The Direct Sales Industry is Coming Full Circle

We at MLM.com had the wonderful opportunity to meet with Alan in January of 2021. He provided us with such powerful information, we felt we needed to share that with our readers. We miss Alan. He was always so willing to share his knowledge about the industry. Thanks to Alan and to Strategic Choice Partners for their compensation plan expertise.

Direct sales industry started as a retail-focused business. When multi-level commissions came on the scene that focus shifted to recruiting. That shift lead to internal consumption—distributors buying the product—replacing the retail selling that was originally the norm. Now, pressure from the FTC and the rising gig economy is driving the direct sales industry companies away from internal consumption and back toward retail sales. Today, I want to discuss that history in more detail.

Retail-focused direct sales

The direct sales industry as we know it started in 1972. And that’s around the time that I got involved. A lot has changed since then.

When I got started, direct selling was a retail business. Salespeople sold to end-user customers who were not involved in the compensation plan. At the time, I worked for Tupperware. At Tupperware, if Distributor A recruited Distributor B, for 16 weeks Distributor A got a little bonus on Distributor B’s sales. If Distributor B recruited Distributor C, Distributor A got nothing on Distributor C. In other words, the plan paid on one level of distributor genealogy for a limited time. The purpose of the compensation plan was to pay commissions directly to salespeople for sales they made to customers. We might call this the retail-focused strategy.

The same was true at Stanhome and most of the party plan companies at that time. In the 70s, the big-name companies were all retail-focused.

Was there internal consumption in the era of retail?

Yes. About 12–15% of our sales at Tupperware were our own salespeople buying our product. Here’s what internal consumption looked like back then: I sell for Tupperware, but I also stock my kitchen with Tupperware products.

Today’s internal consumption is different. People sometimes refer to it as discount buying wherein some percentage of people sign up as distributors just to get a discount. These people are distributors in name only, rather discount buyers in fact.

But back in the 70s, typically, when distributors bought their products, they weren’t discount buyers. Instead, they’d be selling a new pot, they’d like the pot, so they’d buy one for themselves. It didn’t hurt the company. They were using their discount, but they weren’t getting any commission and nobody else was either.

Internal consumption was a small part of total sales.

The beginning of multilevel compensation in the direct sales industry

About the only sort of multilevel type company in the 70s was Amway. They were in the middle of a monstrous battle with the Federal Trade Commission. In the end, Amway was allowed to continue operating with their multilevel commissions as long as they played by a set of rules.

That legal battle created the framework by which multilevel compensation plans were allowed to propagate in the direct sales industry.

Ultimately, multilevel compensation took the industry away from a retail focus. However, in the beginning, company heads still tried to be retail-focused.

What multilevel marketing companies eventually grew into were pure internal-consumption-based network marketing companies.

After the ’73 Amway FTC ruling, we saw a split between two types of direct sales companies: retail-focused companies and consumption-based companies.

Retail-focused	Consumption-based
Typically called “party plan”	Typically called “network marketing”
Typically used a breakaway compensation plan	Typically used matrix or binary compensation plan
Distributors worked to make sales to customers	Distributors worked to recruit other distributors

Of course, there were some retail-focused companies outside of the party plan arena. These are just general heuristics for differentiating the two types.

As the two types split, there started to be a major trend toward the consumption-based multilevel model and away from the retail-focused single-level model. That divergence started with the Amway case.

One of the things that traditional retailing companies learned from the early MLM companies was people could make more money by recruiting than they could by selling. At the time, I was with Tupperware. Distributors at these MLMs were making more than our Tupperware dealers were making. They were making more than even our best Tupperware managers. There was a general feeling among retail-focused companies that we were going to have to figure out how to compete with the MLM trend, or we were going to lose people.

Party plans started to shift toward multilevel

The first major party plan company to break the line was Mary Kay. If I remember right, it was 82′ or 83′ when Mary Kay’s compensation plan changed to pay multilevel bonuses. They denied to the hilt that it was an MLM plan. But it paid on multiple levels making it definitionally multilevel. It was a very shallow multilevel compensation plan. It paid on three levels. But again, it was revolutionary.

A lot of the traditional party plan companies, including Tupperware, kind of stood back in horror and said, “this will never work.” But some new party plan companies started adopting some of these principles (for example Pampered Chef and Lady Finelle Cosmetics). In time other older companies, like Arbonne, adopted some of these compensation methods.

