The initial idea sounds great to all parties involved, so the expectations are quite high. The first reactions from the field also seem very promising. People are enthusiastically joining the sales force. Products are moving out and the whole field force is happy as the members are receiving increasing commissions… A familiar story, right?
It is very common for a start-up in the direct selling industry to have quite positive results in the beginning. However, this dolce vita is doomed if the management does not pay attention to some critical issues. These issues impose high risks on a direct sales company’s long-term success:
Weak Product Offering
Everything starts with the product (No, not with the compensation plan as some people claim!). And if what your company is offering is not bought, everything basically ends there! Make sure the products are at least at a reasonable quality, priced accordingly and are sold with a good reason behind to be purchased by the end-users. Whatever the claim it carries, your product has to deliver it.
Poor Compensation Plan
A poor compensation plan is not necessarily the one that has a lower total commissions pay out than your competitors’. On the contrary, there are good reasons why it is not a must to come up with a plan having the highest pay out to beat the competition. A strong compensation plan, in short, is the one that is in full harmony with your company’s strategies and objectives. It has to be rewarding all field activities you deem necessary, for sure. However, it should not offer any rewards for those unnecessary activities, too. And last but not least, it has to be financially fully controllable.
Lack of Internal Policies and Procedures
In many cases, this is not among the priority items on the to-do-list when launching a direct sales business. The initial staff count could be small and there may be a small group of sales reps. So, the thinking might be that there is no need for any detailed policies. Just wait until the business growth accelerates. Everything becomes a mess at that moment and losing poorly served distributors becomes the inevitable consequence. Having policies and procedures does not create unnecessary bureaucracy or a barrier to growth as some people believe.
Insufficient Working Capital
This is not the initial investment that some would think. Entrepreneurs usually do not make big mistakes there. Working capital is the difference between a company’s short term assets and its short term liabilities, financially speaking. A positive difference shows the business has room to grow in a healthy manner. If it is negative, then it can go bankrupt in no time! So, proper working capital management ensures that the business maintains adequate cash flow.
Inability in Scaling the Business
The demand for a company’s products can substantially exceed the initial forecasts. This is not unusual at all. In such situations, some direct sales startups struggle to scale their operations due to limitations in production capacity, distribution capabilities, or other logistical challenges. This can hinder their ability to meet increasing demand and grow, disappointing the newly recruited field force.
Inadequate Managerial Resources
Entrepreneurial spirit is definitely a must-have at a start-up! So is the knowledge to run and improve a business, though. A business comprises several aspects, to include finance, accounting, logistics, human resources, legal, IT, corporate communications, brand communications, digital marketing… Proficiency at all these areas requires having a good management team. Going international is an entirely different ball game, with its additional requirements. Being good only at product development and field management is not enough!
Delegating Field Development and Training
Some entrepreneurs think the easiest solution is to leave this to a seasoned direct seller who has built teams comprising hundreds or thousands of people with another company. However easy it may seem; this strategy is full of risks. The industry is full of unsuccessful attempts, mainly due to the discrepancies between the corporate mindset and the mindset of a sales leader.
Regulatory Compliance Issues
Your business has to comply with all related rules and regulations, period! And not only in your home country, but in all the international markets that you operate. Authorities’ intervention can give colossal damage to the overall business. Thanks to social media, it is so easy for the bad news to reach all over the world in the blink of an eye. Make sure you have taken all the necessary measures for your independent distributors to be in full compliance as well.
Success does not come easy. However, avoiding the mistakes that the others have made can surely help.
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Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki Ozmorali is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.
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Joanna says
Given the factors outlined in the article, can a direct-selling company of fast-moving personal care products (i.e. hair care, skin care, etc.) with a strong product offering be successful while maintaining mass-pricing (not masstige or premium) price points that are very competitive to supermarket brands? Is there an example of such as successful direct selling company? Or should we assume that for one to have the resources to have all the success factors above, product pricepoints must be well-above supermarket prices?
Ruben says
Absolutely agree. It seems to me a great article. I add two more points that, although in broad strokes could already be commented in the general points, I have also seen that they are important.
Lack of market adaptability: In an ever-changing world, especially in the digital realm, companies must be able to adapt quickly to new trends and market demands. A company that cannot evolve with the changing needs of its customers and channel partners risks being left behind. This includes adapting to new technologies, communication methods, and consumer preferences.
Inefficient communication: Communication is essential in any business, but it’s even more critical in the world of direct selling. Companies need to ensure that both their internal team and their sales force are well-informed and aligned with the company’s vision and goals. Poor communication can lead to misunderstandings, demotivation, and ultimately the loss of distributors and customers. .
Great post.
Hakki Ozmorali says
Thank you for your input, Ruben. Much appreciated.
Hakki
Rick Loy says
Excellent. All points are key, but the caution on using distributors to train and establish the company’s messaging and “best practices” is exceedingly important.
The company’s role here is critical.
Thanks so much!