In Depth: The Direct Selling Channel Part One
The direct selling channel in the United States is experiencing a strategic inflection point. The balance of forces acting on it has shifted dramatically as a result of advances in technology and socio-economic change. The same can be said of the traditional retail channel as many iconic brands struggle to find a way forward in a new digital world with a non-digital model. It should be apparent that the old structure, the old ways of doing business and the old ways of competing must evolve.
A core problem facing direct sellers in more developed markets is channel obsolescence driven by the proliferation of consumer choice. This causes rapid market segmentation, fueled by the infusion of ecommerce competition resulting in the commoditization of high margin categories. Unlike emerging markets in South America where an expanding mobile platform acts as a catalyst for direct sales growth, developed markets are inundated with e-channel competitors better suited to serve smaller consumer segments.
As traditional direct selling companies placed shopping carts on line, more customers chose electronic ordering instead of attending in home presentations. Customers compared this experience unfavorably to what they discovered with e-retailing competitors. Prices were too high, selection was too small, shipping was slow and expensive, and returns too difficult. Key performance metrics deteriorated, rep counts declined and customer acquisition cost rose. Many businesses became locked into excessive overheads, unable to “right size” their fixed costs as quickly as consumers shifted channels. Here's the ugly truth--simply adding a shopping cart to your business doesn't equate to creating a competitive digital model.
Party-plan business models are further challenged in the U.S. because of a dramatic shift in the composition of their historic target market, stay-at-home mothers. According to Belinda Luscombe in her 5/14 Time article, “Stay at home moms not who you think they are,” current versions of business models were created to serve the “opt-out-stay-at-home mom” with a car pool and a husband with a nine to five job. While start up party-plan companies continue to pursue an educated, married white home owner with a household income greater than $75,000, research indicates they make up a very small percentage of just 1% of all stay-at-home mothers—a huge disconnect. The vast majority of moms taking care of the kids can’t find well-paid work and they can’t find childcare that would make less than well-paid work worthwhile. One third of stay-at-home moms were not born in America. Half of them are not white and nearly half have only a high school diploma or less. Twenty percent are single mothers and more than one third live in poverty, nearly double the percentage compared to 1980.
As 2015 begins, two well known direct selling companies will shutter—Jockey’s Person to Person and Lia Sophia Jewelry. These are just the latest in a long list of direct selling party plan companies to close their doors in the last 48 months. Avon’s stock is trading near a 52 week low as the collapse of their U.S. channel continues. Not all direct selling companies are affected in the same way and to the same degree, but those that find themselves struggling in developed markets must create a new approach to the customer or continue to experience a downward cycle of revenue.
Creating a new approach to the customer isn’t a new idea. This channel has successfully reinvented itself in the past and will again in the future. But reinventing requires management to reconceptualize the channel. The narrow definition created by the Direct Selling Association defines the channel as “the marketing of products or services directly to consumers in a face to face manner, generally in their homes or the homes of others, at their workplace and other places away from permanent retail locations.” This definition may have served the industry well in the past, but it's far too narrow for today. Perhaps more than 70% of domestic dollars flowing into U.S. direct selling companies aren’t sold in a face-to-face manner. They are marketed through email campaigns initiated by representatives to their contact base and promotions spread across social media. Orders that occur as a result of electronic solicitation are placed online without the representative being in the same room, same State or even the same Country. The channel is evolving but its participants are constrained by an obsolete business model. There is a huge pent-up demand for a contemporary approach to the customer, especially with young women that are universally rejecting the current outdated model.
I've reconceptualized the channel allowing me to look around the corner to see what so many haven't seen, a new direct selling space with enormous potential. I've articulate new concepts that form a new channel structure and a new way of doing business. I've identified appropriate categories and underserved target markets with exceptional potential. This led to a new set of business rules and a new technology architecture. Most will view it as the next logical step in ecommerce, some will see it as a 21st century version of direct selling. Both will be correct. One thing is certain; those that choose to enter or remain in the channel must create a business model that is more like the future or risk building on a platform of obsolescence.
Note: Belinda Luscombe , “Stay at home moms not who you think they are” Time Inc. 5/9/14