I was suprised today when I came across a January post on bloggingstocks.com characterizing Avon’s corporate restructuring plan, which began back in 2005, as necessary because of a flawed business model – reliance on recruiting, and not enough recruits to be had. It’s an interesting, if somewhat naïve, assertion about a company and business model that are more than 100 years old – having survived decades of economic ups and downs and societal shifts.
It’s particularly interesting given Avon’s positive early 2008 forecast – predicting mid-single digit growth in 2008 despite a questionable U.S. economy, according to this Reuters story. It hardly seems like a company in trouble.
Even more interesting are the post’s assertions about the direct selling model in general.
Point #1: Companies “live and die by how many new representatives they can recruit.”
Nope, that statement misses the point entirely. Of course recruiting is a critical part of the direct selling model, but companies rely on those recruits to sell products, not just to sign up. Recruiting alone doesn’t result in income for sales reps or the company. With low start up costs (usually less than $100, and in some cases, far less than that) money is made in direct selling when products move. Products move when sellers sell product.
Point #2: “While MLM companies like to focus the public’s attention on the selling of products, the reality is that it is through the recruitment of new representatives that these companies grow.” No, the reality is it’s still product sales that matter. If a company has 10 reps that each sell $5000 in products, that’s always going to be better than having 100 reps that sell $100 each. Just adding more representatives doesn’t increase profits – which is why many direct selling companies are focusing on making the “career opportunity” more attractive. By nurturing promising recruits to sell more and, yes, recruit more motivated sellers, sales and profits rise. Any business, direct selling or otherwise, has an interest in cultivating leaders who can be top performers and inspire others to do the same, thereby building the business. Not everyone will rise to the top, but those who do will be the next leaders.
Point #3: “Representative turnover is high, however, in large part due to the fact that the representatives don’t make much money from selling products.” Turnover in direct selling averages about 56%, comparable to turnover in retail, which is about 53%, not really that notable. Yes, there are plenty of people who try direct selling and decide it’s not for them. There are also lots of people who might try a new brand of cereal and decide it’s not for them either. That doesn’t make the cereal bad, and quite frankly the financial risk for either scenario is about the same. But beyond those who just decide not to continue, you have the equivalent of seasonal workers in direct selling (who may sign up and drop out every year like clockwork) and you have people who achieve their modest goals and then see no need to continue, each of whom contribute to the turnover rate, but none of whom is unhappy with their experience.
Point #4: “My hope is that this outdated method of doing business is something that more and more women are avoiding.” Sorry to disappoint, but more and more women are choosing direct selling because it offers a flexible alternative to a 9-to-5 job. There’s minimal upfront cost, low risk (especially given the generous buyback DSA members are required to offer) and ultimate flexibility. When fears of recession are rising, people are looking for additional income sources – and direct selling provides a perfect fit. Combine that with relatively low-cost, consumable products that the average consumer doesn’t abandon in slow economic times, and both recruiting and sales are in a position to increase.
Point #5: “With over 99% of distributors losing money in the MLM schemes, it’s no wonder that recruiting representatives may be harder and harder.” It’s absurd to believe that 15.2 million American direct sellers (and 60 million sellers worldwide) are the mindless followers suggested by this assertion. With $32 billion in sales in 2006, direct selling provides opportunity and success for millions every year. As in any type of business there are people who are not successful. However, there are many more who achieve their goals – both financial and non-financial – and consider their direct selling experience to be a fulfilling one.
Considering all these points reminds me what a solid business model direct selling really is. Companies like Berkshire Hathaway, Hallmark, Reader’s Digest, Jockey, The Body Shop and myriad others operate, or have invested in, direct selling companies – something they wouldn’t be doing if the model were questionable. So, don’t count the Avon lady out quite yet – she’s alive and well.