With direct selling, distributors avoid intermediaries in the supply chain and sell products directly to consumers. In traditional retail settings, products are sold online or at a physical store, but direct selling relies heavily on salespeople getting in front of customers in nontraditional settings.
How Direct Selling Works
Direct selling eliminates several intermediaries involved in product distribution, such as the regional distribution center and wholesaler. Instead, products go from the manufacturer to the direct sales company, then to the distributor or rep, and finally to the consumer. The products sold through direct sales are usually not found in typical retail locations, which means finding a distributor or rep is the only method to buy the products or services.
Direct selling is usually associated with party-plan and network marketing companies. Although these companies use direct sales, they aren’t the only ones; many businesses that sell business-2-business (B2B) use direct selling to target and sell to their end customers. For instance, many companies that sell advertising or office supplies will send their reps directly into the stores that can use their services.
Types of Direct Selling
There are a variety of ways business owners can utilize direct selling, including:
- Single-level direct sales
- Host or party-plan sales
- Multi-level marketing
Single-level direct sales are typically performed one-on-one through door-to-door or in-person presentations, online meetings, or catalogs. Generally, income is earned on sales commissions, with possible bonuses for reaching target goals. Host or party-plan sales are made in a group setting, usually involving the distributor or rep doing a presentation in their home or a potential customer’s home. In some cases, a company might sell to individuals in a business. For example, a real estate software sales rep might do a group sales presentation to a group of Realtors. Income can come from commissions from sales, and sometimes through the recruitment of other reps.
Sales in a multi-level marketing (MLM) are made in various ways, including those associated with single-level and party-plan sales. Income earned through MLM is commission on sales, as well as the sales made by other business partners the distributor recruits into the company.
Direct sales may be mistakenly referred to as MLM or network marketing, but these terms are not interchangeable. While MLM and network marketing are a form of direct sales, not all direct sales systems involve MLM. For instance, in single-level marketing, the sales representative is only paid commission on the sales they personally make; there is no recruitment of other sales team members or commissions earned from their sales.
Unfortunately, it can often be hard to distinguish between a legitimate MLM business opportunity and a pyramid scheme because they share many of the same characteristics. Both MLM and pyramid schemes require participants (called “distributors”) to recruit other people, and both tie an individual’s compensation directly to their recruiting results. The main difference between the two is that pyramid schemes are designed to keep distributors’ money flowing into the company.
Most pyramid schemes will keep the income stream going by charging fees and requiring distributors to regularly purchase a certain amount of products to sell even if they don’t need it. There may be products or services to sell, but most people’s income largely depends on how well they can recruit because the company is more interested in having a steady flow of income from distributors. Here are some potential signs of a pyramid scheme:
- Promises of getting rich quick
- Too much emphasis on recruiting other distributors
- You’re required to initially “invest” a lot of money
- Promoters use emotional sales tactics to convince you to join
- Very little focus on the actual product or service2
Direct sales particularly MLM and network marketing have suffered a bad rap because many companies have been scrutinized for using marketing methods resembling pyramid schemes. Direct selling is perfectly legal, but pyramid schemes are scams and illegal. In the U.S., recruiting people into a pyramid scheme can be a felony, and the Federal Trade Commission is the primary agency responsible for stopping such cases.