DIRECT SALES INDUSTRY – Changes to Look for in 2020

We’ve been told all our lives that “change” is the only constant. The new year sets the stage for the new decade, where we can only anticipate SOME of the changes that all Direct Sales companies and their suppliers/supporters face. Those companies that embrace change and take proactive steps to stay on or ahead of the wave are the companies that will thrive in the near and far-term. Companies that fail to change, or fall far behind, are likely to disappear.

To keep things simple, let’s look at changes in the 3 C’s, and develop your strategies for staying ahead of the wave:

  • COMPLIANCE
  • COMPENSATION
  • COMPETITION

COMPLIANCE

Compliance is a broad category that includes laws and regulations from the Federal Trade Commission (FTC), The Securities Exchange Commission (SEC), and local taxing authorities (e.g., states, counties, cities, etc.). I’m also including compliance with good cyber security practices.

We’ve seen the FTC crack down on big, established companies like Neora (formerly Nerium International) and AdvoCare. Bad news travels fast. The media eats up bad news about MLMs and spits it out in sound bites that get repeated over and over to an audience of skeptics who already believe that ALL direct sales companies are illegal pyramid schemes. Distributors have a hard enough time overcoming objections without the help of FTC lawsuits.

The SEC gets involved when they receive complaints of an “investment” gone wrong. Near the top of their complaint list: “investments” in illegal pyramid schemes masquerading as legitimate MLM companies. NEVER use the term “investment” in your recruiting and training materials!

Most small to mid-sized companies have been on Easy Street when it comes to sales tax compliance. Each state has its own sales tax policies and laws, and with multiple tax jurisdictions within each state, 100% compliance is not possible for small companies.

We’ve been hearing about sales tax simplification efforts across states for years, but we haven’t seen much action from Congress. Sales tax compliance is still a difficult and expensive endeavor, but consider Easy Street as CLOSED PERMANENTLY. California forced Amazon to lead the way a few years ago, and now almost all online sales are taxed at the state level, at least.

Third-party software takes some of the burden off of those companies that can afford to register, collect, report and remit sales tax across multiple tax jurisdictions, but you can expect to pay through the nose for this service! Until your company can afford a reliable sales tax solution, register in those states where you have sales and collect, report and remit AT LEAST to the state. Most direct sales software has a basic sales tax component that charges sales tax by state or by zip code, and most software companies have integrations with one or more third-party sales tax solutions. Be aware that many third-party solutions are expensive, but I think we’ll see competition drive the cost down.

A cyber security breach is one of the absolute worst things that can happen to any company. Without breaking a sweat, you can probably list 5-10 well-publicized cyber security breaches from the past 2-3 years. Did you know that the average cost per record to the company is about $300. Big companies lose millions; small to medium companies lose everything.

Think about all of the data that you have for your customers and your distributors:

  • Full names
  • Home address
  • Social security number
  • Birth date
  • Bank account routing and account numbers (in some cases)

I’ll stop with just these 5. This data is valuable to bad guys. You may be surprised to learn that your biggest threat for a cyber security breach isn’t from some hacker. The biggest threat is from an insider — anyone with a username and password (all admin, distributors and customers). 80% to 90% of all breaches are people-caused. Most are innocent users who click on a link in a normal-looking email. Some are disgruntled employees who intentionally damage the company’s reputation, so be aware of the job satisfaction among workers.

While no standards for cyber security compliance exist in our industry, know that good cyber security hygiene begins at home. I won’t get into solutions here, but you should read this blog post from August 2018: Cyber Terrorism is Real.

Make a decision now: Would you like your company to be known as an Industry Cyber Security Compliance Standard-Setter, or another victim?

COMPENSATION

Over the past few years, we’ve seen a significant trend toward “simplification” of compensation plans and strategies. Gone are the days when companies required new distributors to purchase expensive enrollment kits, for which the sponsors received commission. Most companies offer several non-commissionable enrollment options at different price points. Some companies also offer optional one-time product bundles at enrollment only, which typically represent a good value for a new distributor, and may be commissionable.

