So Old-School It's New: Direct Sales And The New Recipe For Retail

Direct sales aren't just for Avon ladies and the Fuller brush man—in fact, they're getting downright modern again and work as a cost-savings tool and a customer-service play. Hil Davis, founder of luxury menswear brand J. Hilburn, elaborates.

A younger generation might find this hard to believe, but at its roots, the concept of retail is based on direct sales. Before chain stores replaced direct selling as the mainstream mode of distribution, no one would have thought twice about choosing to buy their everyday products from a friend in the comfort of their home. Over the years, direct selling has earned itself a bad name, and these days many companies don’t even consider it.

We’ve come a long way since the days when Tupperware parties and door-to-door cosmetics sales ruled the retail world, but what I’ve learned from my experience in the industry is that by leaving direct sales behind, we’re failing to take advantage of valuable resources with the potential to take brands into broader markets, cut distribution costs, reach new customers, and bolster brand loyalty. This is not to say that we should revert back to the way things were. Rather, we need to embrace direct sales as a valuable strategy to complement brick-and-mortar stores and e-commerce. The combination of these three channels is the perfect marriage for the next wave of retail.

In recent years, e-commerce has taken a significant bite out of “traditional” retail, and for good reason. Online shopping affords great convenience and an unbeatable selection to the customer, and it allows companies to save heavily on distribution costs. The trouble is, online-only business models can be difficult to scale due to high customer acquisition costs and a limited capacity to engage on a personal level in order to drive repeat sales. Though e-commerce sales continue to soar across industries, online-only brands like Warby Parker and Everlane are now seeking to supplement their digital presence with physical spaces like pop-ups in order to reach people offline. Additionally, the costs to manage an e-commerce business are rising significantly, driven primarily by the need to offer free shipping and liberal return and exchange policies.

Physical stores—particularly in well-trafficked malls and shopping centers—boast the advantage of being able to catch the eye of shoppers, drawing them in to browse items they might not otherwise have been looking for. Years of research have taught merchandisers just how to position their products to drive in-store sales, while sales associates are trained to engage potential customers to buy, perhaps spend more than they otherwise would have, and leave feeling good about their purchases. These are important resources for brands seeking to establish themselves in the consumer consciousness, but the fixed costs associated with this model (rents, employee salaries, insurance, inventory stocking, and so forth) can be unjustifiably high, and can increase year over year, forcing companies to raise their prices or sacrifice profits.

So where does direct sales fit into this puzzle? Rather than altogether replacing the in-store shopping experience or eschewing online options, direct sales can elevate a brand’s presence in a number of ways by working in tandem with these other channels.

One important advantage of direct sales is that it opens up opportunities to reach small to mid-sized markets, where the costs of setting up a store often outweigh the benefits, but consumers still demand alternatives to online shopping. In regional markets, networks of direct sales associates have the power to leverage their networks (both personal and through online social channels) to identify potential customers and physically bring products to them to see and feel. This offers a level of personal services that is rarely found even in luxury retail stores, as well as exceptional convenience. Technology today is making it easier than ever before to build, train, and sustain a direct sales force, and consumers are ready for change. In other words, direct sales makes it possible to tap into the potential buying power of underserved consumer markets, in addition to providing an appealing shopping alternative for people across the country, from New York to Los Angeles, and just about anywhere in between.

A second benefit of direct sales—and this is arguably the most important—is that this model naturally lends itself to vertical integration, which allows brands to deliver exceptionally on both quality and price. By going straight to the same mills and factories as traditional luxury retailers and selling direct to the consumer, brands can skip the middlemen in the traditional supply chain and slash the costs of distribution. To give just one example of how this cost structure works, by using a vertically integrated model, it's possible to sell a luxury dress shirt that costs $45-$60 to make for $135 instead of the $300-$600 that comparable brands would charge after layering in the costs of the old standard supply chain.

The ability to exceed expectations for quality at a fraction of the price of similar premium brands is what really makes things interesting. If you don’t "wow" the customer, odds are they won’t stay around for long, but if you can get the product right at an unbelievable price, you can build customer stickiness quickly. Couple this with the convenience of an online option, which streamlines the process for those who have already gained a sense of how their order will look, feel, and fit, and you’re able to give customers even more of what they want. To take a brand to the next level without adding excessive costs, adding a smaller number of flagship stores in core markets, designed to engage customers with an experience that beats the standard can help to create a sustained physical presence.

