Four years ago, Jere Thompson spotted an opportunity in Texas's newly deregulated energy market. The Dallas entrepreneur, whose grandfather founded the now ubiquitous convenience grocery chain 7-Eleven (No. 4,929), had worked for years in the telecommunications industry. He founded a long-distance company, ultimately known as CapRock Fiber Network, that topped 1,300 employees in just its first few years.
CapRock's model was to persuade customers to switch from one long-distance provider to another. In 2006, Thompson's new company, Ambit Energy, sought to persuade customers to switch electricity providers – something of which most consumers were skeptical, at least at first. "We knew it would take years for people to become aware of deregulation and to get comfortable with the idea that their lights wouldn't go out," Thompson says.
Unwilling to spend a lot of money on marketing in order to try and convince Texas residents that they could save money by switching their power provider, Thompson instead hired Chris Chambliss, an executive who had successfully built a direct sales force at another long-distance company. By recruiting thousands of independent contractors tapped their social networks and got paid every time they got someone to make a switch, Chambliss helped Excel jump from $20 million in revenue to $1.5 billion in just two years.
Using a similar game plan, Ambit Energy, which now fields a direct sales force of some 70,000 independent consultants, has experienced meteoric growth of its own. Sales have increased by 20,369.4 percent over the past four years, from $1.5 million to $325 million. The numbers are so flashy, in fact, that they earned Thompson's company the No. 1 spot on the 2010 Inc. 500 list and the title of the fastest growing private company in the United States. "We could have never achieved that kind of growth through any other model," Thompson says.
This kind of one-on-one informal sales approach made famous by direct-selling pioneers such as Mary Kay, Avon, and Tupperware, has been experiencing a kind of renaissance in recent years. Not only have fast-growing start-ups such as Ambit Energy and other Inc. 500 companies embraced it, so have billion-dollar corporations such as Mars, which launched a direct-sales chocolate company called Dove Chocolate Discoveries in 2007. Even famed investor Warren Buffett, has gotten into the game. His company, Berkshire Hathaway, acquired the Pampered Chef, a direct seller of kitchen supplies, in 2002.
The trend has become even more pronounced over the past two years as the economy has struggled to recover from a recession. "We have long held that direct selling does well in poor economic times," says Amy Robinson, a spokesperson for the Direct Selling Association, an organization that represents some 200 direct selling firms. "This is particularly true for products that are 'recession-proof,' such as cosmetics or kitchen utensils, which are things people won't give up regardless of the economy."
The trend also applies to companies that service the direct selling industry. Take NetSteps, a software company in Pleasant Grove, Utah, that powers the websites and databases used by direct selling companies, or "network marketers" as they are known within the industry. Demand has been so great of late for custom websites suited to direct selling that NetSteps has seen its sales grow by some 1,942 percent over the past few years, which helped it land the No. 137th spot on the 2010 Inc. 500 list. "The recession has been very good for my business," says founder and CEO Derek Maxfield.
The record number of unemployed workers has also come into play as a reason for the industry's growth, says Robinson of the DSA. While direct selling has traditionally appealed more to women than men, people of both genders have turned to direct sales as a way to earn supplemental income or to tide them over until they land another job. "People are also looking for ways to work closer to home, which makes direct selling especially appealing," she says, noting that there were some 15.1 million people involved in direct sales in 2009 – a number she expects to jump substantially when the numbers for 2010 are finalized. That jump in interested sellers is confirmed by Sarah Baker Andrus of Vector Marketing Corp, the marketing arm for Cutco, a member of the DSA, which has long employed individuals – primarily college students – to sell its knives. "Everyone in our industry is reporting an increase in interest from potential recruits," she says, noting that interest is particularly high from those college students having trouble landing more traditional jobs or internships.
Companies rely on a variety of pitches to recruit sellers, who typically get paid as independent contractors. Many companies typically require sellers, who are often referred to as consultants or demonstrators, to pay an upfront fee to cover training materials or possibly even specify that sellers must buy a set amount of inventory to get started. Approaches to selling a company's products or services can also vary. Some sellers might simply use the phone or e-mail to contact members of their social network. Others, like sellers working for Uppercase Living (No. 138), a 2010 Inc. 500 company based in Salt Lake City, Utah, are encouraged to employ a "party" approach, a term made famous by Tupperware, where a seller invites friends, family and acquaintances over to a home to watch a demonstration and sample the product for sale. "With a party plan, no one ever feels like they are in a high pressure situation to buy anything," says Richard Fankhauser, CEO of Uppercase Living, which makes decorative vinyl home décor.
