Academic Forum
July 2010
How to do business in a global recession-keep close to your customers
When national economies are under pressure and when consumers stop spending, the big challenge facing most manufacturers of consumer goods, particularly big ticket products, is being isolated from their customers. Most rely on retail stores who are effective and efficient when demand is strong. However, when demand falls off, they have little or no resources for re-creating demand for the goods that their suppliers have to offer.
Not many channels of distribution can claim to be impervious to economic downturns, but the direct selling of consumer goods has proven to be one of them. In 2008, over 1000 direct selling organisations (DSOs) in Europe, the majority of whom are represented by a national Direct Selling Association, reported record sales of €20 billion – resulting from over one billion, individual, consumer transactions. Throughout 2009, as the recession really began to be felt by conventional retail stores, there has been no such decline in direct sales volumes. This is for two simple, reasons:
The first is the products that are direct sold. Although some DSOs market big ticket goods, the majority concentrate on those low ticket products that are the very last to suffer from any downturn in consumer demand – essential and useful household products, CTF and personal care, nutrition, health and anything related to the education, care and well-being of children.
The second is how we sell them. Direct selling is now Europe’s largest provider of independent earning opportunities. These micro businesses, with a proven business format, and which require an investment that rarely exceeds €100 have an appeal to men and women of all ages and all social groups and become even more attractive in a recession, as a means of supplementing a family income. Unsurprisingly, recruitment in the UK shot up by 12 per cent.
The growth of direct selling is well illustrated by the history of two of the UK’s longest established direct selling brands – Kleeneze and Betterware.
These two businesses were founded in the 1920s. They thrived and became household names during the 1930s depression in Europe. Today, they remain two of the UK’s largest DSOs – with combined sales now approaching £200 million. The original formula for success has changed, but not that much. In the 1920s they both marketed essential, low ticket household cleaning products and offered full time self employment, predominantly to men – calling on householders door to door. It was an idea pioneered in the US by the Fuller Brush Company. Today, the product ranges of both Kleeneze and Betterware still focus on essential household goods and useful niche household products for which there is strong consumer demand but which are unsupported by advertising and which supermarkets therefore consider to be unworthy of shelf space. The big difference is in their current selling methods and the profile of today’s direct seller.
Today’s consumer is rarely at home during the day, which makes cold calling impractical as a full time occupation for most direct sellers – particularly those selling low ticket household goods and personal care and nutrition products. There are now better and more consumer friendly ways of direct selling such goods. A hand delivered catalogue, with an undertaking by the direct seller to collect an order and then deliver the products, free of charge, a few days later, has a strong measure of customer service – and gives it a competitive edge. Compared with direct mail to an unqualified mailing list, the overall response rate, 10 per cent of orders received to catalogues delivered, is not only acceptable to the direct seller, it is cost effective and environmentally friendly. Over 20 per cent of catalogues used by Kleeneze and Betterware are recovered and re-used.
It is unsurprising that this direct selling marketing method now appeals to a quite different category of direct seller. Today, over 90 per cent of direct sellers are women, working for a few hours a week making sales to their friends and neighbours. It is a model long adopted by Avon Cosmetics, the UK’s market leader in the direct sales channel, and most other DSOs.
The power of personal recommendation and endorsement from another satisfied consumer is at the heart of all successful direct selling businesses. The majority of Europe’s nine million direct sellers earn between €500 and €1000 per annum for just a few hours work a week - obtaining orders from their friends and neighbours for goods that they like and use, and feel totally comfortable in recommending to others. It’s an appeal that avoids a requirement for professional selling skills – although those skills can help. The other big difference is for those who choose to take up the additional business opportunity of recruiting, training and motivating their own groups of direct sellers, and be rewarded on the basis of the sales achieved by their sales teams. For those that do, the rewards can be substantial.
Apart from the issue of customer service, direct selling has long been recognised as an effective means of creating consumer demand through explanation, referral and demonstration – an opportunity denied to most retailers who now look solely to their product suppliers to create consumer demand through advertising.
When it comes to generating demand for truly innovative products, direct selling has no equal. Early in the 20th century the vacuum cleaner was pioneered by Hoover – as a direct selling business in the US. It was not until the 1960s that Hoover abandoned direct sales, in the UK, in favour of advertising and retail store distribution. This proved to be a mistake, as Hoover immediately lost its dominant market share.
That direct sales attracts retail competition is a fact of life that DSOs cheerfully accept. Oriflame pioneered the market for skincare, through demonstration at direct sales home parties. Their innovative products were soon replicated by others. This was the same experience of Tupperware – the pioneers of plastic food containers demonstrated and sold at home parties. However, these two DSOs and others, such as Vorwerk, the leading German vacuum cleaner manufacturer, continue to prosper by being innovative and, in product development, keeping one step ahead of high street retailers.
Many pundits thought that the advent of e-commerce would pose a challenge for direct selling. The reality is rather different – it has brought huge benefits.
Online shopping gives traders the opportunity to receive and promptly fulfil orders – placed at times which are convenient to the customer. A fast growing proportion of today’s direct sellers have already taken full advantage of this opportunity to gain repeat business through their own personal websites. For years, the ‘stranded customer’ – someone who has made a purchase and then lost contact with the seller – had been a problem in direct selling. Having gained the confidence and goodwill of a customer through a face-to-face approach, direct sellers are now using the web to cement that personal relationship with their customers and gain repeat orders. For DSOs the benefits of the internet have been even more dramatic.
In a practical sense, a DSOs customers are its independent direct sellers who, if they are to be retained and motivated, quite rightly demand a good service. With the change to part time working, it is not unreasonable that they should want something approaching a convenient 24/7 facility to obtain information and place orders. Prior to the internet, DSOs were forced into attempting to meet this demand with telephone order lines open for up 14 hours a day – a hugely expensive administrative cost burden.
Today, the direct selling channel of distribution represents Europe’s largest B2B online network, used by a high proportion of the nine million direct sellers in Europe. Virtually every DSO now provides its direct sellers with the opportunity, at any time of the day or night, to check product availability, place an order, make a payment and check the progress of a previous order. It is an adoption rate of e-commerce that is still unrivalled by any other business sector.
Finally, what is the role of advertising in direct selling? Self-evidently, direct selling is a business channel that largely eschews media advertising in favour of rewarding direct sellers for creating demand by word of mouth, personal demonstration, referral and endorsement. This does not mean that media ads are not helpful to a DSO in reinforcing confidence amongst direct sellers, and in the channel, the brand and the business opportunities they have to offer. The challenge with national advertising is the risk of creating demand in those parts of the country where demand cannot easily be fulfilled. For all DSOs, consumer sales and recruitment, is in the hands of thousands independent direct sellers – working, mainly, in their local areas. Every DSO aspires to achieve national distribution. However, for the smaller DSO that has yet to achieve full national coverage, a national advertising campaign runs the risk of being counter-productive. It can easily frustrate the recipient of advertising who is unable, easily, to respond to the message. Some DSOs meet this challenge by encouraging direct responses to the DSO, and then distributing these leads to those in their sales force in the geographic neighbourhood of the enquirer.
This strategy can work but it is much better to remember that it is not essential for a DSO to spend money on media advertising. The great strength of the direct selling channel is that it rewards direct sellers for delivering ‘word of mouth’ advertisements, demonstrations and endorsements – which are more honest and far more effective in creating consumer demand. This direct, ongoing personal contact with our customers is the huge benefit of the way we do business and reward our direct sellers.
