Direct selling is the essence of free enterprise. Thousands of
direct selling companies have sprouted during the last few decades. Sadly, many
are no longer in business. I have been entrenched in the direct selling industry
for more than 25 years and have seen hundreds of companies come and go. As the
years have passed, I have discovered patterns of success and tragic mistakes
that weaken direct selling businesses, often to the point of failure. While
there are many reasons for failure, it is my hope that by understanding 10 of
the more common mistakes, an aspiring direct selling business owner might have a
better chance at success than those who failed to see the picture clearly. These
10 common mistakes include:
- Inadequate planning
- The wrong business model
- Poorly designed compensation plan
- Lack of a good field training system
- Lack of an effective selling system
- Inexperienced management team
- Computer software that doesn't work
- Listening to the wrong people
- Poor customer service
- Growing too fast
While these mistakes are not in any particular order, they
carry with them differing levels of severity. For example, while a poorly
designed compensation plan can become a major obstacle to the success of the
organization, it isn't too difficult to correct the problem by changing to a
good one. Lack of funding, however, can force a company out of business within a
few weeks when it fails to meet payroll or its commission obligations. Both
problems can be fatal, but one is easier to correct than the other. Let's review
these problems in more detail.
No. 1: Inadequate Planning
Funding Requirements
Let's suppose you want to build a house and have borrowed
$350,000 to complete the project-the most your bank will lend you. You have
$50,000 of your own money to add to the mortgage and expect the house to cost no
more than $400,000. During the construction, you find a few unforeseen problems.
While digging the basement, a water spring was found that had to be routed to a
different part of the property. Cost: $8,000. Lumber prices rose 30 percent from
the time you started the project. Cost: $12,000. You upgraded the carpeting,
hoping to make up the difference in other areas. Cost: $9,000. As you near the
end of the project, try as hard as you might, you can't get the house completed
without another $40,000. You've already borrowed as much as you can to get the
$350,000. You have no more money of your own. What will you do?
So it is with starting a business. Many well-intentioned
entrepreneurs embark on a long journey to prosperity full of hopes and dreams.
As they journey along the road, they hit a few water springs, and find many
things costing far more than expected. They make a few mistakes, which are
expensive to fix, and soon find they didn't budget enough money to get the
business off the ground. These people always come away from the experience
learning a golden rule of business:
Know how much money you need beforehand,
and secure the funds before you start.
How does a person find enough capital to start a direct
selling business, and how much does he need? Finding the necessary funding will
take a well-prepared business plan that is not only reviewed by potential
investors and financial institutions but will also determine the amount of
financing needed. No investor will be willing to risk their money without a
plan. You shouldn't be, either!
Common sources for funding include:
- Home Equity financing through banks, savings and loans,
etc.
- Venture capital organizations that specialize in helping
new businesses. This investor or investor group will expect a significant
ownership position for taking the risk. Venture capital groups are found by
networking with financial planners, accountants, bankers and merger/acquisition
specialists. You may find a few that know the direct selling industry by going
to www.dsa.org and looking
through the supplier members list (search for "Finance"). Be prepared to give up
a healthy chunk of your equity if you ask them to take on a big part of the
risk. Know how much money you need and secure the funds before you
start!
- Private or 'angel' investors, including friends, business
associates, friends of friends, etc. Find them by networking with everyone you
know. Talk to financial planners, accountants, business owners, etc. * Small
Business Administration or other federal and state agencies. These agencies will
either loan the money, or guarantee a loan through a bank. In either case,
you'll need to be able to pay back the loan on a set schedule. See www.sba.gov for more information.
- Local community bond funding. Some communities, work
aggressively with businesses to acquire funding for starting or expanding,
especially in areas of high unemployment. Contact local county and state
agencies to see if programs are available in your area.
- General bank financing. Banks will often lend based on
credit history and assets with a personal guarantee of the business owner or
another credit-worthy third party.
Don't become impatient and launch the business without the
necessary funding! How much funding is necessary will depend on your business
plan. Some companies start for as little as $50,000, while others find they
require several million dollars. Your business plan will tell you how much you
need.
Lack of an Effective Business Plan
A business plan is a "first creation" of the business, just
like an architect's blueprint is the first creation of a beautiful home. A good
architect will plan every detail of a home long before the first shovel of earth
is moved. So it must be with any business. You must become a business architect
before you can build the business. Companies that are successful without a plan
gain their success more by accident and luck than by design and thought.
A key benefit of the business plan is that it is often used to
attract potential investors, lenders and vendors. No investor will be willing to
risk their capital on a business venture without a well-designed business plan.
Investors have plenty of other candidates to consider who have prepared a
compelling business plan. You compete with those other candidates, so consider
your business plan much like a resume-you want to give them a compelling reason
to pick you rather than the others they are considering.
