Is the $200 million-plus direct sales economy retail by another name or something different? Regardless, what can we learn from it?
When complex business structures meet sophisticated branding strategies, it’s a recipe for opacity. That opacity can make network marketing, referral marketing, direct sales and multi-level marketing (MLM) a difficult retail category to understand, but these businesses have many unique tricks that the rest of retail could benefit from.
The above terminologies broadly describe a business strategy in which revenue is derived from a non-salaried workforce who are incentivised to sell a company’s products or services on commission and recruit fellow salespeople. Each company has its own preference regarding descriptions, which I’ve adhered to as much as possible, but for convenience, I’m using the term direct sales where a different preference is not specified.
Older readers might remember these strategies as the stuff of Avon ladies and Tupperware parties. However, it’s 2019, and times have changed. Many of these heritage companies have now adapted their business models to suit social media and ecommerce, and they’ve also been joined by a range of new companies.
Direct sellers can sell anything from personal care products to power tools, and according to the Direct Selling Association of New Zealand’s latest data, they’re collectively employing a salesforce of more than 100,000 Kiwi distributors, agents or salespeople. While each individual direct selling company is its own vertically-integrated empire with internal hierarchies, training programmes and marketing style, a handful of basic business structures are replicated across the category.
Here are three of the most common, together with their many synonyms and variations.
Direct selling: The person-to-person sale of goods or services, traditionally made in person at the customer’s home by companies such as Rawleighs. It can also be carried out on social media, in the customer’s workplace or anywhere that’s not a retail premises.
Synonyms: Door-to-door sales, single-level marketing, party plans, home business.
Network marketing: A level up in complexity from direct sales, network marketing is a business model that depends on a network of independent direct sellers for growth. Many network marketing businesses are based on multiple tiers of reward that see sellers incentivised to recruit other salespeople to the network in return for a commission on sales made by those they recruited and the individuals these salespeople then went on to themselves recruit, known as their “downline”.
Synonyms: Cellular marketing, referral marketing, affiliate marketing, consumer direct marketing (CDM), inline marketing, home-based business franchising.
Multi-level marketing (MLM): According to the Direct Selling Association of New Zealand (DSANZ), MLM is a relatively recent term referring to essentially the same structure as network marketing. Individual direct sellers are promoted within internal hierarchies based on sales and recruitment figures. MLM is the preferred terminology for most of this category in New Zealand, with 85 percent of DSANZ members using MLM as their core sales reward structure.
When your business strategy rests on frequent recruitment and sky-high engagement, it’s important to have a strong brand identity that’s capable of drawing anyone who engages with the business into further involvement, then keeping them there with an even stronger internal culture.
In some cases, this focus on recruitment and team culture has shown up in the form of a scam that masquerades as a direct-sales-style business.
Pyramid selling scheme: Pyramid selling schemes are a form of financial scam, and they’re illegal under the Fair Trading Act in New Zealand. They’re problematic because the way that they’re structured means most participants will always be at or near the base of the pyramid and will not see the promised return on their investment.
The Commerce Commission explains that what differentiates a pyramid scheme from the legal direct-sales-style business structures above is an emphasis on recruitment over product sales. If a structure has the following two elements, be suspicious:
There’s evidence internationally that the MLM model may have a dauntingly low rate of return on investment for participants. A 2011 report, The Case (for and) against Multi-level Marketing,by Jon Taylor of the Consumer Awareness Institute, analysed earnings data and compensation plans from 350 US MLMs only to find that less than 1 percent of MLM participants turned a profit. Similarly, a 2018 survey by the website Magnifymoney found that of the 1,049 American MLM participants polled, nearly 60 percent of respondents reported earning less than $500 over the past five years.
Several prominent international MLMs have recently been taken to court over claims that their rate of return is so low that the business is effectively an illegal pyramid scheme. Herbalife dodged the label in 2016 and paid a fine, while similar class action suits against Arbonne and Amway were dismissed last year and settled in 2010, respectively.
However, the majority of New Zealand’s MLMs, network marketers and direct sellers are legitimate businesses which trade in accordance with New Zealand law. There are around 47 companies of this type currently active in New Zealand, all but four or five of which are registered with the DSANZ. The Commerce Commission has received just 13 complaints relating to the 42 DSANZ member companies since 2006, and the DSANZ receives around three to four complaints through its code per year.
Garth Wyllie, executive director of the Direct Selling Association of New Zealand, says direct sellers, network marketers and MLMs’ laser focus on customer care tends to keep category complaints low.
“Distributor to the end customer is the bit that counts the most in terms of the perception of the market, and so we’re very firm on that area,” he says. “But we would only get one or two complaints in that space a year against a member company. It’s really quite small.”
He says the DSANZ advises unhappy customers to first complain to the distributor, then if that fails, approach the company. More often than not, Wyllie says, this results in a quick resolution.
“We don’t see a big issue because the companies themselves are 100 percent focused on the end consumer. They would rather refund a product, even if there’s some question as to whether the customer has a genuine complaint or not, than have an upset customer.”
