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How to Build a Successful Direct Selling Company

by Jay E. Leisner


In the United States, almost two million new businesses are started each year. People with good ideas and good intentions decide to put their best foot forward. They open their doors for business and hope their businesses stay alive and grow.

 

In contrast, there are several hundred direct selling businesses that are launched each year. Some of them are funded well at their birth, others are launched with bridge funding, and many begin with a critical shortage of investment capital at the outset.

 

It's a rough world out there. Half of new businesses don't make it past their first year and most don't celebrate a 5th anniversary. The odds don't scare many away, so don't let them scare you away. A healthy dose of fear, however, can be a good motivator to do the right things to increase your odds of staying in business.

 

Here are some smart things you can do when building your direct selling company:

 

Choose a business that is clearly profitable.

 

For a direct selling business to be profitable, it must have healthy gross margins. The retail price of your products should be at least 5 times the cost of goods sold. Operating a direct selling business with margins less than these is possible, but difficult. Companies with smaller margins typically pay out a smaller percentage of commissions, the result of which impacts the attractiveness of their business opportunities.

 

Create a business plan.

 

Many people think that the sole purpose of a business plan is to secure outside investment capital. This is one of the two purposes. A business plan helps demonstrate that you have thought through the business in detail and can show convincingly that you have a viable, profitable model.

 

The other purposes are less obvious.

 

Writing a business plan forces you to think about the seemingly endless collection of details about the business you plan to launch. The exercise of writing the business plan is key to the process of working through the plan as you write it. The pain is worth the gain. You'll see what you know already, and you'll also see what you have yet to learn.

 

Having a business plan gives you a concise document to share with the consultants you'll contact as resources to help launch your business.

 

If you have your business model reviewed by a qualified attorney, he or she may ask to see your business plan (and any other documents you've written about your business, such as your compensation plan).

 

If you choose to engage a business consultant to help you fine tune your business model, having a business plan will save you money in reducing the amount of time the consultant will need to spend to understand your business model.

 

When the time arrives to make decisions with respect to software, your software company will appreciate reading your business plan for it will help to identify unique requirements that may need to be addressed with software.

 

Don't view your business plan as a static document, once written, that shouldn't be changed. On the contrary, your business plan should change as you adjust your business model prior to and after the launch of the business.

 

Secure dependable sources of cash for the business.

 

Most businesses fail due to undercapitalization. Direct selling businesses are no different. Not having enough cash to address the expenses incurred prior to and after launch is the cause of many business failures.

 

You should prepare a sales forecast and a budget. These documents, like the business plan, will be prepared initially based on best guesses. Once you've launched the business you'll have real numbers to look back upon, and with these real numbers, your ability to prepare a good forecast and a good budget will be significantly improved.

 

Before you begin spending big money, you'll need to decide how to fund the business. Will you supply the cash personally, locate multiple outside business partners or investors, or find an "angel investor"? These are tough decisions for many entrepreneurs as their limited cash often accompanies a strong desire to own most or all of the company.

 

Most product-based businesses become profitable within 18 months to 3 years from launch. Yes, I've seen companies that have been started on a shoestring budget with the plan to be profitable within 90 days. While this is possible (as some companies have achieved this goal), the odds that you will be one of the lucky few are small.

 

Don't take a lottery approach when starting your business. Yours should be a serious business, not monkey business.

 

Software and Technology

 

Making a decision on the purchase or use of software for a direct selling or network marketing company can be a difficult process. Each business is unique with specific requirements that should be considered when evaluating software vendors and their products.  Don�t make the mistake of assuming that you have no unique requirements.

 

On the surface, vendors can look alike, but each has its strengths and weaknesses that are not readily apparent.  Take the time to compare vendors and their products.  Don�t be �wowed� by the bells and whistles.  Instead focus on basic functionality and insist upon a track record of successful projects with several client references that you can speak with.

 

Some companies choose a vendor based on how quickly they can implement a system, assuming all vendors offer the same service and the same product. These are incorrect assumptions.

 

Selecting a software vendor is much like selecting a spouse. Just as you shouldn't select a mate based on how quickly he or she will marry you, timeliness is not the primary factor to be considered when purchasing software. It is definitely better to choose a software vendor carefully than to make the wrong choice quickly, for the wrong reasons.

 

Using a consultant to assist with the purchase of software gives companies many strategic advantages. A consultant familiar with software vendors and their products and services can help not only to explain the differences among them, but also to help identify what is most important to the purchaser and to communicate these requirements to the prospective vendors.

 

For a marriage to work well and last, both parties need to understand how each other thinks. The same goes for the client/vendor relationship. An experienced consultant can help teach the purchaser how to be a good client and can help present the client's needs clearly to the vendor. He or she can provide guidance to both parties and can serve as an intermediary to help negotiate the terms and deliverables in contracts or to resolve disputes.

 

Endeavor to understand your sales force and its retail customers.

 

Who do you anticipate will be attracted to your business opportunity and who will buy your products? What are their needs and how will you meet them? What will you do to keep them coming back for more?

 

Understanding the personal goals of those that will become your consultants will help you in building your marketing plan and your commission rules. Identifying and promoting the reasons consumers are attracted to your specific products will help your products to be viewed as even more attractive and needed.

