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Traditional Direct Selling Model – 4 Reasons Impacting Growth

Traditional Direct Selling Model – 4 Reasons Impacting Growth

Recruiting is down and growth is slowing for many US-focused direct selling companies.  For some companies – way down.  On July 31, 2019 four direct selling brands closed their doors while others continue to model potential strategic changes internally.  The industry keeps talking about the Amazon effect and social media algorithm changes.  Yes, those are having impacts, but they are not the only reasons. What worked in the 1980's will not work today.  Actually, what worked in 2017 will not work today either.  It's time to pivot.

Here’s my take on what’s happening:

1)    The Gig Economy is the New Normal

Traditional direct selling frameworks have several inherit strategic benefits for brands.  Word of mouth advertising, strong connections, etc.  Unfortunately, many of those strategies are now satisfied by improved eCommerce technologies and influencer marketing. Social media sharing has replaced the person-to-person interaction and fewer people are getting together for home parties.  It’s easier for people to post content than organize something on a specific date and time. Also, the times to represent only one brand are over.  People want to be hyper-affiliates, micro-bloggers or nano-influencers for the brands they love, versus team builders and managers of people for one brand only. Brands are causing fear with their sellers by instilling policies which aim to restrict representing more than one brand.  This fear comes from a scarcity mentality, rather than one of abundance.  And it causes a strain on trust.

Today’s social currency is about authentic variety and sharing.  Those who have the most engaged followers post valuable, consistent content, displaying expertise on a broad topic such as fitness, wellness, beauty, etc.  People who post about the same products or content over and over show one thing, a bias towards one brand.  They are selling, not influencing.  As mentioned, authentic variety is key today. 

With the gig economy comes improved technology platforms, small parcel distribution direct to consumer's doors, social media and a strong desire to earn some supplemental income.  Direct selling is not the only channel that facilitates this framework anymore.  Affiliate and influencer marketing has opened up simpler, less stigmitized frameworks.  The gig influencer is not "closing their eyes and dreaming a big dream of residual income."  The gig influencer is looking to make an additional $300 a month or an additional $1,000 a month.

Side note: I think the biggest threat to the traditional direct selling model in the US are current name-recognized brands launching hybrid affiliate models like Vitalibis.  The brands are trusted and well-known.  The brands don’t limit affiliate programs to influencers with 25,000 followers or more.  The brands learn how to activate consumers person-to-person with simplified compensation plans that cater to the 94% of direct sellers who earn less than $1,000 per month.  Think Sephora, Walgreens, Vital Proteins, Glossier, etc. These brands can impact the traditional direct selling model the most.

2)    Traditional Compensation Plans are Too Complicated

Attention spans have decreased, and a confused mind says “no”.  If it’s not simple or if the technology being used makes the business processes seem difficult, brands are going to face an uphill battle when it comes to recruiting people – especially digitally dependent Millennials and Gen Z. Building on item #1 above, people want to leverage their social currency, they don’t want to focus on understanding complexities.  And recent regulatory impacts and external forces are highlighting flaws with today’s view of traditional compensation plans.  Compensation needs to be derived from Customers and Team Builders.  To be safe, compensation should be derived by activities close to the Team Builder, not aggregated from infinite payouts.  One and two level compensation plans will be the new standard, in our opinion.

Additionally, many traditional direct selling compensation plans perform very well during growth stages of the company.  They use techniques and strategies that are great when sales are increasing.  Unfortunately, those same plans do not perform well when sales are declining.  Compensation plan designs and strategies are very complicated, however how a plan performs with declining sales is just as important as during times of growth.  Several plans which fail to address impacts on the downside can have fatal flaws for brands.  Not to mention, Field Leaders have created specific lifestyles for their families based on the income of the "good old days."  When compensation drops, corporate executives look to help out leaders financially so they stay with the company instead of courting options elsewhere.

3)    Engagement Strategies Need to Put the Customers First

We've heard this for many years in the industry, however many brands have yet to pivot.  Traditional direct selling compensation plans cater to Field Leader behaviors.  A tremendous amount of money is spent on paying Field Leaders and trying to incentivize them to do more.  Yes, they have built incredible teams of activated consumers, however a massive team builder is harder and harder to find these days (there are many more digital influencers than team builders today). 

Also, product pricing is generally higher in traditional direct selling companies and shipping fees are still charged on sales tiers or by order weight.  Charging $12 to $14 for shipping is a practice of the past.  It only irritates customers and leaders.  Customers want fairly priced products and free shipping - there are many other options available for them to shop.  Repurchase rate data shows this in spades.  When repurchase rates are down, Field Leaders are working harder and harder each month to replace the volume lost by customers who found products at other brands. And if the majority of sales volume comes from the 70-80% of people who will never build a team, then brands need to pay attention to what those 70-80% care about most.

And finally, when a brand turns to consistent product sales and offers to drive sales volume, it’s time to review strategies before turning your company into a discount brand, where no full price orders are minimized.  Take a look at the fashion industry, few people purchase at full price when they see 40% off sales consistently popping up.

4)    Field Leaders are Aging Out and are Tired

For some brands, 10-15 Field Leaders created the company.  They created the momentum and magic to put the brand on the map.  They are also typically the same ones making decisions today.  With slowing sales and recruiting numbers down, this of course leads to fewer and fewer new Field Leaders becoming "successful" in the compensation plan.  The handful of top Field Leaders that created the foundation of many companies is getting older and tired.  They are tired of replacing sales each month.  They are tired of jumping through the compensation plan hoops each month.  These Field Leaders also created the culture of the company and can be very reluctant to change.  For many brands, creating and recognizing new Field leadership is critical to growth, but this is becoming harder and harder to do.

Going Forward

Instead of innovating ahead of the trends, many traditional direct selling companies are doubling down on past recruiting incentive strategies or they are openly trying to find a new Head of Sales / Field Development.  Neither of these is innovating.

Times have changed; it’s time that the traditional direct selling model pivots.

-       Keep things simple, simple, simple

-       Products must be great and ingredient transparency is essential

-       Products must also be priced competitively as if there was no compensation plan

-       Free shipping is essential; don’t charge your most loyal consumers the highest shipping fees

-       Technology must be simple and accessible on any device

-       Experiences are key to building a diverse, connected community; experiences cannot be just for the top earners

-       Social impact must not be an afterthought; people see through “social-washing”

-       Compensation plans must be simplified and easy to communicate

-       Customers must be able to shop the way they want and how they want, without stigma and pressure

The future of brand activation and engagement is at the intersection of eCommerce, affiliate / influencer marketing and social selling.  Robust, simple front-end technology enabled user experiences, coupled with simple commissions programs and the ability to leverage digital sharing is what’s needed. 

Most traditional direct selling companies will not be able to pivot as fast or as far as smaller brands. There’s just too much history and culture to change.  Many legacy brands will spend time, money and effort modeling compensation plan changes; however few will make the necessary modifications to innovate. 

Changes of this magnitude will be expensive and will require a lot of communication and strategic execution. It won’t be easy or fast, but unfortunately it might be necessary.  The time is now to pivot.  Be well.

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