Financial Resource Center

Small Business

Sizing Up Direct Selling

by Dianne Molvig / November 29th, 2010

Perhaps you've long dreamed of being self-employed. Or maybe you're having a tough time finding a job these days, so you're searching for something different. Whatever the motivation, you've decided to look into direct selling. Direct selling entails selling consumer products or services person-to-person, rather than through a fixed retail outlet. No doubt you've heard of some of the better-known direct-selling companies, such as Avon, Discovery Toys, and The Pampered Chef. The types of products available through direct sales are diverse: nutritional supplements, pet supplies, tools, wine, clothing, books, home accessories, and much more. How do you know if direct selling is right for you? People often assume an outgoing personality is a prerequisite for the job. Not necessarily, says Amy Robinson, vice president of communications and media relations for the Direct Selling Association (DSA), Washington, D.C. "A lot of people would never envision themselves getting up in front of a group to do a sales presentation," she says. "But once they start their business, they uncover a lot of skills they didn't think they had." Still, Robinson emphasizes that one quality is essential to being a successful direct seller. "The person best suited to direct selling is someone who goes into it with realistic expectations," she says. "Problems arise when people think they're going to walk into an opportunity and make all this money. It doesn't happen like that. You have to build your customer base, and that takes time, just like in any small business."

Clarify goals

People go into direct selling for many different reasons, Robinson notes. So when someone recruits you, you'll learn about one person's experience. "You have to take that and say, 'OK, that works for you. But I want to do this,' " she says. "Make sure you're evaluating an opportunity on your own terms with your own goals in mind." For instance, you might aim to make an extra $200 a month to supplement your other earnings. Or maybe you're relying on direct selling for a substantial portion of your household income. Consider what it will take to get what you need. Will it be five hours a week? Twenty? Fifty?
"The person best suited to direct selling is someone who goes into it with realistic expectations."
Once you're clear on expectations, decide what you want to sell. Many people feel drawn to selling a product or service they already use and believe in. If that's not the case for you, think about what sort of product would match your personal interests. "Find a rep for that product in your area," Robinson suggests, "and attend a party. Watch what that person does and ask yourself, 'Would I like to do this?' " Expect to invest time and effort into getting good at direct sales. A major source of your on-the-job training is the person who recruits you and becomes your mentor. Plus, many direct sales companies offer online or in-person training events. External sources in your community, such as your area Small Business Development Center, also can be useful training sources.

Check out the company

Before signing up with a company, you need to know exactly what you're getting into. Learn all you can about the company's track record. Contact your state or area consumer protection office or the Better Business Bureau® to find out if complaints are on file. "Most any company will get a complaint from somebody at some point," Robinson says. "So the key isn't whether a company has had complaints, but how it handled those complaints." Take a close look, too, at the company's compensation structure. Most direct-selling companies have a multilevel compensation plan. That means you're paid based on what you sell and also on the sales of the people who are "downline"—that is, the people you recruit into the company and, in turn, the people they recruit. "Your primary source of income has to be from the sale of products," Robinson says, "whether it's your own sales or the sales of people you've brought into the company. The red flag comes up if you're being compensated merely for bringing in other people." That's a sure sign you're looking at a pyramid scheme, which is illegal.
"It should be easy to get in and get started, and it should be easy to get out."
Those are the sorts of factors that DSA investigates during a yearlong trial period after a company applies to join. Once admitted, member companies, which number nearly 200, must adhere to DSA's Code of Ethics. An independent code administrator looks into complaints from sellers or consumers. Still, there are plenty of nonmember companies that are perfectly legitimate, Robinson says. But you'll need to do more work on your own to check out a company's practices. Do they measure up to the standards of the DSA Code of Ethics?

Other questions to ask

Your advance research also must include finding out:
  • What are the start-up costs? The median cost for a start-up kit for a direct sales company is $99, according to Robinson. The kit typically includes product samples, catalogs, order forms, and so on. Avoid any company that assesses a sign-up fee that gets you nothing other than the right to recruit other people, with no tangible product or service to sell. That's a mark of a pyramid scheme.
  • What is the buy-back policy? If you decide to stop direct selling, the company should buy back sales aids and product inventory that are still marketable. The DSA Code of Ethics requires member companies to refund you at least 90% of what you paid for such materials in the previous 12 months. Many companies pay back 100%, Robinson notes. "You want to make sure if you decide the company is not for you," she says, "that you don't get stuck with a garage full of products."
Doing your due diligence up front will assure that the direct selling endeavor you join is legitimate and what you're expecting it to be. "It should be easy to get in and get started," Robinson says, "and it should be easy to get out. You should not have to risk financial loss by getting involved in direct selling. It's important to go into it with your eyes wide open."
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