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Why Do You Want to Own A Direct Selling Company?

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Article by: Bob Hipple
December 8, 2013

Why do you want to own a direct selling company? One motivation for starting a company in this industry is obvious. Other than a home-run technology company, few businesses have such fast upside potential as a direct selling company. A network marketing company recently enjoyed revenues close to a billion dollars in less than seven years. A well-known party plan business has catapulted from obscurity to revenues of $200 million in five years. The right product at the right time with the right people can produce incredible revenue and return for the investors. But the truth is, most network marketing companies fail, and they do so in the first couple of years.

A few years ago I helped to start a new network marketing company. At the time I thought I knew a lot about the business. I had been a vendor in the industry for a dozen years, a past-president of two different direct selling companies, had consulted with some of the biggest and best network marketing companies in the world and had even served an annual stint on the board of directors of the Direct Selling Association, one of the finer industry associations. The truth is, I did know a lot about the business. But the education I got during the three years with that company as it transitioned from a start-up into a real business was incredible.

I had no idea what I didn’t know—about comp plans, about events processes, about individual distributor styles and make up, about duplication models and replicable systems, about vendors, about field psychology and group think. The list goes on and on. Although I knew a lot about the business, it’s what I didn’t know that tripped us up—especially the stuff that I didn’t know I didn’t know. Direct selling is a dynamically complex business with many moving parts. At the corporate level it can at times, be overwhelming. People who own and run direct selling companies should be clear on why they chose this business model and embrace the business with their eyes wide open. Direct Selling is not an easy business. Although I hate repetition, I’ll say it again: Direct Selling is not an easy business. There is no cookie cutter recipe to fall back on. It’s kind of like raising children, what works with one child, or in one situation doesn’t necessarily work in another. The purpose of this paper is to discuss motive, so I’ll ask the question, “Why do you want to own a direct selling company?”

 

Below are some real-life examples of owners who have gotten involved in the industry.

He’d been wildly successful as an entrepreneur and currently owned a number of businesses that had done well, but with the present economic realities, those businesses were floundering. He needed a cash machine and had a couple of friends who had done very well running their own network marketing companies. He and some successful entrepreneur friends. Each invested some cash and started a network marketing company selling the most basic of all commodities. None of them had ever been in the business before, they knew next to nothing about the business, but they decided to be the ones who ran the operations, created the comp plan, and developed the sales force. The amount of money they’ve put into the business is triple what they expected, and the company isn’t in the black.

He heard that, comparatively speaking, it doesn’t cost much to start one and once it gets going these companies spin off tons of cash. So he bought a sleepy network marketing company that had been around for a couple of decades, had a proven product, predictable numbers, and a slow but steady sales force. He tweaked the plan, lowered the pay-out and enjoys a solid return on his investment.

He’d been a distributor for a couple of network marketing companies and decided that he knew at least as much as the guys who ran the companies that he’d been with. He’d seen their lavish lifestyle and decided that if they could do it, so could he. In fact, he could do it for a couple of hundred thousand dollars. Eighteen months and $350,000 later, he shut the doors.

As a distributor, he was doing fairly well and then for reasons that could only be interpreted as corporate greed, the owners changed the compensation plan a couple of times. It not only looked like they were self-serving, but it also appeared that they really didn’t know what they were doing. The field leaders in the company got nervous and, one-by-one, left for other opportunities. His check that had been growing, flattened, and then took a nose dive. He was angry and disgusted. After a few months, he and a couple buddies decided to start their own network marketing company. It lasted six months and went through $500,000.

He was a mid-level manager in an existing network marketing company. He golfed with mid-level managers of other network marketing companies that he’d met over the years. As they golfed, they talked about the business. They shared their frustrations and made observations about what “those guys” (the senior managers and owners of the companies where they currently worked), should be doing, but weren’t. As a group they decided to combine forces, start a new company and “do it right”. The company was one of the fastest growing companies in the industry.

He came across a neat berry in a secluded part of the world and knowing the popularity of exotic super juices, he decided to start a network marketing company. He took his small fortune, earned in the heyday of the real estate market and opened the doors. Although he hired competent industry executives, he didn’t empower them, and kept all final decision-making authority to himself. After 2 ½ years, he closed the network marketing operation on 13,000 distributors and decided to go retail.

He came across a cool product at a flea market, talked to the two ladies who created the product and negotiated a buy-out, paying them a royalty on future sales. He kept the business incredibly lean and learned all he could about the business from industry consultants and experts. Using a party plan model, the business grew from nothing to hundreds of millions of dollars in revenue in a five-year period.

 

The owners who seem to do best in this business are those who have already spent considerable time running direct selling companies or those who rely on people who have spent considerable time running companies. The owners who struggle in the industry are distributor leaders who decide that because they were successful as a distributor that they can also be successful running a company. Not true. We regularly meet people who think they are industry experts because they’ve been a distributor in a couple of deals. They decide they want to own a network marketing company, not realizing that the skills required for building a field organization are very different from the skills required for building a company.

But the worst is the guy who has never been in the network marketing industry who assumes direct selling is more similar to than it is different from other businesses he has been in before. He thinks that because he has been successful in some other (sometimes outrageously successful) business and because he has learned a few industry clichés and phrases, that he knows how to run a direct selling company. These guys judge everything by how much money they’ve made in the past.