As you establish credit with vendors, they will be more
willing to grant credit if they can review a well-prepared business plan.
Remember, any credit granted by vendors reduces your starting capital
requirements; if your manufacturer is willing to extend 90-day terms for
$100,000 of product, you will need $100,000 less to start.
A business plan should include:
- An Overview: One or two pages describing the business will
help a potential investor become interested in learning more about the
opportunity. If an overview is missing, few investors will be interested enough
to take the time to read the entire plan. The overview should describe the
products or services being sold, the principals involved, funds required to
launch, and estimated return on investment, both conservative and potential. It
should also include an exit strategy for initial investors.
- Background of Management Team: A summary resume of the
company owners and executives is a critical part of a business plan that will be
read by investors, banks and other trade creditors. A common expression among
investors is "Bet on the jockey, not on the horse." In other words, the strength
of the management team is often considered as more important than the company,
product or compensation plan.
- A mission statement that clearly identifies what the
company is all about should be included. It's been said that distributors
will work for money, but kill for a cause. Your mission statement should be
something you can proudly display in literature or on a wall plaque. A corporate
motto might be taken from the mission statement. Most mission statements are
expressed in one or two paragraphs. Find samples of mission statements in annual
stockholder reports of many public companies. There are a number of books
available that also teach how to write and use a mission
statement.1
- A product description section describes your products and
what makes them unique. This is called your Unique Selling Proposition or USP.
- Goals and objectives should be identified and each should
spring from the mission statement. Goals might reflect the level of customer
satisfaction, order turnaround, staff efficiency, but most certainly sales and
profits.
- A market analysis must be done to determine the potential
of the product or service at its offered price (based on end-user pricing rather
than wholesale pricing to your sales force). The analysis should address market
demand, similar products and how they have been accepted and marketed,
competition, etc. This information might be found on the Internet, in libraries,
universities and other business consulting groups. The Small Business
Administration has access to large amounts of information and people who can get
the information for you. Many universities have business students who would love
to do market research for businesses, often at no charge, for their MBA
requirements.
- Your recruiting and marketing plan explains how you will
build your sales force and promote your products. What sales-support materials
are required? Who is your target audience? How will you reach them? This is not your compensation plan.
- Operational plans: How much office space will you need? How
many employees will be needed to handle the expected business volume? Warehouse
space, telephone equipment, initial product orders, printing, distributor kits,
videos and scores of other issues must be addressed in as much detail as
possible. This section may be the most important section of all and is usually
the one people try to gloss over. It's more fun to make sales projections than
to figure out how much office space is needed. Yet one major mistake in this
area can cost tens (or hundreds) of thousands of dollars. This part of the plan
takes time, often several months. Time spent here will pay huge dividends in the
future.
- Projections: Profit, loss and cash flow projections are
critical to every business plan. A competent consultant or accountant can assist
in this effort by identifying common areas of expenses for new businesses. Once
an initial spreadsheet format is built, many scenarios can be created with
computer spreadsheet programs like Microsoft Excel. Always prepare a
pessimistic, worst-case scenario, a middle-of-the-road scenario and an
optimistic (but realistic) best-case version. As you develop your business plan,
always project on the conservative side, but be ready to move into the more
optimistic version should the need arise. If your investor has read the
overview, the next thing he'll want to know is how much money is needed. These
projections are critical to a prospective investor.
- Return on Investment Analysis is important for those
investing in the business. This is why they would want to take the risk.
Attractive charts and graphs are essential. This section answers the investor's
question, "What's in it for me?". Remember that you are competing for
their money against other options they will evaluate. Investors are quickly
turned off by hype, so be conservative in your estimates.
- Risk Analysis: Careful study of the each known risk and the
assumptions involved should be explained in this section. While not intended to
turn off a potential investor, most investors will do their own risk analysis,
but with only the bits and pieces of information available. This is an
opportunity for you to address the potential concerns of an investor in a
positive and controlled fashion. If you don't need an investor, this section
will make your business plan more bulletproof. No plan is viable that hasn't
addressed the potential points of failure and risk. If an investor finds that
you have overlooked some key areas of risk, they will assume you are headed for
failure.
Once the plan is complete, bind it so it makes an attractive
presentation. Do not include your proposed compensation plan, as it would only
confuse the reader in most cases. Include a table of contents, index tabs and an
impressive cover. Don't put the plan on the shelf! Use it in each manager's
meeting, refer to it like the corporate bible. Change it when needed, but follow
it carefully.