What this all tells us is that there are opportunities across industries for companies to rethink what they’ve learned about retail and elevate their businesses in ways they’d never before considered.

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—Hil Davis is the co-founder and CEO of luxury menswear brand J. Hilburn, the fastest growing custom clothing company in the United States. Prior to launching J. Hilburn in 2007, Davis was an equity research analyst covering restaurant, retail, and luxury goods companies.

[Image: Flickr user MJ Ecker]

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4 Comments

  • Jennifer Bilodeau

    It is about time that direct selling become regulated to avoid FTC dodging.  There are many practices that some companies that do not pay distributors as promised or they have a fine print clause that can wipe out a top producers income overnight. This resulted in many class actions for consumer fraud.  What people are finally waking up to is the unsustainable business model that will collapse just like Wall Street did.  Many companies rely on those start up fees, web maintenance fees, lead generation fees, training costs, and other hidden fees to supplement operating costs.  A former distributor and top leader at Veridian told me that his focus was finding people who could afford the $500 start up costs and the "Gotcha" hidden fees.  The young man had ethics and left the organization after a year bringing his book of business to a new company that acted more ethically.

    Now that Direct Selling has hit commodities such as gas, electric supply I have personally witnessed unethical behavior I am sure many can relate to.  I have had 6 calls in the last 2 weeks offering discounted utility rates.  The callers have all violated FCC Telemarketing regulations, but that's another story.  The callers do not clearly identify themselves and plow into a pitch claiming I am eligible for up to a 15% discount on service and  rattle some government programs off to make themselves sound as if they were calling from the government or some other official branch.  One caller even claimed that he WAS from FEMA and I was eligible for discounts because I was in an area devastated by hurricane Sandy.  Another guy claimed he was with the utility distributor calling from the billing office phishing for my account number.  Their objective is always the same pretending I was entitled to discounts and pressured into providing account information to be slammed.  Only two of the 6 identified who pays them... one was with Ambit, and the other Ignite.  The others hung up when I asked what company they were with. 

    Direct Selling is a great industry because anyone can do it whether there is a start up fee/costs or a free model where you just roll up your sleeves and work.  Direct Selling is also a horrible industry because anyone can participate and ethics of distributors are not checked.  There is no performance monitoring.  Corporate brands can be destroyed by rogue agents and those "following the company rules" are harmed by those who are not.

    Direct Selling is flawed because there is no "evidence" of liquidity in the businesses.  A potential rep has to go on faith.  There are no financials, there is too much subterfuge and mystery underlying the glitz and glam that captures the dream of financial stability, time with family, and freedom to to what they want. 

    In my opinion the way Direct Selling should be regulated would be expensive on the front end because a system would need to be put in place to monitor agents for ethical behavior.  Disclosures would need to be made outlining the "hidden costs" up front so reps can make a true educated decision if they can afford to launch a business as a distributor.  Regulations should address distributor protections to ensure they are paid fairly.  There are too many games in the industry how companies can cut top earners income.

    I still hang out with Direct Selling people, I like tinkering in the business... but I would NEVER rely on Direct Selling as a primary source of income because there are too just many risks that no one seems to be interested in mitigating at the executive levels across the board.

  • Andres Peluffo

    Hi, i'm looking to find out how traditional direct selling companies are thinking its future. Do you know who are the leaders n that field? Can anyone name a few resources (ie books, sites, organizations companies, etc.)?

  • Len Harmon

    As the chaos of the web continues to unfold, identifying opportunities for efficiency and scale is increasingly important.  The assumption is that the WOM and relationship between customer and personal sales rep is as powerful as the reputation of the brand and/or brick mortar location and also trumps convenience of the web.  The trick is fulfillment and the payout cost of storing/shipping goods in smaller quantities and identifying those under served markets.  Relationships are tenuous if after-sale fulfillment does not exceed expectations.  The margins in a luxury item may be enough to cover that, but would convenience/non-shopping items have a greater challenge?

  • Hil Davis

    Thanks  for the thoughtful response.   Re: your comment on fullfillment & shipping  costs, you can start to see scale on those with medium volume. Re: after-sale fulfillment, that is our biggest risk and we are now building technology that allows to interact with the customer so we can offset most of that risk. Re: the margins, it is dollar profit that is more important than % margin, so the key is does the product have enough $ profit to cover shipping/fulfillment and G&A.