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Essay- Understanding Direct Selling in India

Building a socio-economic edifice

Over time, the human race and more so in India, the larger population has

engaged in three basic traditional occupations agriculture, manufacturingand trading. Infact of the three, agriculture and trading have always been

around growing crops and trading or bartering them for goods or produce

that the other did not have. With the introduction of monetization and

currency, trading over time evolved to form selling and buying mostly peer

to peer before it became more structured to form channels sales.

Unique as it might seem, the most common or conventional form of sales

and purchase has been direct sales, while structured channel sales came

about only with the advent of modern day manufacturing and finished goods

where economics of demand-supply ruled the quantum of produce,inventory, sales channel modulation and eventual returns.

India and Indians are known as much for their spirit of entrepreneurship

catalyzed by trading as they have been known for their inclination and

dependence on the agrarian economy. As a population we have always been

quite dependent on trading or selling produce in return for necessities and

money to build wealth and well-being for self, family and the community at

large. As a trader, you earn as much as you can sell, with the price being

decided at an open market, trading area or exchange or by the trading

fraternity focusing on specific commodities, goods or products.

The concept for Direct Selling is not dissimilar to that of channel based sales.

The first element of similarity is that as in trading, the model of sales is

based on peer-to-peer engagement and transaction. Secondly, the income

generated by an individual in direct sales is directly dependent or

proportional to the goods or products he/she sells viz. to say you earn only

as much as you sell (and therefore if you do not sell or transact, you earn

nothing).

The modern day format of direct selling is not entirely new as mentionedearlier. The concept of peer to peer linkup to create a chain selling tree or

structure has always been around, where goods are handed down through a

chain and the profits or commissions or incentives being shared

proportionately in terms of effort. In fact it is this very same structure that

modern day channel or structured sales has adopted As in direct sales, so

also in channel driven sales, there is a peer to peer or group to group link-up

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(C&F Agent to Distributor, Stockists, Large Format Retailer or Wholesaler and

finally unit/small vendor /retailer). So the model of chain or multi-level

marketing is neither new nor does it have any nuance of complexity as

purported.

There are several questions of doubt and a general air of misconception andmyths that surround the world of direct selling. Some of these

misconceptions emanate from stories revolving around the fact that direct

selling is based on a structure where the organization apex rewards down

the line constituents for signing up memberships, where products are

exorbitantly priced to accommodate high value commissions or incentives or

there may be selling structures where the products are not of high quality

and are just a faade to procure money from innocent customers and

reward members from the spoils.

Infact, nothing could be further away from the truth than these statements.Firstly most direct selling organizations, and atleast the well-known ones do

no charge any joining or initial subscription fee, and neither do they pay

constituents any rewards for sign up.

Credible and well known direct selling organizations only pay commissions or

incentives for actual goods and products sold, not for membership sign ups

(two logical reasons additional memberships mean nothing they do not

guarantee any revenue generation and the direct selling company which

already spends a lot in terms of training and development will not dish out

more money to attract new distributors it just does not make business

sense).

Secondly, as far as product pricing is concerned it is important to understand

two things (a) that these products are high priced because the cost of

manufacturing them is high. This high cost comes from the fact that the

products are assembled, manufactured or put together in high-tech state of

the art manufacturing units and further caused to high cost of raw ingredient

material of the highest quality (most of which are source imported from

international markets at high prices). (b) that every company has to maintain

the best standards in terms of other operational resources as well Training

& Development facilities, R&D, Quality Control, Human Resources, Software

and Technology backbones, Logistics etc and everything comes at a cost

a high cost at that (isnt it logical to accept that the best resources will cost

the most?).

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Resultantly to incentivize all operational resources and the Sales-Distribution

resources to perform well in terms of sales volume build in margins. To

contend with and counter the argument that margins in direct selling are

more than that of conventional channel sales one must draw clear and

linear analogies. Firstly, The incentivization structure in both models of sales

are nearly the same and in many cases without any difference. As a

traditional manufacturing and services company pay its C&F agents,

distributors, vendors and retailers with sales margins and commissions as

well as its sales workforce (on direct payrolls) so also does it reward these

same associates and resources magnanimously with substantial rewards for

meeting or exceeding sales targets and this has been the practiced

convention everywhere from Insurance to Banking, Airlines & Hotels,

Automobiles, Software, consumer durables, FMCG etc

So why the insinuation that Direct Selling companies retain steep margins to

reward associates and employees when the converse is possibly true? Infact

companies with traditional sales models have greater or better margins

hence the high profits, great salaries, great commissions to sales agents and

distributors. It is a fact that direct selling companies do share their profits as

incentives or commissions as reward for achieving certain sales levels, but it

is also true that the cost of maintaining a direct selling structure is lower

than that of a conventional channel sales structure.

Look at this analogy Under the conventional channel sales structure, the

company goes through atleast 4-5 levels to reach the last mile retailing pointwhereas in Direct Sales the company makes the transaction directly with the

last mile retailing point, while sometimes the last mile retailer or the

distributor may in essence only serve as the order taker and the ordered

goods can be delivered directly to the consumer saving on time and money.

Whats more definitive in terms of impact, is that some of the best known

Direct Selling companies in the world and in India have the best products for

a particular category or segment e.g. Tupperware makes one of the best

food-grade plastic products which albeit premium priced has virtually no

competition in terms of quality or for that matter an Oriflame, Mary Kay,Artistry or Avon beauty care or the wonderful home cleaning products of

Amway.

What is important is that the consumer must benefit at the end of the day

if the product or service purchased brings good value to the customer.

Secondly one must also evaluate the Direct Selling Industry must also be

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seen through the prism of pure social economics that of direct and indirect

employment or livelihood generation. In India, The Direct Selling Industry

(constituting member companies of the Direct Selling Association) currently

has a distributor/sales agents base of more than 2 million, a direct

employment base of nearly 5000 employees and several thousands more in

terms of indirect employment (employees of companies or contracted

consultants associated directly for business with the Direct Selling Industry

ranging from transportation, infrastructure, IT, Manufacturing and Material

Supplies). To top it up it also generates several hundred or thousand crores

of Taxation revenue for governments

One cannot ignore the new wave of micro-entrepreneurism that Direct

Selling has been able to generate and bring to the people of India, and will

continue to do so; and in doing so has generate a new way of life of

independence, self-belief and monetary success.