 

Don't wait for the company's launch to find out what's good and what's not. Before you open your doors, take the time through focus groups to demonstrate the infant versions of your marketing and commission plans. Present the products and obtain feedback through carefully crafted surveys to learn what is liked (and not liked) about them. Then, adjust your business model and your products as needed to make each more attractive.

 

Determine multiple sources for your products.

 

A chain is only as strong as its weakest link. If you can't purchase enough of your products quickly enough to satisfy demand, your business model will break, your sales reps will flee, and your end consumers will go with them.

 

To ensure the product leg of your business is strong, whenever possible identify multiple vendors for each product. Explain to your vendors that you anticipate your purchases will increase significantly over time and that you require your suppliers to keep up with you. Locate suppliers who have a track record of keeping up with fast growing companies. If possible, provide incentives to your vendors for meeting your requirements for product quality and quantity and disincentives for failing to do so.

 

Price your products and services right.

 

It is almost impossible to make the point that you have the lowest prices and the best quality. Most direct selling companies emphasize quality over price. You should probably do the same.

 

Products and services sold through direct selling can cost more than similar products sold through other marketing channels, but not that much more. If similar products exist, determine the price ranges of those products (from discount warehouse clubs to the corner store). I recommend that if your products are very similar to those available in traditional shopping venues, your prices should not be more than 25% more than other prices.

 

If your products today are sold by other direct selling companies, I would be careful not to overprice them. If your products are unusual and can't be found anywhere else, clearly you have more room in pricing these products.

 

Ideally, your products should be unique and not readily available anywhere else. Products that require a story or an explanation to understand their use typically do well in direct selling.

 

Through your focus groups, you can experiment with different price points to see how purchase decisions are affected. Then, you can set your prices at the right price points.

 

Develop strategies for recruiting.

 

Companies that wish to grow quicker at launch time typically have a strategy to identify and recruit experienced direct sellers, giving them special roles in exchange for their commitment to heavily promote the business opportunity (and to recruit others) during a pre-launch period and after the official launch of the company.

 

The definition of "special roles" varies by company. Some will offer to grandfather a core group at higher than entry level positions in the sales force. Others will offer a monthly stipend as an incentive to join this elite group at the "ground floor" of the company. Some companies will offer both types of incentives.

 

If you choose to offer special deals, do so only if you require specific performance in order to continue to be paid at the higher level or to receive the monthly stipend. "Pay for performance" should be a clear requirement.

 

Some companies feel strongly that no special deals should be offered and that each consultant should earn her title and that the compensation program itself is reward enough for the effort put forth.

 

How will you recruit your consultants? Before your official launch, will you seek to build a core team of experienced direct sellers who wish to promote your business opportunity at the outset, or will you build your sales force more gradually?

 

Plan for change to your business.

 

Don't view your business as an island. Keep aware of your competition's moves. When I say competition I mean both other direct selling companies (that offer similar business opportunities) and companies that sell similar or identical products.

 

While looking sideways at your competition, you should also be looking forward to offer innovative products and business opportunity advantages to help differentiate you from others.

 

Professional consultants can offer you suggestions that you can fine tune for your business model.

 

Introduce changes to your business infrequently.

 

While you may have a long list of "cool things" you wish to release to your sales force, temper your enthusiasm with controls that limit the frequency of new announcements and changes that you introduce each year. If you can, announce changes on a quarterly basis as any change to your business (whether good or bad) deflects the focus of your sales force and its end customers from recruiting, selling, and purchasing your products.

 

Limit your focus.

 

Decide what kind of business you want to be and then build that business. Keep to your core mission - running a profitable company. Whenever possible, don't introduce new product lines with inferior margins compared to your existing product lines, because your new product line may cannibalize an existing one. If this happens, your sales will stay the same, but your profits will decline.

 

Before you introduce a new product line, use focus groups to determine the impact of new product introductions on existing product purchases.

 

Know your limits.

 

Many entrepreneurs fall into the trap of not admitting what they don't know. Their self-confidence can be their own internal enemy. To avoid this trap, surround yourself with people who have skills that you don't have, whether they are business partners, employees, or professional consultants. Let others make recommendations and decisions. View your business as run by a team.

 

Require performance.

 

Just as the entrepreneur sets high standards for himself or herself, so should standards be set for performance of business partners, employees, and your sales representatives.

 

Accountability and rewards for achieving goals should be a key ingredient in all of your agreements with employees (and sales reps, too). Your compensation plan should reward consistent attainment of specific goals.

 

Conclusion

 

Your business is a result of your drive to create something significant. Building a business is an exciting but complex endeavor. Pay attention to the details, and seek assistance when needed to help you through the rough spots.

_____________________

Jay Leisner is President of Sylvina Consulting, a business and software consulting firm with more than 17 years of experience having worked with over 150 direct selling and network marketing companies. Sylvina Consulting provides a wide range of services to both new companies and established firms.

 

For more information on Sylvina Consulting, including free white papers on direct selling and a company brochure, please contact Jay at 503.244.8787 or visit http://www.sylvina.com/party-plan-consulting.php  .

 

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