I have been working in this amazing industry for nearly 20 years. I have held the posts of Chief Financial Officer, Chief Operating Officer and Chief Executive Officer, in addition, I have had the opportunity to serve as a consultant to many companies in the industry. I have seen how this model can grow rapidly and in the process change the lives of so many people who are willing to take advantage of a lucrative business opportunity and provide products and services to their friends and family members.
The Key to Success
So what separates those very few skyrocket startups and rapid moving businesses from the so many that don’t make it and fail. In my experience, in addition to great products, a lucrative business opportunity and amazing customer service, a successful direct selling company must have a solid KPI (Key Performance Indicator) based plan that realistically reflects the strategies and tactics that come from a solid business plan.
I am constantly amazed by meeting leaders of a recent direct selling launch who have no financial plan and as a result, have no concept of their working capital needs. The typical topic of that first conversation is we are running out of money and need assistance in finding an angel to assist the realization of their dream. At this point, it is often too late. If their concept is good, an angel will insist on majority control; if the concept is weak there is no way to put lipstick on a pig.
Solid Business Plan
So how do you avoid finding yourself in this situation? It starts with a solid business plan. A key element is of course product whose retail value is some multiple of its cost. Many startups make the mistake of launching a company under the premise that once they achieve some critical size, they will be able to negotiate for better costs from their suppliers. This can work but often times it is a recipe for the more you sell the more you lose. Ideally, you have a retail average that is between 6 and 9 times the average cost of the product. This affords enough margins to fund a lucrative compensation plan.
Another situation is that entrepreneurs like to borrow from what has worked in the past. Too often a startup will copy the compensation plan of a fast mover company – this is almost always a horrible idea. You could be borrowing a plan from a company that is unsatisfied with the plan they have. Another reason for not borrowing is that most compensation plans are designed specifically around the retail-cost relationship of their products. You could be taking the compensation plan from a company with an 8X cost multiple and try to make it work in your company that is only carrying a 5X cost multiple. Once again, this is a recipe for the more you sell the more you lose. Consult an expert to build an attractive compensation plan that works with the products and your margins.
Many startups make the mistake of losing money on certain aspects of their business as a necessary cost of selling their primary products. This is almost always a mistake. Successful companies understand that their shipping and handling rates need to cover the cost of delivering the products and the variable pick and pack costs, technology fees must cover the cost of any system employed, and printed matter must be sold at a profit.
The overhead burden of a company can be made highly variable. Bringing on resources in advance of achieving the size necessary to support those resources is a very important strategic decision and should be entered into lightly. When in doubt, outsource and use contract resources. A well-managed business should be able to be profitable at almost any size.
Now What Do I Do?
Having said all of the above, a well-done plan will dictate the amount of capital necessary to launch and run the business until breakeven is achieved. I have met so many earnest entrepreneurs who are trying to launch a business on a shoestring budget. Although this is possible, it extends greatly the amount of time it will take to achieve scale. You will not grow like a rocket ship if you do not have any fuel.
Do yourself a favor and invest the time to develop a solid plan and roadmap for your new or existing business. If you need assistance in any aspect of this process, please call the experienced team at Strategic Choice Partners LLC. We are here to help in all aspects of the operation of your Direct Selling business.
About Dan Murphy
Dan has over 30 years of experience in high growth organizations holding senior finance and operating roles at TJX, Pepsico, Panera Bread, Princess House and Immunotec. For the last 15 years Dan has served as both a CEO, CFO and COO for two party plans and network marketing company respectively. Currently Dan is a consultant specializing in the Direct Selling Industry, his primary area of focus is interim management, turn around management, financial management, strategic planning, operations and capital formation