Profitability
Part of the business plan, of course, is to plan to be a
profitable company. It's amazing how many companies fail to plan to be
profitable. Here's a general breakdown of how income is used in direct selling
companies:
- 40% of income for commissions to the field
- 20% of income for cost of goods or products
- 20% of income for administrative expense such as payroll, facilities,
utilities, etc.
- 20% of income for profit
While these numbers are very rough, they have proven to be a
target that many successful companies have set. Your numbers may vary
considerably. The profit you make on each sale will be a primary factor in
determining how much you should allocate to each major category, especially
commissions (discussed later).
No. 2: The Wrong Business Model
The world of direct selling has a variety of business models.
The model you choose will determine the type of compensation strategy you
employ, how you sell your product and how you grow the business. For example,
Avon's business model relies mostly on retail sellers using catalogs to sell
their products to customers. Melaleuca and Arbonne, instead, have thousands of
customers who signed up as distributors to buy their products at a substantial
discount off retail. They have few people buying their products at the full
retail price. Pampered Chef and Tupperware rely extensively on the home party to
demonstrate their products to customers.
These examples of different business models for direct selling
have a profound effect on every aspect of how each business is operated. It will
be the same for you. Choose your model wisely! It's one of the first decisions
you will need to make. This decision determines your method of selling, your
compensation plan, your product-pricing strategies, your marketing strategy, the
growth rate of your business, your training systems and your internal operating
procedures.
No. 3: Poorly Designed Compensation Plan
A compensation plan that fails to motivate distributors can
become a brick wall to the growth of your company. Some people believe that the
greatest key to success is a good compensation plan. While there is some truth
to this, I have also observed a few successful companies reach very enviable
sales volumes with poorly designed compensation plans. But the truly successful
companies always have a sound compensation plan.
At the heart of the issue is the question
what makes a
compensation plan good? Let's address a few points:
Reasonable compensation percentages. Most
compensation plans of today pay between 25 percent to 45 percent of company
income to field distributors. If a company promotes a plan paying only 20
percent or so, it may have a hard time recruiting and keeping distributors. It
may find great difficulty competing in the marketplace against other direct
selling companies.
How much can you afford?
Look at the table below (an expanded version is found at
www.danjensen-consulting.com). If your markup from your
product cost to your retail price is 500 percent (5x) and a distributor makes 25
percent for selling the product (retail profit), it shows that you should be
able to pay about 28 percent of wholesale (wholesale is revenue to the company
on the sale of each product to a distributor, exclusive of tax and freight).
| |
3x |
4x |
5x |
6x |
| Wholesale |
$75 |
$75 |
$75 |
$75 |
| Upline Payout |
$15 |
$18 |
$21 |
$24 |
| Product Cost |
$33 |
$25 |
$20 |
$17 |
Be sure you know the true long-term cost of your compensation
plan before you announce it. Your estimate of the percent of sales you will pay
should be done at "maturity," usually about 4 to 8 years from launch. A direct
selling company's compensation plan payout is mature when:
- Almost all volume is deep enough from the company (at the top of the tree)
that it does not run out of people to pay commissions to. Shallow volume never
pays the full commission because, as commissions are calculated upline from
sponsor to sponsor on each dollar of volume, it eventually hits the top of the
tree before all commissions are paid. In a mature company, this almost never
happens.
- There are some top leaders who have achieved the top recognition title or
rank and qualify for the maximum commission payout.
- The payout of the plan is stable for six months, within 0.5 percent
month-to-month, adjusted for seasonality, if any.
It takes experience and a good analytical approach to
accurately project plan payout at maturity. Some may need to call upon a
competent consultant who has done this before for help.
Design it for the part-timer: Unfortunately,
many plans are designed by direct selling "big hitters"
for direct
selling big hitters. Yet DSA surveys show that 95 percent of distributors are
part-timers. While a sound understanding of the principles employed in a
successful compensation strategy is essential when designing compensation plans,
one must never forget that ordinary, part-time people are the ones who must be
motivated by it, more so than the "big hitter." Plans designed for the
part-timer always generate bigger checks for your full-time leaders.
Design it for the long-term. Changing a
compensation plan is costly in lost momentum and distributor commitment. When a
distributor recruits another person, the compensation plan is often a
significant part of the recruiting process. They build their business according
to the rules of your compensation plan. To change the plan later will often
devastate them. Most people don't handle change very well. Some may perceive the
change as a bait-and-switch tactic. Avoid designing a plan that works for the
present but that you expect will need replacing later. That approach will
eventually hurt many of the distributors who build your business and may ruin
any positive momentum you build in your early years.
Don't copy someone else's plan. While you may
want to have the same success as another company, don't fall prey to the
temptation to copy their compensation plan. It rarely works well for you and can
often be a disaster waiting to happen. Do you sell the same products as the
other company? Are your margins the same as theirs? Can you afford to pay as
much as they can? Is their business model the same as yours? It is not uncommon
for me to hear a prospective client tell me how they would like a plan like XYZ
company while knowing that XYZ company has asked me to help them fix their plan
because it isn't working for them anymore. Don't copy another company's plan.