That's why it's no accident that selling through parties can be more appealing than selling through a traditional retailer like Wal-Mart, says John Rochon, the former chairman and CEO of Mary Kay. "If you want to put your product on shelves of a major retailer, you have to pay placement fees, which can be huge barriers to entry especially to start-up companies who are trying to introduce a disruptive product that competitors would rather not see on the shelves," Rochon, who also helped build the Avon and Dirt Devil brands, points out. Not only can selling in the home save a company countless dollars in marketing and distribution fees, it brings results. "A typical closing rate for a consumer in a store is about 2 percent," says Rochon, who has started a new company that employs direct sellers to pitch a disinfectant product called IV-7. "In the home, on the other hand, the closing rate is just about 100 percent. Once someone decides to attend the party, they have already agreed to buy something."
Direct selling is also particularly effective when it comes to any product that could benefit from a demonstration. "Many products can be more appealing to people when they get to see or touch them in person," says Robinson from the DSA. There was a trick to snapping on a lid to a Tupperware container, for instance, something that a seller could easily demonstrate. The 75,000 active sellers for Scentsy (No. 19), an Inc. 500 company based in Meridian, Idaho, for instance, get to show off how quickly the aroma of their wickless and flameless scented candles can fill a room. "We keep things simple, which allows our consultants to just be themselves, which enhances the authenticity of the product," says Orville Thompson, who founded the company with his wife Heidi in 2004.
A party approach also lends itself to having a good time, which can help both sellers and buyers relax and enjoy the product. That's part of the appeal of selling jewelry made by Stella & Dot (No. 67), an Inc. 500 company based in Burlingame, California. "I always tell my stylists that it's not like you're going on Hardball with Chris Matthews," says founder Jessica Herrin. "You're going into a room full of friendly warm people who are happy and relaxed and want to see you succeed."
Working for a direct sales company has obvious appeal to someone looking for work or even someone looking for extra income. At Stella & Dot, for instance, the average stylist earns 30 percent from their sales and gets a ton of free jewelry to boot. Leslie Montie, who founded Wildtree, a Cranston-Rhode Island based business that sells healthy herb and spice blends that earned a spot on the 2010 Inc. 5000, says that one of her representatives will earn some $300,000 this year. "Our company offers a great opportunity for unemployed or underemployed men and women looking to add to their family's income," says Montie. "It's a great solution because its very marketable and everybody eats."
Salt Lake City resident Leann Garms, 48, was turned on to Arbonne International, a Swiss cosmetics company, by her brother's girlfriend three years ago. Now, she sells their botanically-based products in addition to running her own public relations and fundraising consulting company. "I know at least 15 people who have replaced six-figure incomes by selling these products," she says. "But even for those who are not top producers, an extra $300, $400, or $500 a month can make a world of difference."
But direct selling also has its detractors, especially when it comes to the idea of multi-level marketing, or MLM, through which people can earn a percentage of the sales brought in by anyone they recruit into the organization. While there are many reputable companies like Stella & Dot and Ambit Energy that use MLM effectively, there are many horror stories of pyramid schemes designed to simply rob sellers of their money – where the fees paid by new recruits simply get funneled to higher-ups in the organization. "Anytime there is a decline in the economy or a high unemployment rate, MLM schemes can seem attractive," says Allison Southwick, a spokesperson for the Better Business Bureau that works with the DSA to track reputable organizations. She points to one such scam, NarcThatCar.com, that reportedly paid sellers money for tracking license plate numbers through an online database. To head off scams, Southwick suggests working with members of the DSA, which employs a rigorous one-year application program, and to check www.bbb.org for a company's reliability report. For what it's worth, www.narcthatcar.com currently has an "F" rating.
Jere Thompson of Ambit Energy, which has earned an "A" rating from the BBB, acknowledges that scams have been a problem for the direct sales industry in the past, but that largely by policing itself, the majority of direct sales and MLM companies are legitimate. He also believes that direct selling is here to stay for the long term. "You're seeing more and more companies use direct sales as a way to start a business or to test a product," he says. "I think you will see more and more people selling from their homes and that it will remain popular for a long time to come both here in the U.S. and around the world."