Legitimate companies focus on sales above recruiting. Sure, recruiting is an important part of the distributors’ job, and the company’s success plan, but no one gets paid without product sales. Rank achievement typically includes a combination of sales, recruiting, and ensuring the success of personally-recruited distributors (via training and mentoring). Modern compensation plans include ways for people who just want to sell to make a robust income without building a downline. The bulk of the commission, therefore, goes to the people who do the selling and the mentoring.

Company owners have realized that they have only so many ways to split a nickel. Rather than paying the nickel through 5-10 upline levels, modern compensation plans pay a larger percentage of personally sponsored distributors’ sales activities, and 2-3 additional levels. Compensation strategies still include ways to reward distributors who achieve management and executive ranks, but the payout doesn’t necessarily come from paying on many levels. Companies find creative ways to drive the desired behaviors and reward the people doing the work, and modern software is configurable beyond levels.

We can’t talk about compensation without addressing compliance. The FTC, SEC and state attorneys general are coming down hard on companies that encourage front-loading (requiring new distributors to purchase more products and samples than they can possibly use in a pay period — usually a month). Requirements for initial and/or ongoing monthly purchases to qualify for promotion or rank maintenance are red flags and likely to gain unwanted attention.

Moving into this new decade, remember to focus on SALES TO END-USER CONSUMERS. If you’re selling more to customers than you are to distributors, you’re on the right track. Stress customer acquisition and retention and you’ll stay out of trouble, your distributors who do the work will make more money, and you’ll create a sustainable business model.

COMPETITION

We all understand the realities of distributor earnings, where, in general, less than 3% of the distributor base actually earns a livable income. Do a Google search for “MLM disclosure statements”, and you’ll see that across the board, most distributors don’t even earn the cost of their enrollment kit. Granted, people join MLMs for reasons other than money, including getting discounts on their own purchases, but the truth is brutal:

In a convention room full of 10,000 excited distributors, about 300 are making an evident profit in their businesses. After accounting for the cost to attend the convention with 9,999 other distributors, fewer than 100 are profitable (less than 1%).

Even then, many distributors pour their earnings into building their businesses, so the true take-home value of the earnings isn’t realized. This next thought may be controversial, but I stand by it:

Instead of 10% of your distributors earning 90% of the money, imagine what your company would look like if 90% of your distributors who do the work earned 90% of the money?

You’d certainly have bragging rights in the industry!

The “Gig Economy” is awesome for the direct sales industry! Let other companies compete for “professional” MLM-ers who are driven by the dream of the rich-and-famous lifestyle. Top earners represent less than 1% of all distributors, and those who join for a quick trip to the land of luxury often quit before doing anything!

Change your focus. Look at all of the people who have jobs or are retired who are drivers for Lyft and Uber. Restaurant and grocery home delivery is BOOMING in my area. If restaurants and grocery stores are making huge investments in home delivery services, they must know that they’ll have people to take all the new gigs! People who work gigs often take on 2 or more. Let your competitors focus on the “lifestyle” dreamers and shift your energies to attracting people who just want to make an extra $500 or $1000 per month without a big investment and/or long-term commitment.

You can still have the “lifestyle” elements of your compensation strategy, just keep it real, don’t create unrealistic expectations and focus on what’s important: retail sales to customers. Create a new model where 90% or more of distributors get paid more than they spend, and you’ll smoke the competition.

We have an emerging competitor that may take us some time to figure out a competitive strategy. Amazon. Amazon has almost everything a consumer wants, competitive pricing, and FREE shipping. Product differentiation is vital — why pay more to buy CBD oil from you when it’s half the price on Amazon and it ships for free? What is different about your CBD and the buying experience that’s powerful enough to make consumers choose you? You must be explicit, and it’s not just the product: it’s the whole buying experience. Consider the following areas as points in the process where you can make clear why consumers should buy from you:

  • Packaging — The package opening experience should make people say, “Wow! This looks great!” I keep examples of great packaging and if I like the product, I’m likely to buy it from the same source in the future, even if it costs less somewhere else.
  • Customer Service — When I buy from Amazon and other online sellers, the only follow-up I get from the seller is a request to provide a 5-star review. I’d be “wowed” if I got a call or email from a seller who wanted to see that I received the product in good shape, and answer any questions I may have. Your distributors can handle this.
  • Corporate Mission — Is your mission in alignment with your target customers’ values? What charitable organizations do you support? Do your employees and distributors volunteer for just causes?

