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How to Assess a Direct Selling Opportunity

Despite the pyramid and Ponzi schemes that imitate direct selling, there are plenty of legitimate opportunities to be found. Here's how to tell the difference.
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Though direct selling is by no means the get-rich-quick scheme it's often touted as, it does offer some distinct advantages to the aspiring entrepreneur. Chief among these benefits are the flexibility to set your own schedule and the infrastructure of a larger company manufacturing your products, boosting your brand, and hopefully providing you with the sales and leadership training.

The central rule for weighing the legitimacy of a multilevel marketing or direct-selling opportunity is the promises the company makes. "Any company that tells you you're going to make $1 million or that this is something that's so simple, is a joke," says Nick Beste, the founder of Man Cave. The Minneapolis, Minnesota-based direct-selling company focuses on grilling accessories and meat; a rare find in the industry that largely sells and caters to women.

Even if a company doesn't promise you the world, you need to read the fine print carefully, especially regarding the compensation plan, before signing any agreements. Here's what to look for.

How to Assess a Direct Selling Opportunity: How Their Ethics Impact You

Since Spencer Reese is responsible for making sure direct-selling companies stay above the board, he knows all the tricks the dirty ones pull on their sellers. Reese is an attorney at Grimes & Reese, an Idaho Falls, Idaho-based firm specializing in multilevel marketing law. He outlined what he calls the four P's of direct selling ethics:

Products: You don't want to sign on with a company only to discover that it is misleading its sellers and customers about the function or value of its products.

Practices:
Not only should the product be legitimate but the company shouldn't use any underhanded tactics or deceptive marketing to attract people's attention.

Plan:
Before becoming a direct seller, examine the company's compensation plan. There are dozens of ways it can dupe you or put you in a financial bind, which we'll discuss in more detail in a moment.

Policing:
It might seem nice to find a company that has a more laissez-faire attitude towards its sellers once they've come on board, but it's really in your best interest for the company to scrutinize its sales force. Shenenigans by some salespeople reflects badly on the larger brand.

Dig Deeper: How to Create an Ethics Policy For Your Business


How to Assess a Direct Selling Opportunity: Ask the Right Questions

As Grace Keohohou describes it, she's been around direct selling since she was in diapers. Keohohou co-founded the Direct Selling Women's Alliance in Kailua, Hawaii, with her mother Nicki to teach other direct sellers and network marketers the tricks of the trade. Here are some questions she advises you ask before taking advantage of a direct-selling opportunity:

Is there any leadership or sales training? - You don't want a company that will rope you in and then leave you on your own without any support. Though a training program doesn't guarantee a company is legitimate, it does show at least the pretense of concern for the success of its sellers.

Are there any start-up costs? – While Man Cave doesn't have any start-up costs for its sellers, the company is the exception rather than the rule in the direct sales field. While Beste is down on start-up fees of any kind, Keohohou rationalizes them as compensation for the costs the company incurs to provide its sellers with infrastructure, such as a website, marketing materials, and even manufacturing costs. But even she cautions against excessive fees. Also, make sure there are no renewal fees.

Are the sales quotas reasonable? – Man Cave has a sales quota of $99 per month, which seems pretty achievable with any sort of commitment of time on the part of the salesperson. Even if someone fails to meet that quota they get a grace period and of course they can include any purchases they make themselves in that quota. The worst-case scenario for quota situations is when a company makes recruiting new sellers the major incentive but doesn't relax their minimums to account for the amount of time and effort that takes. You could bring on dozens of new people and get booted out for not selling enough yourself.

What are other sellers' impressions? – Often when you're introduced to a direct-selling company you'll be invited to a seminar or another type of event. Get as many different perspectives as you can about how the company treats its sellers.

In addition to these questions, Keohohou advises prospective sellers to research the company online to see whether it has a positive track record. Also, if you discover that there is no real product or service being sold, but merely, "the opportunity to sell the opportunity, you should contact the attorney general's office cause that is a pyramid scheme."

Dig Deeper: 6 Questions to Ask Before Starting a Business

How to Assess a Direct Selling Opportunity: Signing the Agreement

Much like a franchisee, an entrepreneur who becomes a seller for a direct-selling company needs to sign an agreement outlining what the company promises them, and the limitations on how they can use the brand. The document, which is alternately called an independent sales representative agreement, an independent consultant agreement, or a distributor agreement, is typically one page in length but it is not uncommon for the accompanying terms an conditions to run as long as 20 pages.