While figures from the US-based Direct Selling Association indicate a 30 percent jump in US MLM or direct sales participation between 2011 and 2016, Avon’s 2018 retreat from the New Zealand market indicates a tougher environment.
“We’re a well-developed market and what you also have to appreciate is that the direct selling industry thrives when there’s a higher unemployment rate,” Wyllie says. “New Zealand has a very low unemployment rate so it makes it very hard to bring new people into the business to actually grow and expand their businesses.”
The category has historically been attractive to those who need more flexible work than mainstream employment can offer – especially mothers. New Zealand’s direct sales, network marketing and MLM salesforce was 71.5 percent female at the last DSANZ survey, which Wyllie says represents a stronger male presence than many international markets.
Unlike mainstream retail, the line between customer and sales representative isn’t always clear in this category.
The chief executive of global health and nutritional supplement direct sales company Usana Health Sciences, Kevin Guest, says Usana’s sales reps are its best customers. He explains that this dynamic is encouraged by the company as interaction and familiarity with the products gives those who are distributing them a shareable experience.
“It’s not anything different than if you go to a movie and then you tell a friend about something that you liked,” Guest says. “You’re very motivated to do that and that is how we approach Usana. Have a great experience with the product, and then you’ll feel like sharing those experiences with others.”
DSANZ’s Wyllie says his organisation is currently seeing strong growth in an ecommerce-led interpretation of the network marketing model which is focused on creating “auto-ship customers”. These customers sign up through a sales representative to get automatic reshipments of products on a regular basis. Some will also come on board as consultants to access wholesale prices with no intention of on selling their goods.
“What companies are trying to do is separate out those that are basically customers from those that are generally wanting to make a business out of it.”
Around 10 percent of direct sellers’ overall sales force are what Wyllie describes as “genuine business builders”. These are consultants who become involved with the company intending to create a full-time “business as a lifestyle”. The other 90 percent treat the opportunity as a part-time side hustle, and around a third of the bottom end of the saleforce are wholesale buyers as described above.
Asked by NZ Retail if there was anything he wished mainstream retailers understood better about his category, Usana’s Kevin Guest emphasised its similarity to mainstream retail.
“The misconception is, from my perspective, that the legitimacy of direct sales is compromised at times. We truly do have an outstanding product that we offer, there are differentiators and it is a unique product offering.
“The only difference is, with a home-based business the people are working out of their home, versus out of a bricks and mortar local location. It’s the same type of business from the perspective of providing products to those end users.”
Those working for MLMs don’t necessarily consider themselves retailers, however, and there’s not a significant recruitment pipeline from these companies into mainstream retail companies. But for those who aren’t willing to brave the entrepreneur life alone, direct sales can offer the training and support they’re seeking.
Business builders join direct sales companies seeking support materials that enable them to run a business without the full weight of backroom processes on their shoulders, says Wyllie. Among other offerings, this could mean the company provides digital marketing materials to be used on social media, creates structured ordering systems, and gives access to systems allowing the salesperson to measure their performance and that of their downline.
Part-time builders are much more focused on “understanding and training”.
“We had a large survey done just two years ago which showed very clearly that the skills that they get from being involved with a company, their training, their ability to present, their ability to actually talk about products, all of that, is part of the training that they get,” Wyllie says.
“And a lot of them eventually do go on to run another small business somewhere. It’s quite common to say, they’ve got the skills, now they can go off and do their own thing if they want to, with a separate small business, because they’ve got the right skills to be able to do so.”
While ecommerce goes from strength to strength, it still can’t achieve the same kind of experience as a face-to-face interaction, and this is where direct sales’ key advantage over mainstream retail lies.
Because the category’s salespeople’s income relies on their ability to personally attract and retain customers, they’re incentivised to seek out and connect with customers in an active, continuous way that retail staff can’t be expected to match. Direct sellers are never off the clock, and they’re serious as a heart attack about customer loyalty.
“It’s about being able to see the product, touch the product, and talk to a real person about the performance of what that product does, and know the person, usually,” DSANZ’s Wyllie says. “Unlike a retailer, who has to attract the customer in, direct sellers are out there talking with their customers and meeting with their customers all the time.”
Usana’s Guest agrees: “The biggest differentiator, I believe, is the personal interaction and involvement on a very personal level, the relationships that are built with their customers, many of which go on for years and years. That’s a unique element.”
The category is optimised to support this approach, focusing on reorder and reshipment of what’s usually consumable products. Brand loyalty is also part of the puzzle, as is conversion of enthusiastic customers into salespeople.
Sales and loyalty are areas that many mainstream retailers – especially SMEs - struggle to measure and control. While direct sales and its associated business structures are complex and confusing territory, much of that complexity lies in the sophisticated systems they’ve developed which codify these areas. As the retailer’s relationship with customers grows more and more important in a global marketplace, direct sellers are a valuable source of inspiration for mainstream retailers seeking to deepen their connection with shoppers.
This story originally appeared in NZ Retail issue 760 February/March 2019
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