In your opinion, what are the best business models? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Peter Lynch, VP Private Equity; formerly at JPMorgan and Rabobank; founded ASimpleModel.com, on Quora:

In 2013, I had the opportunity to meet with Hil Davis, the co-founder of what was then the largest manufacturer of custom men's shirts in the world. His company, J. Hilburn, had been inspired by a passage he had read about Warren Buffett's best dollar-for-dollar investment. I stumbled upon the story in an Inc. article doing some light due diligence ahead of our meeting:

Hil Davis was reading The Warren Buffett Way on a plane about six years ago when he came upon a passage in which the legendary investor said that his best investment ever, dollar for dollar, was not Coca-Cola or American Express or Geico but the direct-sales kitchen-equipment company The Pampered Chef. In fact, Davis learned, Buffett owns several other direct-sales companies, under the umbrella group Scott Fetzer Companies.

"My first thought was, That makes no sense. Direct sales? That's a dirty word," Davis remembers. But Buffett was his hero, and Davis found himself preoccupied with figuring out what he had missed about the model. Davis, who talks in a high-speed mashup of business jargon and good-ol'-boy charm, was 33 at the time and working in investment banking as an equity researcher, a job that paid him the very handsome salary of $1.4 million. "I loved equity research," he says. "I loved the chess game, the math behind it." Partly, his deciding to examine direct sales in depth was just a way to channel his excess business geekery. It was a puzzle that demanded solving. But he was also restless. [1]

In our meeting, Hil explained that the search for a perfect product to apply to this model became an obsession. He evaluated many ideas, but it was a failed shopping trip with his wife (if I recall correctly) that focused him on men's shirts. Frustrated with the selection available at a department store, he had a light bulb moment and left to redefine how custom men's shirts were sold.

As J. Hilburn grew, he quickly began to realize the benefits of direct sales. By empowering commission-driven employees geography and more importantly, brick and mortar locations, became less relevant. He started to realize that secondary and tertiary cities lacking large department stores could be incredible markets so long as the only infrastructure required to penetrate those markets was a couple self-employed salespeople.

Per the article:

Five years later, J.Hilburn is the single largest seller of men's custom dress shirts in the world. Shirts start at $89, and they're made from the same fabric as shirts from the Zegnas and Armanis of the world. Last year, Esquire named J.Hilburn the best custom shirtmaker. Since the company officially launched in 2007, it has expanded from dress shirts to custom men's suiting; ready-to-wear casual clothes; belts, ties, cufflinks, and other accessories; outerwear; and now formalwear. [1]

Multi-level marketing gets a bad reputation because the model is abused by companies that sell terrible products and promise distributor's and salespeople riches if they take on the inventory risk themselves. [2] But with the right product, which is to say one that the end customer actually wants, it is a brilliant model. As anyone that has attempted to start a business knows, a brilliant sales and marketing strategy facilitates success.

In college I learned of another similar story. An individual I knew had inherited a manufacturer of corrugated boxes with approximately $8 million in sales. They sold through typical channels, but the new owner decided to take a different approach. He encouraged salespeople to move to new cities and hire additional salespeople. They did not have to take any inventory risk, but they would be paid a reduced salary until the new location was cash-flow positive. They would also earn a percentage of sales generated by salespeople they had hired. The business paid favorable commissions that went on in perpetuity so long as the relationship was maintained. Encouraged to be creative, the product offered became a service: custom packaging of all kinds. And the business took off. Today the company generates north of $600 million in sales.

If anything is a testament to this model, it is that you can build immensely successful companies around average or even terrible products (anyone ever actually enjoyed consuming Herbalife supplements?). Fortunately, with the right product, it can also be used to build brilliant companies that provide goods and services appreciated by customers (coincidentally, like the great-fitting shirt I am wearing as I write this answer).

[1] http://www.inc.com/magazine/2013... (Note: this article is no longer available on the Inc. website. I saved excerpts here: From Wall Street to the Largest Seller of Custom Shirts)

[2] An incredible story on this topic: Financiers Fight Over the American Dream

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Published on: May 10, 2017