Avoid fad plans. By staying within more
traditional plan concepts, plans that have proven themselves over the years, a
new direct selling company can be innovative but still have a plan with
long-term viability. Stick to proven plan approaches that won't need to be
changed as fads come and go.
Avoid recruiting "heavy hitters." These
successful direct selling professionals can bring tremendous short-term success,
but they can also be a major cause for failure when they grow bored with your
company and join another, often taking many of their downline with them. Wise
companies always build slowly for the first year or two, until they have the
critical mass and experience to handle big increases in business volume. Don't
design your compensation plan to focus on attracting these heavy hitters. If a
heavy hitter wants to work for you, allow them to do so on the same terms as any
other sales representative. Avoid offering special deals, because inevitably the
rest of your sales force will hear about it and you'll have egg on your face!
Design the plan around the behaviors that build
success. Remember that a compensation plan should be designed to
compensate and reward the producers while not rewarding the nonproducers. What
one man receives without working, another man works for without receiving.
A compensation plan should provide incentives for the Five
Golden Behaviors:
- Product retailing
- Recruiting
- Building managers
- Building leaders
- Retention and consistency
These Five Golden Behaviors are the basis of every successful
compensation plan. Compensation plans that perform poorly do so because they
fail to reward good behavior. You can read more about these Five Golden
Behaviors at
http://www.danjensen-consulting.com.
No. 4: Lack of an Effective Field Training System
You need a system for training your sales force. A system is a
process or approach that is duplicable and provides predictable results. Even
with the world's best products and the industry's best compensation plan,
without field training you won't be going very far. There are two key elements
in developing human behavior:
- Motivation: "Why should I do it?"
- Competence: "I don't know how to do it!"
These key concepts are critical to your success. Once you
train your sales force and give them a great reason to work (motivation through
the compensation plan), your business will grow.
How does one develop a training program or system? You rely on
people who have done it before. Find people with experience in training direct
selling distributors how to sell, recruit and build successful businesses. How
can you find these people? There are a number of competent consultants available
to help. Look at
www.dsa.org for supplier
members who are consultants who do field training. It will be one of the best
investments you make.
No. 5: Lack of a Selling System
As noted previously, a system is a process or approach that is
duplicable and provides predictable results. A selling system, therefore, is a
method of selling that you can teach your sales force that provides them with
consistent sales success. What are examples of sales systems used in the direct
selling industry?
- Party Plan (most common)
- Catalog (Avon)
- Office parties
- Automatic monthly shipments to customers (Melaleuca, Nu Skin)
- Door-to-door (Southwestern)
- Lead follow-up (fairs, referrals)
- Free video with follow-up
- Free gift or sample
If you fail to develop an effective selling system, your
distributors will try to develop their own and, for the most part, will fail.
Your attrition rate will be high, and your business will not grow. An effective
selling system is essential to your success. It also allows you to avoid
unfounded claims that might put your company in a bad light by exerting some
control over your product message.
No. 6: Inexperienced Management Team
No business can rise to the pinnacle of success and sustain it
without effective management and leadership. It's been said that
leadership
is doing the right things. Management is doing things right.2 You need both. The graveyard of free enterprise is littered with the bones
of companies that were poorly managed and poorly led. Most often, the
mismanagement started with an enthusiastic business owner with little or no
direct selling or business experience believing that he or she could handle the
job. Statistics show that across all industries, 80 percent of new business
start-ups end in failure within their first year. While there are many who
launch businesses successfully, there are few who have the skills to
sustain
the success. Make no mistake, direct selling businesses fail from the top
down, rarely from the bottom up.
A wise business owner recognizes there are people he can hire
who are better than he or she in many areas of the business. He seeks for these
people. He must then empower them to do their job effectively. Don't hire
skilled people and ignore their wisdom and talent!
The ideal role of the business owner is to lead, and get out
of the way of his effective and competent managers who are empowered to handle
the various departmental needs of the business. Leadership becomes one of
planning, reviewing results, accountability, promoting and motivating.selling
the vision! Let managers do their jobs according to the business plan, which
should be the yardstick by which the managers are accountable.
Training
What NBA basketball team would recruit a young player, place
him on the floor his first day and expect him to perform like the rest of the
team? Without training with the rest of the team, at best his performance would
be mediocre. At worst, it would be disastrous and the game would be lost.
So it is with any new manager or employee, especially if the
whole staff is new in a new business launch. Who should train them? What should
they be trained to do? How do we know if they have completed their training?