They scored a touchdown or two and believe that they are invincible. People like this are guilty of what the ancient Greeks referred to as “hubris”. Hubris is defined as “extreme haughtiness or arrogance.” People who suffer from this unfortunate and destructive thinking error are out of touch with reality. They overestimate their own competence and capabilities.

They incorrectly believe that because they built a real estate company or an online software business that all of their skills, talents and instincts will transfer into talent and experience required to run a direct sales business. Not true. Sadly, hubris seems to attach itself to people in positions of power, influence, and wealth; people who can manipulate others and get crowds to follow them. Too many times, a couple of million dollars later, these guys get their butts handed back to them on a platter.

If this sounds at all like you, stop right now, give us half the money you have allotted for this venture, and reconsider your decision to start your direct selling business. We will have saved you half of your investment and years of frustration and work.

Like businesses in any other industry, what you don’t know is much bigger than what you do know. And it’s what you don’t know that does all the damage—not only for you, but for a whole lot of other people involved in the business—like the people who invested in your vision, like your employees who sacrifice their weekends attending Super Saturdays and who work nights from home hosting conference calls and three-way calls talking about your company. (In network marketing, much of the business is done at nights and on weekends).

Like your suppliers and vendors who will either come to dislike you or love you, but most importantly, like your distributors—those independent business people who decided that they trusted you and bought into your vision. They left another company, recruited their friends and family into your company, hoping that this would be their final “home.”

As we’ve explained in another article, there are pot holes, land mines, and danger zones for those who manage direct selling businesses. Many of the danger zones are counter-intuitive. They come in the form of sales tools that don’t work, unscrupulous or ill-prepared vendors, software and technology that doesn’t deliver, misaligned corporate strategies, incentive programs that cost a fortune and don’t change behavior, mutual distrust between the sales force and corporate, initiatives that don’t leverage the strengths of the comp plan, products that don’t do what they’re supposed to do. The list is almost endless.

The most challenging aspect of managing a direct selling company is having an accurate understanding of the tenuous relationship that exists between the company and the distributors. This relationship is where the lethal land mines are hidden and where significant damage can be done both to the company and to the distributors. There are many good people who will get hurt if you ignorantly trip in one too many pot holes or step on one too many land mines. And often, you didn’t even know that you blew one up until after the shrapnel and body parts fall from the sky.

So why do you want to own or work in a network marketing company? It’s important that you consider this question. And that you’re willing to accept the responsibility that goes with it. The lure of big money attracts people into this business. It is possible to become wealthy if you own a successful direct selling company. Many people who appear to have marginal skill and talent have made phenomenal wealth in a rather short period of time as owners of direct selling businesses. But many of these people didn’t start their businesses with the singular goal of making money. They had bolder objectives – they wanted to make a difference in the world. They were compelled to work in this industry because it was the best place to make their contribution.

I worked for an owner, who, once he realized what network marketing was all about, said with disgust that he “hated the business.” (He said it often.) He initially thought owning and running a network marketing company was going to easy and that the business would be a cash cow. He got a great return, but his return had to be earned, and he despised the complexity and the fluidity that is required and is inherent in every network marketing company. His previous businesses were predictable. Do this, get that. This wasn’t the experience he was currently having. He didn’t have the personality that is needed in this business. He didn’t like people. He found the distributors to be fickle, unpredictable, demanding, manipulative and ungrateful. This was the wrong business for him. He got no pleasure from the work and eventually got out of it as quickly as he could. He now runs a fishing business in South America. A much better fit.

What was it that he hated? Just this—network marketing is an intensely, people-oriented business and you have to love people if you’re going to succeed in this industry. That’s the great secret, the illusive silver bullet that everyone is looking for—pure and simple. The dynamics of managing a network marketing company comes from the people in the business. Although they fit into somewhat predictable groups, distributors are of an endless variety. What one leader loves, another hates. One leads with the product, another, the opportunity. One builds with meetings, the other, with the internet. As I’ve said, distributors are like kids, what works with one doesn’t work with another. Appreciate that reality and work with it.

Jesus taught that “the kingdom of heaven is like a net that was let down into a lake and caught all kinds of fish” (Matthew 13:7 NIV). He could have been talking about network marketing. The business attracts the finest, most generous people in the world, and some of the most manipulative, difficult, self-serving folks that have ever been born. And much of the time you can’t tell the difference between the two! They look the same, sound the same and use the same words!

For the most part, you can only figure out who’s who over time. And often, there is significant damage to clean up when you eventually separate the good guys from the bad guys. This is a constant challenge in every network marketing company. And, to be honest, the distributors have the same challenge. They have to decide if they trust the owners and the people who are running the business, or if they’re just a bunch of shysters that are here today and gone tomorrow.

Direct Selling is so much more than just a distribution channel for getting goods to market, although for certain kinds of goods and services, it is the best of all channels. It is a weird blend of product movement, people development, community, cause, and culture—and the income generation that keeps the train moving. None of these pieces is more important than another. (Although, if your comp plan doesn’t work, nothing else will.) Some people stay for the money, others for the community, others for the sense of belonging, and others for the products. The trick is meeting all these different people at the level of their particular needs. An effective company executive or owner has to be firm, but amiable. It’s a fine wire balancing act much of the time.

In closing, really consider why you’re getting into this business. Make sure that your expectations are aligned with the realities of the industry. If you’re just interested in making some money, believe me, there are easier ways to do it than starting a direct selling business. One the other hand, if you understand the business, care about people and have a vision to make a difference in the world, then come on in. We need you.

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