Understanding the direct selling business model
While there are many reasons why someone decides to start their own company, such as independence or following their passion, a common motivation is to make money. Depending on the nature of your business, it doesn’t mean that you spend more than your product to realize it or provide a profitable service. To get a high return on your investment, looking at ‘how we’re going to sell our offer’ is just as important as ‘what we’re going to sell’. In this article, we will look at how to increase profit margins as opposed to just generating revenue.
In previous articles, we have seen Different business models and how each is suitable for different products and services. The reason entrepreneurs define their model from the beginning is so that they are clear on how they are going to reach audiences by creating a distinct identity and coherent company message to customers that differentiates them from competitors.
For example, if you operate a taxi business or deliver food like Lyft and Grubhub, company owners may consider Peer-to-peer model Services where both businesses come together to expand their offerings and expand their profits. Perhaps, instead, your company sells clothes, one of your options is the drop shipping model where you sell products on your website from a third party who handles the costs associated with inventory and shipping.
This article, however, focuses strictly on the direct sales business model, where unlike the examples above, there is no middleman to bring suppliers and customers together. In this model, business transactions occur within your company, through sales representatives, and between your customers, the end users. Although company costs will include commissions or discounts, this model is among the most affordable.
Let’s look at this model in more detail.
What is a direct sales business model?
When you design your company around direct sales, you get your product or service to customers without dealing with wholesalers or distribution centers. Because, as a business owner you can’t be everywhere at once, you will have sales representatives who will bring your offering to a wider market. In addition to being enthusiastic and resilient, your sales force needs to know their customer’s needs and have a deep understanding of how your product or service can meet them.
This model is also not based on a retail environment where, when employees are not working from their home or office, they are out on the street meeting potential customers. As a company owner, you need to support your sales reps by equipping them with catalogs, free samples, and demo models so that their pitches have a greater chance of success. Avon is an example of a business operating this way.
How does the direct sales business model make money?
The direct selling business model builds personal relationships and generates revenue using strategic partnerships, for example, influencers who advance sales based on their reputation and established following. This model includes various methods to reach your target market, namely:
- single layer. Also referred to as one-to-one sales, this is where sales representatives present your product to potential clients, for example, by going door-to-door. Nowadays, however, it has been replaced by methods like e-mail marketing which have a wider reach and are more cost-effective by reducing travel costs. Either way, sales reps need to build trust by making a sincere first impression. Social media offers a way to do this where you can build credibility by telling stories that are relatable to potential customers. Platforms like Facebook also provide an opportunity to build a community.
- Binary. This type of approach is where each sales rep recruits two other reps to create a close-knit structure where more members lead to more leads.
- Host or plan the party. In this instance, the sales representative presents your product to potential buyers in a social setting. For example, host a cooking show, a tasting event or a demo featuring your product
- multi-layered. Sales representatives sell through this channel by encouraging people to join a network through membership where the representatives not only receive regular commissions from their sales but who also benefit from the sales made by their recruits. An example of this is Amway where sales reps can work as freelancers or even own small businesses.
Examples of direct selling models.
So far, we’ve looked to Avon and Amway to explain the direct selling model. Other examples of businesses that use this model are cCompanies such as H&M and Zara because they all control the supply, design, production and distribution of their products.
Tupperware’s model is based on removing the middleman to keep prices competitive. Their approach is multi-level where they have a network of users of their product who add to their income by influencing the purchasing decisions of potential buyers. transport. Carmakers such as Renault launched their direct sales platforms online in April 2022 where they removed the costs associated with dealer markups. Ford and Toyota aim to do the same soon.
Advantages of Direct Sales Model
Compared to other business models, the direct interaction with potential buyers and existing customers that characterizes direct selling comes with the following advantages:
- Customized products and services. Having access to direct feedback from buyers helps your company develop its offering which in turn saves on marketing costs as it is easier to sell your product or service.
- Cost control. Since there is no third party involved in this model, your company can offer competitive pricing. Advertising costs are also significantly lower because sales representatives start selling by word of mouth to their acquaintances, family and friends.
- Buyer loyalty. Building relationships with your clients not only secures repeat business but also ensures your company’s survival in tough economic times.
Disadvantages of Direct Sales Model
As with all approaches to business, there are pros and cons, and it’s up to you as an owner, what risks you’re willing to take to excel in your endeavors. Let’s briefly look at the potential pitfalls of the direct selling business model:
- Lack of diversity. Due to direct contact with customers, the success of this model depends on acting on customer feedback to maintain a successful business relationship. The challenge here is that due to efforts to personalize products, there is little room left for growth where company owners stick to what they know. This makes a business less dynamic with no incentive to expand your offering as it sells.
- High staff turnover. Due to the demanding nature of sales, this business model has a high employee renewal rate. The company, therefore, has to spend a significant amount of time recruiting and retraining new representatives which requires resources.
- Intrusion into personal relationships. Because the income from this business model is mostly from close contacts and sales reps reaching out to their peers, trying to sell to such close contacts can leave them feeling taken advantage of, which can damage relationships.
In this article, we have looked at the direct selling business model, how it makes money and what are some examples. We’ve also looked at the pitfalls so you can weigh the pros and cons of adopting such a model
As a business owner, Before choosing this or any business model Ask yourself how your company adds value to customers and enhances their experience so that you not only operate at a profit but you secure future business because you are able to connect with your customer.
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Business Models · Find Your Way · Grow Your Business · Sell
Business Models · Find Your Way · Grow Your Business · Marketing
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