October 26, 2004

Direct-Sales Operations Gain,With Boost From the Internet

House Parties Also Help New Businesses Compete In Product Distribution

On a recent Monday evening, Nadine Thompson reaped the full benefits of running a direct-selling company when she held a national sales meeting dressed in pajamas.

Because the 9,100 sales "consultants" for her Warm Spirit Inc. natural health and beauty products firm work primarily from home as independent contractors, Ms. Thompson didn't need to secure a big meeting space or pay overtime. Instead, around 10 p.m. she curled up in her Exeter, N.H., home study and spoke via conference call about ways to use the Web to boost sales. Several hundred team leaders listened in, and that night began spreading her advice via e-mail to other representatives.

"It's a great way to work a business," says the 44-year-old Ms. Thompson whose five-year-old company had $6 million in sales last year of its shampoos, herbal extracts, and other items targeted at black women. "I didn't have to put on a Donna Karan suit or set up a PowerPoint presentation. I didn't have to pay and pull a whole convention together."

More and more, the old-school, direct-sales approach of Tupperware is gaining traction among small-business owners. The Internet has helped in large part by making widespread recruitment of sales representatives easier and cheaper, while e-mail has facilitated marketing, training and selling. What's more, e-commerce has allowed direct sales to expand beyond the traditional house-party selling format by letting reps direct potential customers -- who may live nowhere near them -- to a company's Web site for purchases.

And, in an increasingly crowded retail landscape, the direct-sales model lets upstarts get wider distribution quickly without fighting for shelf space. "I don't have to go in and compete with Origins and a hundred other cosmetics companies for space," says Warm Spirit's Ms. Thompson. "Now I'm banking on having 9,100 points of distribution, which is costing me much less than trying to get into ten strategically placed department stores and then hoping someone walks by the aisle and the salesperson shows it to them."

Over the past decade, membership in the Direct Selling Association has jumped 89%, to 227 companies hawking everything from tools and golf clubs to legal services and utilities. Total U.S. direct sales reached almost $30 billion last year, up 20% from 1999, according to the DSA. That's close to 1% of all U.S. sales. "It's great for entrepreneurs because they don't need a million dollars to get started," says Amy Robinson, spokeswoman for the DSA.

Competition for Space

As a former small-business man in the toy industry, Andrew Shure recalls the frustration of trying to negotiate precious shelf space for his arts-and-crafts line with mass-market retailers. "It was hypercompetitive," he says. "I felt like I would be spending the rest of my life trying to sell to one account in Arkansas."

Late last year, 41-year-old Mr. Shure launched a new venture of natural pet lifestyle products including Aromutt Therapy spray, Devine Canine Breath Drops and Purr-fect Wheat Grass. From day one, Mr. Shure employed the direct-sales model, using the Internet to advertise for his first reps through various mother-oriented Web sites. He now relies on search engines such as Google and Yahoo, as well as word of mouth, to draw additional recruits to Shure Pets Inc.

"In today's environment, it's as easy for people to find us in Nevada as it is Chicago," Mr. Shure says. He has already tripled the number of projected 2004 sales reps to 300-plus, and has distribution in 45 states. Corporate headquarters is a bare-bones 1,200 square-foot space above a dry cleaner in Chicago. The CEO employs only two other full-time employees plus one part-timer and expects sales in 2004, his first full year in business, to exceed $300,000. He's projecting sales could triple in 2005.

Most sales reps hold parties at their homes or other friends' homes, and often invite pets, too, so the reps can perform, say, puppy makeovers. New reps pay $99 for a "New Puppy on the Block" starter kit and then get 25% of each sale they make. They also are encouraged to recruit new sales reps and thus receive a percentage of that recruit's sales for their effort. The structure extends up to four generations with "Top-Dog" reps retaining 27% of their own sales and 3% to 5% of subsequent generations.

However, Mr. Shure says his savviest representatives market themselves using everything from grass-roots fliers to the Internet to boost their sales. Because customers can order products off Mr. Shure's Web site -- so long as they have a Shure Pets sales rep's ID number -- the reps can earn commissions without opening up their front door.

The Party Goes On

Still, the party format remains the most popular direct-sales method, in part because it allows companies to coach consumers on how to use products. Consider Tomboy Tools Inc., a line of tools ergonomically designed for women's hands.

The Denver company's founders knew they couldn't count on selling women a caulking gun unless they taught them what it's for. "I don't see how that would happen if we sold our tools through stores at retail," says Janet Rickstrew, Tomboy Tools' chief operating officer.

Instead, the company trains its sales consultants in person and via video and CD-ROM on the basics of simple home-improvement projects -- such as repairing drywall, executing faux painting or replacing a running toilet's flapper. The some 200 reps then give demonstrations at parties where they receive a percentage of tool sales. Launched in 2000, Tomboy Tools had roughly $500,000 in sales last year and expects to top that by 15% this year.

Not that direct sales isn't without distinct challenges. Inventory control, for instance, can actually be harder. Tomboy Tools employs five main manufacturers to make their private-label tools and must pay upfront for the merchandise. That means relying on some guesswork as to how much reps will sell instead of relying on orders already placed by retailers.

Subsequently, Ms. Rickstrew says that in 2001 her company bought inventory for the summer months based on the sales reps' strong spring sales performance. But the summer was dead with reps going on vacations with families and so tools just sat gathering dust in the warehouse. The staff took pay cuts to get through the slump.

Turnaround time on shipments is also onerous. "We try to ship out in 24 to 48 hours," says Mr. Shure of Shure Pets. The CEO says he's often up at night helping pack boxes of product himself. "If they don't get it quickly, they've lost interest in it."