These questions need to be addressed individually:
Who should train new employees?
Don't let the old saying, "the blind leading the blind" be
said of your trainers. Find very competent people to lead and manage each
department, and have an experienced general manager to orchestrate the various
departments like a symphony. Experience in direct selling is vital in most key
roles. Don't be led into the trap of saving money on inexpensive workers in the
beginning; it will cost far more than it saves.
To find experienced and friendly people to do the training,
look to professional consultants, the direct selling Association (DSA) and other
direct selling business owners for names. Advertise in industry publications
such as
Direct Selling News (
www.directsellingnews.com). Executive search firms can often
be fruitful, as well. There are several firms that specialize in direct selling
talent and they can be found in the supplier members list at
www.dsa.org. Many people find they
must hire from outside the industry and train them on the principles of direct
selling, because experienced direct selling people are hard to find. If you do,
plan on them having a steep learning curve.
What should they be trained to do?
As an experienced person is hired to supervise a department,
their first task is to design and document a system or method of operation. For
example, to process sales orders, a diagram showing how an order must flow
through the office should be created. Exceptions should be noted with a flow
chart or diagram to handle each case. What do you do if the credit card is
declined? What should a warehouse person do if some of the products ordered are
not in stock? Every conceivable problem and its appropriate solution must be
documented in advance. Policies need to be documented and organized into a
handbook for the staff. These policies might even be put on the office computer
system for instant access. Professional direct selling consultants can be an
invaluable sources to help prepare the flow charts and documentation.
Once the systems, policies and procedures are documented,
training can begin. With documented systems in place, training proceeds quickly
and thoroughly. Without systems, policies and procedures, training can never be
complete and takes many times longer.
How do we know if the employee has been trained?
An evaluation process that takes a new employee through a
sequence of duties and responsibilities should be established. For example, a
distributor-services rep might not be allowed to handle commission-related
questions until they have explained the compensation plan to the department
supervisor thoroughly, top to bottom. Each department must also establish a
minimum level of competence before allowing an employee to perform their
assigned tasks alone. Until then, they are paired with another peer or
supervisor. Some companies have tests that are taken and scored, focusing on the
various objectives of the job. The best tests focus on
objectives rather than on the mechanics of the job.
Success comes when:
- Your staff catches the vision
- They are rewarded for excellence
- They feel accountable to the sales force
- They are empowered to succeed
- The barrier between office staff and the field is gone.it can never be We
vs. Them but, rather, Us.
No. 7: Computer Software that Doesn't Work
In the section on training, I addressed the need to have good
systems that, if followed, comprise the methods to handle each type of business
transaction, whether the transaction is a sales order, a phone inquiry, a
complaint or a product return for a refund. Computer systems in direct selling
companies become the glue that binds the office departments together, a core
around which the business is built. No successful direct selling company has
ever sustained their success without a well-designed computer system behind it.
A well-designed software system builds bristling barriers to competition.
Likewise, there are many direct selling companies that have failed due primarily
to the lack of a good computer system. Don't let your new venture become just
another statistic. Choose your software supplier wisely.
What does a good direct selling software system do?
The software determines how you run your business. If the
software can't do it, your business can't do it. In comparison, The equipment
running the software is of little importance. At a minimum, your software must
do the following:
- Manage your genealogy or downline structure
- Calculate commissions with perfect accuracy
- Calculate incentive awards, such as trips, recognition prizes, etc.
- Distributor order processing
- . Party plan order processing (if party plan)
- Order fulfillment and shipping
- Monthly automatic order shipments (if required)
- Customer service support
- Accounting (general ledger, payroll, etc.)
- Product returns and exchanges
- Inventory control
- Credit card processing
- Electronic commission-deposit processing
- Distributor Web access
- Sales tax processing (in the USA only)
- International currency (if more than one country is planned)
Your procedures and policies will have to conform exactly to
your software, or you will be forced to change the software, sometimes at
considerable expense. This is one reason it's important to wisely choose the
software you use.
One of the greatest mistakes companies can make in this area
is to think they can save money by writing their own software. Not only does
this take years to do, but it can never reflect the experience and know-how that
packaged, direct selling software contains. Why reinvent the wheel? Would it be
worth the risk of losing the business to poorly designed software resulting in
incorrect commission checks, errors in tracking a person's downline records,
lost orders and so forth? The companies that elect to write their own direct
selling software often find that it cost more than if they had they purchased it
off the shelf. They often discover that they are vulnerable to the programmer
who wrote it. What if he moved away or became injured or sick? What if he took
another job at a higher wage? Never let someone convince you they can program a
direct selling software system in weeks or months. It's never been done
successfully before. Why should you believe it could be done now?
