And CEOs squeamish about profiting off the entrepreneurial dreamsof others need not apply. Network marketers always make money ontheir sales reps regardless of what the reps themselves make--it'spart of the business model. All the network marketers on this year's Inc. 500 list, for example, sell a start-up kit that ranges inprice from $30 to $195. Reps aren't required to buy a kit, butnaturally many do, just as they attend product and sales trainingclasses that start off free but jump in price as reps climb theladder.
Yet, despite the real and perceived problems, network marketingactually may make sense...and not just for suppliers of consumerproducts. Borges Lamont Co. (#491), in Orem, Utah, is best known as adesigner of premium and incentive programs. CEO Frank Lamont Davissaw the appeal of using independent reps to call on small companies.But there was no sales association or rep group he could just call upto jump-start sales. "And I didn't want manufacturers' reps becausethey're so territory-specific." What Davis wanted was his ownnational sales force, only he knew that wasn't cost-effective.Besides the expense of base salaries, travel, computers, and otherperks, it costs more than $5,000 on average to train each new salesrep, according to Dartnell Corp., in Chicago, which tracks theselling expenses of small and large employers. Companies spendthousands more each year recruiting, interviewing, and relocatingsalespeople. For owners of small companies, it's a high-stakesgamble.
Davis shuns the term network marketing but admits that the"home-business opportunity" he created works in a similar way. His300 reps pay their own sales expenses, including a $60 monthlyadministrative fee to Borges Lamont, and call their own shots. Theyreceive an ongoing commission on clients' yearly contracts. Davissays he does much of the up-front work. "We'll even do salesproposals for reps," he says. "What I needed was the legs." He got300 pairs of legs by hiring marketing firms to make "start-upopportunity" presentations at hotels around the country.
"There's a home-based-business explosion, and I tapped into that.We're more of a shirt-and-tie opportunity," Davis says. But he'sdiscovered the limits of dispatching a sales force with little salesexperience. Too many reps call it quits after a few rejections. "Theygive up and complain about the whole program." So Davis tried a newtack: recruiting health-insurance reps. "If you can sell insurance,you can sell anything," he notes.
In another twist, Davis has stumbled across what may be his mostsuccessful experiment in door-to-door selling yet: he has 6,000independent reps who resell consumer goods that he buys at closeoutprices. The arrangement is not as strange as it sounds becausethere's a tie-in to the employee-incentive business: the goods(watches, camcorders, and the like) are the same type Davis suppliesas prizes to his corporate clients' workers. Only in this case the6,000 reps sell to their neighbors, at prices the reps set. "It'slike a collective-buying organization, but I also do the buying andwarehousing," Davis explains.
At least three companies on our list turned to network marketingto circumvent the start-up costs and inefficiencies of conventionaldistribution channels.
John Cummuta of Financial In-dependence Network didn't want to seethe self-help book he wrote, Debt-FREE and ProsperousLiving, languish on store shelves, only to be returned in boxloads at the end of the season--the accepted practice in bookretailing. "From a businessperson's perspective, a bookstore is theworst place in the world to sell a book," quips Cum-muta. As it was,his book wasn't exactly an easy sell--few bingers freely admit tobeing over their head in credit-card debt. After launching hiscompany with direct mail, Cummuta began building hisnetwork-marketing sales force. It started, he says, with a fewcustomers asking if they could send the book to friends. Over fiveyears the network has grown to a core group of 55,000"financial-independence consultants," as well as 1,260 "certifiedfinancial-independence consultants" who offer Cummuta's book,newsletter, and tapes at investment seminars around the country.
Recent statistics appear to vindicate Cummuta's rejection ofpublishing's traditional sales channel. Mainstream publishers areseeing return rates grow, cutting deeply into their profits.Ac-cording to a report in the New York Times, the AmericanAssociation of Publishers found that from 1990 to 1995, losses forreturned hardcovers rose 60%--while gross sales grew just 47%. Inabout the same period, Cum-muta's sales grew some 900%, and profitsclimbed. "It started slowly, but last year network marketingaccounted for half my sales; this year it'll be 75%."
Meanwhile, Cummuta gets the conventional 1% to 2% response on hisdirect-mail pitch. What's more, he says, "when I do a mailing, 60% ofmy overall costs go to mailing. In network marketing, 60% goes to thepeople who put together the sales organization." He adds that hisseven-level compensation plan is not unlike the commission structurein place at insurance companies and other large organizations wheremanagers collect a percentage of all the sales made "below" them.
Like Cummuta, Greg Martin, CEO of ShapeRite (#44), a supplier andmanufacturer of dietary supplements and personal-care products,didn't have the means to make a dent in retail. Admitting that salesand marketing weren't his strengths, Martin outsourced them. He has150,000 distributors, 50,000 actively selling for the Salt Lake Citycompany. "People come in, but we need to help keep them in. Our goalis to get everyone to at least $300 a month in sales," says Martin."Done right, this is a viable distribution channel. Part of ourmission is to improve the image of the industry." His recent "MissionPossible" sales campaign is something of a throwback--the grand prizeis a Jaguar--but he's also slated name sales trainers Tom Hopkins andLes Brown to speak at the company's national convention.