The free shipping issue is a challenge for all direct sellers. Can you raise your prices to cover your shipping costs? Most Amazon products have a $35 minimum for free shipping, unless the customer is a Prime member, and shipping is always free on Prime items. Can you offer free shipping on all orders over $X.00? Can you have a “preferred customer” club that is either an annual or monthly subscription and gives members free shipping and other benefits? Can you work with several shippers who can give you significant discounts? Would you be better off handing the whole inventory management piece and fulfillment to a 3rd party?

You may want to rethink your sales model this year. Most of our customers are choosing party plan software over traditional MLM software. Whether their distributors (generally referred to as “consultants”) do home parties, catalog parties, live-streaming parties or any other group-sales experience, the event-based model DRIVES CUSTOMER SALES. The party plan model also provides your consultants with a never-ending stream of new customers and potential prospects.

Did you know that party plan software is MLM SOFTWARE ON STEROIDS. Party plan software does everything that MLM software does, so distributors can sell, recruit, view reports, share their personalized replicated websites, etc. It also gives your distributors a significant advantage over traditional MLM software: to sell lots of product to end-user customers and have an endless stream of new customers and potential prospects!

With the nuances of group sales versus traditional MLM and affiliate sales, MLM and affiliate software doesn’t come close to giving the company and its distributors the tools needed to manage group sales. Parties (call the event what ever you want) typically involve a host who invites guests that the distributor wouldn’t otherwise ever meet. Over 90% of the guests buy something! To thank the host for the effort to host an event, the company usually provides “host rewards” based on the total event sales. Host rewards are considered a “marketing expense”.

Here are some noteworthy elements that party plan software has that traditional MLM or affiliate software doesn’t have:

  • Host rewards – calculated automatically
  • Ability to create and send invitations to an event
  • An event catalog tying all orders to the event, regardless of where the orders come from (for calculating host rewards)
  • Multiple shipping options, including shipping directly to the customer (standard); shipping to either the host or the distributor (to save the customer some $ on shipping and giving the distributor a legitimate, non-threatening opportunity to engage the guests after the event)
  • Ability for distributor to leave the event with CASH-IN-POCKET for the retail bonus part of the event sales!

To be competitive today requires modern technology that:

  • Reflects your brand
  • Is easy to use for corporate admin, distributors and customers
  • Works and looks great on all platforms (desktop, phone, tablet, etc.)
  • Solves problems that traditional MLM and affiliate software can’t touch
  • Is AFFORDABLE

Your competitors are constantly working to stay ahead of the pack. They’re sourcing new products; negotiating better purchase terms; streamlining their processes; marketing their products and their opportunities. Do you have a competitor or two doing an outstanding job of staying ahead of the pack? Study your competition. Join their public Facebook groups. Read the direct sales forums. Learn what works and what doesn’t work and stop doing things that aren’t working for your company!

CONCLUSION

The new decade promises excitement and unpredictability. This year is an election year, and the political discourse is ugly and likely to get uglier. As I write this, our country is on the precipice of war and our president has been impeached, perhaps with serious consequences for the US and the entire world. We can’t predict or control the future, so focus on the things you can control in the present:

  • Strive for compliance in all areas, including cyber security.
  • Review your compensation plan and overall compensation strategy. Changes to compensation are difficult for the field as well as the company. If you need to make changes, consult with your executive team and hire an industry expert to review your plans before finalizing and announcing any changes.
  • Let your competitors spend resources targeting the “lifestyle” dreamers and “big fish” (experienced distributors with large downlines in other companies). “Lifestyle” dreamers are looking for an easy way to achieve the dream, and they won’t find it in our industry. “Big fish” are always attracted by shiny objects. Bring in a “big fish”, which usually takes a LOT of cash upfront and concessions, and you may see some increased activity — until the next shiny object comes along!

We’re here to help. We’ve been in the industry for a long, long time, and we’ve weathered changes over the decades. We do more than provide software — we consult and create strategic plans (including comp plans), and guide our clients toward good choices for the unique characteristics of their own companies. We’re here to help you thrive in 2020 and beyond.

Happy New Year and welcome to a brave, new world!

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About the Author: David Doyle

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