Software companies specializing in direct selling have spent
many years writing their software so it works right the first time, every time,
and they offer it to the public for a small fraction of what it cost to create
it. It's the best money you'll ever spend. They also provide a support team to
make sure you send your commission checks on time, every time.
How do I choose a good direct selling software
package?
While this paper does not have the space to address this
subject fully, a few suggestions should be noted:
- Choose a reputable vendor. There are many fly-by-night
software companies that make many claims of experience, know how and software
gadgetry. Don't be taken in by eye candy-software that looks good on the surface
but has little substance behind it. Unless you are willing to be a guinea pig
(and put your business at risk), choose a vendor with a proven track record.
Track records are built over many years of working with direct selling
companies, not just selling a software package a few times. Having only a
handful of clients may speak more about a software company's persuasive
abilities than their real know how and skill. Above all, check at least six
references. Remember that vendors will be eager to provide only their best
references. Be sure some of the references are relatively recent. Always get the
names of other companies from these first references. You might be surprised to
find a different story when you call companies not included in the first
reference list.
- Visit the software company's office. When you choose a
direct selling software package, you not only choose the software, you also
choose the vendor's support team. It's a marriage, of sorts. If the vendor is
not able to provide support services acceptably, what will you do when you need
to change your compensation plan or add a new input field to the order-entry
screen? There is only one constant among all direct selling companies-they
constantly change things! And your software will need to be changed as
well.
While at the vendor's office, meet the vendor's people who will
service you. What kind of people are they? How long have they worked for the
vendor? If you find they are relatively new, either the vendor has little
experience, is growing too rapidly (in which case you may have trouble competing
with other clients for good service) or has high staff turnover. All these can
mean trouble, as the vendor may not be able to handle your needs quickly and
competently. Be willing to pay for experience and competence. You'll pay less in
the long run. If you think knowledge is expensive, try ignorance!
- Avoid very small software companies with just a handful of
employees. Small software companies, to compete with larger and more
established firms, must offer software at bargain prices. This often puts them
on shaky financial ground during their critical years. Many direct selling
companies, trying to save money by purchasing software from these small software
houses, find themselves virtually abandoned later on when they need assistance.
The problem is that servicing one highly successful client can consume almost
all the human resources of a small software company, leaving the other clients
out in the cold. It can take months (or years) to train competent software
technicians on a direct selling software package. The more deadly problem,
however, is that smaller companies tend to go out of business without warning.
The direct selling industry is especially brutal on small software companies and
has seen many software firms close their doors, leaving their clients high and
dry. If you value your business, stay away from the small vendors, and stick to
those with staying power and track records.
- Buy a software package that allows you to create your own
reports. Many packages force you to live only with those reports they
put on the menus. There is a wealth of information inside your computer
database, but with some software systems you can't get it out. It's like having
money in your bank that you can't withdraw!
- Make sure the company can program your compensation plan. Compensation plans are complex and take massive amounts of experience to program
properly. When you have your tax return prepared, do you go to an inexperienced
person, or do you find the most competent one you can find? Compensation plan
programming is not something inexperienced programmers can be trusted to do.
- Do you plan to expand internationally someday? If so,
choose a software package that incorporates international issues, such as
multiple currencies, language translation, cross-border sponsoring, V.A.T. tax
reporting and foreign address formats. Is the software also available in other
languages so your non-English-speaking staff and sales force will not all need
to speak English to use it? If you invest in a software system that does not
handle international currencies, the cost to change it will usually exceed the
cost of the software itself or necessitate replacing it with a completely new
system.
- Buy software that can handle high-growth environments. While personal computers can work for starting a new company, they are not cut
out for larger, successful direct selling operations. Most large direct selling
companies use big, UNIX-based minicomputers with several hundred PC workstations
on a network. Most software that runs on a PC cannot be run on UNIX
minicomputers. In either case, if you expect to be successful, don't limit
yourself by choosing software that runs only on PCs. Some software providers
will rent you space on their powerful servers. This may be less expensive than
investing in your own equipment and can work effectively in the crucial start-up
phase, when funds are tight. Many well-established companies prefer this
approach, too.
- Compare features. Software is designed to handle specific
business issues and often has difficulty dealing with matters outside the
original design. It's difficult to force a software package to do things it was
never intended to do. For example, a software package not designed to handle
multiple currencies or cross-border sponsoring may prohibit a company from
expanding internationally. Wise computer buyers compare features and
capabilities of one package with another, side by side. Ask the vendor which
features it considers unique to their package when compared with others. Like a
car missing its engine, a software package missing an important piece is not a
bargain at any price. As you compare software, use the features list of the one
that has the most to offer and compare the features of the other packages to it,
feature by feature. You'll be surprised as to how many holes the other packages
might have.