Additionally, it is increasingly common for these agreements to be signed as part of an online form. Many people fail to read these agreements carefully. "Usually they're interested in the compensation plan," Reese chuckles, "they'll have a look at that." While some unethical companies will change their policies without alerting their sellers, it's standard in the industry to include a 3-day notice provision if anything substantial changes.

Dig Deeper: Understanding a Franchise Agreement

How to Assess a Direct Selling Opportunity: Types of Scams to Watch Out For

There are dozens of ways direct-selling companies can trick you. Here are a few scams that our experts advise to look out for:

The binary model – There's nothing inherently wrong with multilevel marketing, but some MLM systems are set up to your extreme disadvantage. In the binary model, your returns from the number of sellers you onboard are dramatically limited. Beste explains that if you recruit two sellers, and the first one brings on dozens of sellers and the second one only brings on one you always reap your returns from the least successful of your recruits.

The bait and switch – Keohohou mentions that some companies will attract sellers with a favorable compensation plan but alter that plan once they have them in the program.

The buy to sell – Most programs encourage you to buy at least some quantity of the merchandise you're selling. But if a company is twisting your arm or requiring you to make large inventory purchases to get into the compensation plan, Reese says that should always be a red flag.

The gifting plan – Gifting plans don't involve selling any product or service. Instead you "donate" a sum of money to participate in the plan and then find other people to "donate" to you. Reese calls it a straight up Ponzi scheme.

The point of no return – If you discover you want to part ways with your direct-selling company, it's crucial to know what its inventory repurchasing policy is. Reese says that a buy back rate of 90 percent your net costs for up to a year is the industry standard. Don't get left with a garage full of superfruit juice.

Dig Deeper: When Criminals Come Calling

How to Assess a Direct Selling Opportunity: What Sells Well?

All the experts stress that a passion for the product you're selling will be crucial to your success in direct sales. Fortunately for Man Cave, they specifically chose products that their target demographic is passionate about. "For us it's a lot of fun," Beste says. "[The sellers] grill meat and drink beer. You can't do that in most jobs."

Other characteristics of products that sell well are things that have a demonstrable element. If a product is too straightforward or dull to merit much of a demo, direct sales might not be the right venue for it.

Another key factor is size. Initially Man Cave tried to sell barbecues but they found that the inventory was too bulky for sellers to cart around from house to house. This size restriction dovetails nicely with the company's cap on their price points at $59. After all, if you're selling to friends, you don't want to send anyone into debt.

Dig Deeper: How to Profit From Market Research

How to Assess a Direct Selling Opportunity: Other Direct Selling Strategies

Though it only got started in 2008, Man Cave now has 750 sellers in 47 states. Beste says his strongest seller brings in $10,000 a month and that his trick, aside from a silver tongue, is all about location. This seller lives in an RV park with 400 camping spots, so every weekend he gets a fresh crop of customers coming right to his doorway.

It's important when deciding if a direct-selling opportunity is right for you to consider who you will sell to and if you have access to that group of people.

Dig Deeper: Sales Tips From the World's Toughest Customers


How to Assess a Direct Selling Opportunity: Starting Your Own Direct Selling Company

If you're looking to go into the direct-selling field and feel you have the requisite gumption or business acumen, you can go beyond taking part in a direct-selling opportunity and start your own direct-sales company. Beste outlines some of the perks and downsides of doing just that.

•  Fast growth is a major plus. Man Cave has grown from zero to hundreds of thousands of dollars in sales per month in just under two years.

•  The tradeoff for the fast growth is a lack of control. Your sellers essentially operate as independent businesses and put in as little or as much effort as they'd like. If you're a control freak this may not be the venture for you.

•  Communication is also difficult when sellers are spread out across a large geographic region. Beste notes that for most of his sellers, Man Cave is not their primary job so "they don't have to check their e-mail, they don't have to respond to things, they don't have to take your phone call."

Dig Deeper: 4 Tips on Managing a Virtual Workforce

Last updated: Jul 13, 2010




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