In Depth: The Direct Selling Channel Part Two
This morning I read that a third party-plan company is shuttering in January—another fallen soldier on the battlefield of obsolescence. Obsolescence affects all direct selling companies in different ways and to varying degrees. Some find themselves in safe harbor, oblivious to the storm that’s raging around them. Others are blown away in the gale of commoditization as margins collapse and customer acquisition cost rises. This article is for those struggling in the gale. And it begins with a short story.
A few years ago newlyweds Tom and Mary were looking forward to hosting the extended family for their first Easter dinner. On Sunday morning Tom noticed Mary cutting about two inches off the end of the ham before placing it in the roaster. He asked, “Mary, why do you cut off the end of the ham before putting it in the roaster?”
“Because that’s the way my Mother always did it,” she replied. When Mary’s mother arrived Tom asked her the same question and receive the same answer—because that’s the way we’ve always done it.
A few minutes later Mary’s Grandmother arrived and Tom again asked, “Grandma, why do we cut the end off the ham before we bake it?”
She laughed and replied, “Do you mean to tell me you still do that? When Mary’s Mother was a little girl, I never had a pan big enough for the ham to fit so I always cut the end off it.” For two generations they continued to cut the end off the ham for no reason.
Today party-plan business models have continued to operate with compensation plans that are horribly inefficient because that’s the way they’ve always done it. Even start-up party-plan companies implement obsolete compensation models without first asking, “why?” Commissions, overrides, incentives, host programs, award’s, prizes, sales meetings and conventions are all promotional expenses related to customer acquisition. And they are all behavior modification tools.
When the party-plan model was created decades ago it offered a huge leap forward in productivity for the sales person. Instead of taking all week to make twelve individual sales calls, they could utilize a host who would arrange for eleven prospective customers to be present in her home at the same time. A representative could now earn as much in one night as she was earning in an entire week. But there was a catch, she had to cut the host in on the deal to entice her to clean her home, mail out 50 invitations, follow up with phone calls, get the husband to leave for the evening with the kids and find time to prepare snacks and beverages for the sales party. All behaviors she wouldn’t do for free. We quickly learned that sharing 15% to 20% of the party sales in product credit was enough to produce the behaviors required for success. If a company enjoys a 4X mark to retail and gives away 20% in a host program, that’s a promotional COG expense equivalent to 5% of the parties retail sales before free shipping and handling—expensive, but worth every penny.
Let’s fast forward to 2015. If you read my article, “Obsolescence and the Avon Lady,” then you understand today more than 70% of party-plan sales don’t occur at a physical party, they happen over the web as a result of email solicitation and social media promotions. Without a physical party you don’t require a host to put forth all that effort or said another way, exhibit all those difficult behaviors you’re paying for. For some reason nearly 100% of sales are attributed to a host and burdened by host expenses. How does that happen? Your sales reps are either acting as the both the rep and host, or they are allowing someone to earn the host credits without hosting a physical party. A big reason to compensate a host is to facilitate a physical recruiting experience. Without a physical party you have no platform to recruit and you begin to fall off the cliff. Today’s party-plan companies are paying big money for an important set of behaviors critical to their success and receiving an entirely different group of behaviors.
Let’s examine one more expensive behavior management is paying for and not receiving, field leadership. A big piece of your compensation plan is your total override payout. The money you are paying to the upline to grow the business or said another way, to acquire more customers by acquiring more representatives. This number usually ranges from 10% of sales to as high as 20%. Historically, as a leader grew her team it required more of her time as a coach and teacher. To drive the behaviors of her team she had to get in front of them each month by conducting a local meeting in her home or the home of a rep. As she promoted out reps they in turn were required to conduct monthly home meetings that she attended. When the team grew even bigger she had the added expense of holding meetings in hotels for her region. The added work, the awards, meeting and travel expenses were all costs she was expected to provide. These were the behaviors of leadership required by management in exchange for significant compensation. Today, that same significant percentage of revenue is paid to uplines without requiring the leader to leave her home. Congratulating people via email and providing recognition on social media doesn’t cost the upline much time or money and it doesn’t produce the results management intended. The reason a business fails isn’t the market—it’s the model. The majority of today’s party-plan companies, those that feel the pain of commoditization, are doomed to fail because they are grossly inefficient. They are paying as much as 25% of their revenue for behaviors that don’t exist. They continue to cut the end off the ham years after acquiring a new roaster.
If you’re in business selling a commoditized category you can’t continue to realize the same robust mark-up or you will price yourself out of business. When commoditization happens margins are compressed between locked in variable customer acquisition costs (the compensation plan) and lower realistic retail price points mandated by a proliferation of ecommerce competition. If you attempt to sell at realistic prices with a smaller mark-up you can’t support high customer acquisition costs, especially if you’re not getting the behavior you’re paying for. Checkmate.
With my new channel strategy I’ve identified a new set of behaviors that are drivers of growth and the cost required to achieve the behavior. This led to new business rules and a completely new compensation model that is extraordinarily efficient. It’s not about paying less; it’s about paying the right people the right amount for the right behavior. That drives efficiency, which in turn drives productivity. It’s time to quit cutting the end off the ham.