Direct selling -- Hype or real opportunity?

Reshma Krishnan

HAVE you time on your hands?

Would like to make some extra money? Do you wish you could control when and how much you work and how much you get paid? Well, almost 34 million people worldwide are now doing something about all this. They are now into direct selling, and making a lot of money too. But that is not surprising as it is an $82-billion (Rs. 3,60,000-crore) industry.

What is it?

Direct selling is a simple concept. It is a distributor selling to a customer on a one-on-one basis. The inherent features of direct selling are word-of-mouth advertising, flexibility and performance-related rewards. When you join a direct selling network you are not an employee but a node.

You are an independent business entity, dictating selling price. Your only fixed parameter is the price you sell it at. It is perfect for the budding entrepreneur. India has just been invaded by a multiple of direct selling companies whose products are mainly consumer plastics, home utilities such as kitchen-cleaning products, and cosmetics. Oriflame, Amway, Avon and Tupperware are the big ones operating in the country. Prices of products in direct selling tend to be quite high due to the apparently high quality.

How to become a member?

To become a node in the direct selling network, you can either be introduced to the company by a distributor or you can visit the many outlets these companies have to recruit new people.

Rewards

An inherent feature of direct selling is performance-based rewards. There can be up to nine types of income when you direct-sell. The most basic form of income is the margin at which you buy the product and the retail price (MRP) at which you sell it. The margins here are generally quite high -- 25-30 per cent.

The second is bonus commission, awarded when you reach a sales target -- called your personal sales value. This is awarded on a slab-basis over and above the basic commission. This is where the real money is once you go higher up the ladder.

Once you reach a particular target, you can start recruiting people yourself. At this point you will receive a percentage commission on the total of their sales value and, consequently, of every one who they recruit. This is called `pyramid selling'.

As people go higher up the network pyramid, they concentrate more on recruiting people than on selling. Therefore, a significant proportion of their income is sourced from others' personal sales value commission. But to reach such levels, you have to dedicate yourself to creating a vast network of distributors and consumers and initially attain high levels of personal value.

What is the initial investment?Nothing at all, if you wish. It also differs from company to company. But it is generally divided into two types. Companies such as Tupperware expect an initial deposit which makes you eligible for credit for the value of products you buy. This credit would be settled once you sell the products.

Other companies, such as Oriflame, give you credit once you reach a particular target level and are a priority distributor.

Amway, on the other hand, insists that you pay for the goods when you collect them and not when you sell. This system initially puts people off as they are scared of getting stuck with products they cannot sell. One way of getting around this is to have a personal understanding with your customers. You can collect the money from your customers and place an order thereby making instant profits as you only pay the cost price. This requires building a relationship based on trust.

Merits

Low start-up costs: The costs incurred in this business are minimal. The only real costs are the initial joining fee -- Rs. 100-300 and the initial deposit (in some companies, if you decide to use the credit facility). Oriflame has a registration fee of Rs. 250. Costs incurred in travelling when meeting people can be avoided if you go to community meetings or gatherings or, even, house parties. In the US and the UK, where direct sellers such as Tupperware and Ann Summers hold parties to woo customers.

Product buy-back policy and low inventory: Another merit is that if you have a good relationship with your customers, you need not hold stocks. Even if you do, most companies have product buy-back policies; that is, they will buy-back products you cannot sell. However, companies Business Line spoke to said that due to the high levels of training given, distributors are rarely left with unsold products.

Flexibility: The flexible nature of direct selling is one of the main reasons for its growth. Nothing is fixed except the selling price.

Rewards are directly proportionate to your efforts: So you can earn as much or as little as you want -- the more time you invest the greater the rewards.

Most products involved in direct selling are easy to relate to and hence easy to sell. Most people know how to value and judge cosmetics and household cleaning items. There is comfort in familiarity.

Critical success factors

The critical success factor is your ability to sell and interact with people. Your business thrives on repeat-customers and the focus should be on inducing trial. Once you have convinced the customer to at least try it, the product will speak for itself.

According to Tupperware India managing director, Mr. Pradeep Mathur: ``Direct selling works by introducing new people into the business. The more people selling or buying your products, the bigger your business. It is a new concept and needs explaining.'' Your success ultimately depends on the relationship you develop with your customer. Be assertive but not pushy. Be honest.

One distributor Business Line spoke to says she does not recommend products that she believes do not offer value for money. For instance, she does not recommend the nail polish her firm sells as she believes it is too expensive. Your customer will appreciate such honesty.

And, finally, be patient. It takes a while to develop good relationships and a network.

Worth the while?

It is not a bad way of making money and meeting people at the same time. But there are some points to be wary of:

Make sure you understand the policies of the company on payment of commission and product buy-back. You do not want to be stuck with expensive cosmetics and plastic bottles you cannot sell.

Be sure of your customers. They might ask you to order a product and later change their mind.

Direct selling might be a good option if you want to earn some extra money in your own time. But it is not secure as the main source of income.

Indian experience

HOW have the companies that have touted the benefits of direct selling to the individual fared? They came, they saw but will they conquer? There are about seven-eight companies involved in direct selling in India, with total recorded sales of Rs. 312 crores in 1997-98 and Rs. 520 crores in 1998-99. The figure is about Rs. 620 crores now.

Amway, a direct selling pioneer, pumped in over Rs. 115 crores as foreign direct investment. In its second year of operations (1999-2000), Amway estimates its turnover at Rs. 200 crores -- a 100 per cent increase. Amway expects its business to touch Rs. 1,000 crores in 2002.

Oriflame -- a Swedish direct selling company involved in cosmetics -- claims to have done similarly. Its flashy prices did not convince the consumers about the quality of the products. It has since re-positioned itself to a broader market, targeting lower prices. This change in strategy helped it reap rewards and stage a turnaround.

This seems to have been the trend with all the major direct sellers. The two biggest obstacles they face in this country were explaining the concept and, thereafter, justifying the premium prices of their goods. For instance, Tupperware salespersons are trained on how to explain why a Tupperware plastic bowl costs Rs. 120 more than what is available in the market. They try to promote the concept that the bowl is worth the investment and offers value for money.

Such concepts are alien to the conservative middle-class Indian households. Nevertheless, there is much to be said for the tremendous potential for direct selling in India if the companies play their cards right and adapt to the Indian conditions.