsourced their IT for example claimed to be satisfied by the services provided by their third-party agents. After interviewing a cross section of network marketing executives who are doing the same, it is our opinion that the findings of this study span all industries, including direct selling.
Skinny Body Care (established 2011) founder Ben Glinsky sees relying on suppliers as an opportunity for sheltered scalability. “Many companies come in with huge projections, create a ton of unnecessary overhead, and never get into profit,” Glinsky says. “Other companies try to start small, then outgrow their facilities and structure, and have to scramble to find solutions instead of focusing on building the company. We can grow (or shrink) as fast as the market dictates and never miss a beat.”
Refusing to be locked-in to full-time employees at a brick and mortar headquarters location has given Glinsky’s company the unique ability to strategically shave off the excess when it comes to working hours, while getting the most bang for the company’s buck. “As far as employees, everyone works from home,” Glinsky says. “We track everything they do to know they are being productive, if we need them, if they are overworked. So instead of having a bunch of employees sitting around an office looking busy, we maximize what we get out of our employees, and they love working from home.
I believe they do much better work.”
Lean & Mean
Being virtual and lean is less about whether or not you have a corporate office, and much more about how you want to scale your success. For some having a building makes sense, for others it doesn’t. It all boils down to helping companies create more value for their customers and independent salesforce with fewer resources. Simply put, they are able to focus on what they do best and let their supplier partners handle the rest.
What we are witnessing today is just the beginning of a revolution in how business operates in the new age of technology and the internet. Thriving direct selling leaders who have jumped headfirst into this business trend tell us that success in this new digital age will require organizations to find partners who can both understand their current needs and anticipate what they may need in the future to meet business objectives. At the same time, companies will also experience the demand to lean into a trusting reliance on third-party suppliers and invest in a loyal relationship in order to maximize their benefits. This requires a new kind of cooperation where each company acts transparently and with empathy for the other in an effort to meet their mutual business goals—a direct selling version of supplier keiretsu.