The consequence was a sort of combination—what we might call hybrid compensation plans. These companies were still retail-focused, but they brought some elements of MLM into their compensation systems in order to compete.

It took only about ten years after the split caused by the Amway case for multilevel compensation to pervade the industry. And the next ten years after that brought another major shift in the direct sales industry.

The rise of “deep dish” multilevel compensation

If you look through the rest of the 80s, we saw a die out of retail-focused companies and a major rise in consumption-based companies. Stanhome—which was one of the biggest companies in the US, over 500 billion dollars in sales—nearly disappeared. Fuller Brush, nearly disappeared. The cookware companies survived but were nowhere near as powerful as they’d been before the 80s. The same with the vacuum cleaner companies. They disappeared.

Now we get out of the 80s into the 90s and we see what I call “deep dish” network marketing companies. We saw the introduction of the first sort of matrix and binary compensation plans and the beginning of the notion that: “you don’t have to sell anything. Just buy this minimum amount, and you will be rich.”

In the meantime, the business had flipped. The big dogs were now USANA, Nu Skin, and Herbalife. These huge consumption-based companies grew from nothing to giants in a matter of a few years while the retail companies tried to keep up.

You had companies like Longaberger Basket and Sentsy and Thirty-One Gifts all of which walked that line. They were retail-focused companies, but they had multilevel elements in their compensation plans. To their credit, they could demonstrate pretty clearly (and can today) that 75–80% of their sales are to ultimate customers who are not participants in the compensation plan.

Full circle in the direct sales industry—back to the retail focus

So why are we back to the retail focus in the direct sales industry? Three simple reasons:

The competition and the market have changed

No longer is Mary Kay fighting Arbonne for the cosmetics market or Herbalife fighting USANA for the nutrition market. The competition today is every e-commerce seller out there and their affiliate programs and their constant social media messages and text messages marketing their products.

On the other hand, we’re also competing with Lyft and Uber and DoorDash and all the other many gig opportunities out there where the dollar per hour is competitive or even better than ours sometimes. But, more important than the competitive pay, the ease of doing business with those companies is quite something. If you’re a Lyft driver, you don’t need anything other than a phone and a car to do all of your business, and you get paid instantly. That is what we’re up against.

The direct sales industry regulatory environment has changed

The FTC started to get much more aggressive, and they are signaling what they want out of distributors in the direct sales industry: you better be able to show that 75–80% of your sales are going to ultimate customers, or they will try to label you a pyramid and shut you down. If you have a compensation plan that, by its structural requirements and the ability to manipulate those requirements, appears to focus more on sponsoring than selling, they’ll shut you down for that too.

The “get rich quick” dream has died

People no longer believe in the idea that they can “get rich quick.” Today, what our salespeople are looking for is not so much bikinis and Lamborghinis. First and foremost, they want to know “what’s the best gig I can get that’ll give me the most dollars in my pocket for time spent.” There are other reasons as well. They’re doing it for their love of the product. They’re doing it for connection to other people. And there’s still a significant percentage who are being sucked in for the aspiration. But again, the most common mentality we see among distributors today is the desire to earn the most income for hours spent working the business.

How are direct sales industry companies changing

If you look at the way that the retail-focused companies recruit, they rarely talk about big income. They focus on onboarding the salesperson, helping them get started successfully. Many retail-focused companies have fast start programs that practically pay the new consultant to hit that five hundred dollars (or whatever their target number is) in the first 30 days. They talk about earning a few hundred dollars.

The challenge is when a company gets to be profitable, and the senior leaders are making big checks (some of them making millions of dollars a year), the leaders become highly resistant to any kind of change. So those companies that reached big profits while focused on internal consumption have a hard road changing their focus to retail.

But the trend we’re seeing is legacy companies figuring that out and new companies starting out on the right foot, focusing on retail sales.

Conclusion

So, we’ve now come full circle from 1972 to 2021. We’re now a retail-focused business. My prediction is that within five or six years there will be no more consumption-based network marketing companies of any size functioning in the United States.

The biggest companies in the world may have the same names as the ones who are at the top today. However, they’re going to have to radically change the way that they sell and treat salespeople.