Remember that you aren't just buying a computer; you are
buying software, expertise of a support team, emergency support services (24/ 7,
it's hoped), programming services and a long-term relationship. Choose your
software vendor wisely. Of all the aspects of a start-up direct selling
business, don't be tempted to pinch pennies in the computer area. If you do, you
may cripple your chances for success.
No. 8: Listening to the Wrong People
I am amazed at how often my consulting clients take bad advice
from people who know very little about direct selling. As a result, they
sometimes make foolish decisions that cost them millions of dollars in lost
opportunity.
The direct selling industry is a unique business. For the most
part, things that do well in conventional business models also do well in direct
selling. There are, however, many unique aspects of direct selling where this is
not the case. Here are some examples of what not to do and why:
- Retain a general practice attorney to deal with direct selling-specific
issues. This would be like hiring a foot doctor to do open heart surgery.
- Have a successful distributor from another company write your compensation
plan. Distributors who have built successful businesses know the compensation
plan of that company. They will have very narrow experience with limited
perspective and will, in most cases, design a plan that will not work well for
your unique business. They don't know what they don't know, and often have
little or no corporate experience to balance their perspective.
- Hire a computer consultant with little or no experience in direct selling to
help you choose or design your software system. Direct selling has unique
requirements and business practices that require specialized skill and
experience. An inexperienced consultant will not know the questions to ask nor
which issues are more important than others.
- Hire a VP of Sales with no previous experience in direct selling. Your VP of
Sales will be the person responsible for working with your sales force. If he or
she has no experience in direct selling, how will they teach the sales force how
to build successful businesses?
Find competent people who have experience in the type of
direct selling business you have, remembering that there are many business
models out there. These are the people you want to listen to. Remember, also,
that what you do not know today will often be the cause of your grief tomorrow.
No. 9: Poor Customer Service
One of your most critical departments is the Distributor
Services Department. Each person in this department will handle problems,
complaints, inquiries and a thousand other issues that arise from your sales
force. Your sales force is made of volunteers who will quickly fire you if they
are not well taken care of. Your Distributor Services Department must consist of
an elite SWAT team with an obsession for customer service excellence to your
field distributors. They must be trained by those with a similar obsession for
excellence. A few entrepreneurs try to rely solely on the Internet to handle
questions and concerns by distributors.
Don't fall into this trap! Direct selling is a relationship business. Yes, you should use the Internet to
take care of some of the needs of your sales force, but you can never build
relationships and loyalty through the Internet. That takes person-to-person
contact-the lifeblood of this business. You will also find that some of your
sales people are not comfortable using computers. Most importantly, do not
outsource this function! Nobody will take better care of your precious sales
force than you will.
Many companies enter the industry thinking they sell only a
business opportunity and some great products. They soon learn that they sell
something more, something of immense power:
customer service. Distributors are fickle and seem to join the company that offers the most.
They stick with the company that keeps them happy. Those who have shopped at
Nordstrom's soon learn the power of customer-service excellence in building
customer loyalty. Some direct selling companies find their average distributor
stays active only a few months. Others find it is several years. What's the
difference between them? It's not the compensation plan. It's not the products
they sell. It's how well the distributor is taken care of.
A Customer Service Excellence Plan
Excellent customer service does not come by accident. It is
the result of well-thought-out plans and hard work. It starts by having a
committed Distributor Services Manager empowered to implement the necessary
systems, policies and procedures to achieve excellence. The Customer Excellence
System (CES) must comprise at least four areas:
- Customer Information Database
- Follow-up Systems
- Satisfaction Measurement
- Workload Monitoring
Let's look more closely at each of these:
Customer Information Database
In today's business, customers have high expectations for
service. When a distributor calls the home office to ask for information, they
expect to receive their answer immediately, not an hour later. With a customer
information database, the service rep on the phone can instantly access
information that would otherwise take minutes or hours to find. Their answers
can be correct, because they base their answers on the database of information.
The goal of any customer information database is to know everything possible
about the distributor that might be the source of a question. From order status
to commission problems, the customer service database software must provide
instant answers to distributors as they call the office.
Follow-up Systems
If 1,000 distributors were recruited this month, and 10,000
distributors have already joined, how many phone calls would they place with the
home office? Most likely, well over 1,000 phone calls would need to be answered
by professional, courteous and competent office staff during the month. Of the
1,000 calls, how many would require a return call? It depends entirely on the
quality of the customer information database. The better the online information,
the fewer call backs necessary. The goal of a good customer-service system
should be to have less than 5 percent of the calls requiring a call back. If 30
percent of the calls required call backs, there would be at least 300
opportunities for not following up and finishing the call. That's 300
opportunities to lose a distributor each month.
Any customer-service system that strives for excellence has a
means of tracking each phone call or service request to completion. Open calls
can be tracked and aged with priority given to the oldest calls or to the most
important distributors. Such a system, often called an Event Management System,
becomes the core of any professional customer-service system. In essence, it
keeps track of each inbound phone call or e-mail from the field and makes sure
that every call is answered in a timely fashion. It provides the department
manager with the reports needed to avoid having a distributor's call fall
through the cracks in the floor.
Satisfaction Measurement
If you don't know how well your customer-service people are
doing, then you don't know how your future will be. If they are doing poorly,
the company is doomed to failure. If the distributors rave about the excellent
service they receive, you can be assured of future success because they will
trust you. If they trust that their recruits will be well taken care of, they'll
recruit. If they have doubts that a recruit will be happy, they'll hold back. A
customer-service system must include the ability to track satisfaction levels.
How is this done?
When a distributor phone call is logged and closed, a
follow-up call is placed, an e-mail sent or a survey letter mailed to the
distributor asking:
- Was your call answered in a timely manner?
- Was the customer-service representative courteous and professional?
- Was your question answered to your satisfaction?
Questions such as these, when answered by field distributors,
become invaluable in reaching the goal of customer-service excellence. The best
software packages incorporate Customer Service Excellence systems to help make
your obsession for excellence become a reality. Some companies provide bonuses
to those reps who are consistently scored well by the distributors they serve.
Workload Monitoring
No customer-service department can survive increasing
workloads for long without burnout. If the number of calls received each day is
tracked, along with the length of time it takes to handle the average call,
expansion plans can be put in motion before workloads become critical.
Distributors cannot be serviced with excellence if there are too few people to
do the work. Once again, the task of measuring workload will require an
excellent direct selling software system.
Let customer service be your secret weapon to success. It
takes planning, commitment and hard work to achieve the excellence a successful
direct selling company needs.
#10: Growing too Fast
While most businesses would give their right arms to grow at
exponential rates, direct selling has a track record of just that.
Unfortunately, this kind of growth has often been a major cause of the demise of
many otherwise successful ventures. Success is wonderful, but it can bury you.
New businesses have new staff, new computer systems, new
facilities and are short on the experience needed to handle business
efficiently. An office can only handle a certain volume of business. What if
that volume is exceeded? Something must give. What if they run out of product
for several weeks? Growth can be very expensive.
While growing, cash seems to be unlimited. Some growing
companies go on spending sprees, throwing money at their problems. This, too, is
a false security, for as surely as the growth came, it will level out and
eventually go downward at times. It may be far better to limit growth
temporarily than to succumb to its crushing demands.
How can a direct selling company control its growth?
If you think your growth will outpace your capacity to sustain
it, consider these options:
- Start locally by not accepting distributor applications from anywhere else
until you are ready. Distributors who seek to join from unopened regions are
sent a courteous thank-you letter. Let them know how much you want to have them
join but that the opportunity isn't yet available in their area. Notify them
when they can join.
- Don't sponsor road trips by corporate or field promoters. Take advantage of
the less-expensive local opportunities, first. Meetings can be held locally
every night of the week for the cost of one meeting on the road.
- Don't recruit professional direct selling promoters or big hitters. If they
want to join, they must join as any other distributor. Don't, however, go out of
your way to recruit them.
By controlling growth, a business plan can become a useful
guide for making the business profitable. Use the plan to make success become a
reality, and don't be too anxious to build your walls before you have built a
solid foundation.
Conclusion
Direct selling offers incredible opportunities but also has a
vast assortment of pitfalls and traps. Life is too short to learn every lesson
by ourselves. We are wiser to observe others and let their experiences teach us
a better way. By recognizing these common but sometimes fatal mistakes, your
potential for success will improve dramatically. Those who have money to burn
can ignore these rules. Those who must be careful and have budgets to contend
with should give heed to these 10 mistakes most often made by other direct
selling companies. They may save your business and help you realize your dreams
of success.
Dan Jensen has earned an enviable track record helping new
and existing companies develop winning compensation-plan strategies that build
sales and recruiting. In 1978, Dan Jensen founded Jenkon, an industry-leading
software provider for the direct selling industry. Working with hundreds of
start-up companies,as well as many direct selling giants in the last 28 years,
Dan has acquired a broad and unique perspective on what makes successful
companies succeed and what makes too many of them fail. He has published
numerous articles on sales force compensation and other industry issues and has
consulted for many industry-leading companies on their sales force compensation
and incentives program needs.
1 Stephen R. Covey, The 7 Habits of
Highly Successful People, Simon & Schuster, ISBN
0-671-66398-4
2 Stephen R. Covey
Related Entries
-->
