Mary Kay Ash, Founder, Mary Kay
In November 2010, Kate Creevey, CEO and founder of Designs by Kate, Inc. (“DBK”), sat down with her management team to review the quarterly sales numbers. DBK, which sold women’s jewelry via the direct-sale methods pioneered by Tupperware, had enjoyed rapid sales growth since its founding five years earlier. This growth was achieved despite unfavorable economic conditions and slow growth for the retail industry overall.
However, Creevey was concerned that DBK’s top-line growth trajectory had slowed recently. Juanita Thomas, head of Sales at DBK, noted that this slowdown seemed to have been driven by a slowdown in the rate at which new sales representatives were transitioning to “leader” status and beginning to build their own sales teams. The willingness of sales representatives to build their own teams was central to DBK’s business model. Sales growth had been driven primarily by growth in the number of sales representatives, and more than 90% of DBK sales representatives had been recruited by existing sales representatives. Additionally, sales representatives who became team leaders tended to stay with the company longer and were more productive sales people. A detailed commission structure had been put in place to encourage sales representatives to build and to actively manage their own sales teams (see Exhibit 1a.)
In response to this trend, Thomas polled sales representatives about their thoughts on becoming team leaders and moving up the DBK sales ladder. This feedback included two clear messages which disturbed Creevey and her team. First, many representatives thought the financial rewards offered for “leading” were not worth the trouble it took to earn them. These women had become DBK sales representatives because they wanted to work on their own and didn’t want the hassle that they perceived was involved in building a team. Second, many believed that recruiting friends or
HBS Professor John A. Deighton and writer Sarah Abbott prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration.
Copyright © 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
APRIL 20, 2011
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4284 | Designs by Kate: The Power of Direct Sales
colleagues to become sales representatives was likely to lead to a reduction in their own sales volume (on which they earned much greater commission levels) given that there was overlap between their social networks. As one sales rep commented, “Why would I ever encourage a friend to be a DBK sales rep? That’s just giving away my business! And I worked hard to build this business.”
Creevey and her team pondered what they needed to do to turn this trend around. The current incentive structure at DBK was Creevey’s brainchild—the result of years of studying existing direct sales models and meeting with executives from across the direct sales industry. But now, Creevey realized she needed to get a better handle on what her sales reps were earning and what was happening to that earnings trajectory as they climbed the DBK sales ladder. Also, did the sales structure need to be reworked? Or was it a matter of doing a better job explaining the incentives system? To do this might require hiring more company-employed trainers to work with new sales representatives. DBK had been profitable virtually from day one. Creevey had traditionally kept DBK’s fixed cost base extremely low and was loath to add more employees. That said, Creevey believed the growth prospects for DBK were extremely bright, if they could just get their business model back on track.
History of DBK
After receiving her MBA in 1999, Kate Creevey joined the management training program of a large department store chain and rotated through a number of departments before taking a position in the CFO’s office. She stayed in this group six years until she left in 2005 to launch her own business.
Starting a direct sales business had been a long-term goal of Creevey’s. Her mother had been a Mary Kay sales representative when she was younger, and Creevey had long been impressed by the direct sales model. She recalled, “In the 1970s, stay-at-home mothers were very much an untapped economic resource. Selling Mary Kay products was not only a source of extra income for my family, it was also an important outlet for my mother—it gave her an opportunity to socialize and to utilize her business skills.” While the socioeconomic environment had changed notably since then, Creevey still believed that the model held potential. She believed jewelry was well-suited to this sales model— there were very few companies of any size selling jewelry directly; it didn’t involve many of the complications of selling clothes directly (e.g., sizing); and she believed she could commission attractive, trendy pieces of jewelry which could be sold profitably for $75 or less. Creevey commissioned a jewelry maker in New York, where she resided, to design an initial collection of 25 pieces of jewelry. The highest price point in the initial collection was $100, but most pieces retailed for less than $50.
Creevey hired Juanita Thomas to oversee the development and management of the sales, force and John Simpson—a former business school classmate—to act as CFO. Creevey then launched an extensive word-of-mouth advertising campaign, utilizing her contacts and those of her colleagues to recruit DBK sales representatives from across the United States. She also placed advertisements in several women’s magazines. The response was overwhelming, and by mid-2006, more than 600 sales representatives had signed on with DBK. Since then, DBK’s sales force had grown to nearly 8,000, and the number of full-time employees located in DBK’s New York, NY, headquarters had increased to 24.
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The DBK Business Model
The Sales Force
An individual who was interested in becoming a DBK sales representative would purchase a “Launch Kit” from DBK for $250. The Launch Kit was mailed to the sales representative, and included all of the supplies necessary to start selling DBK jewelry including $400 worth of jewelry to use as samples (representatives could select which items they wanted to purchase), order forms, and catalogs. Sales representatives also had access to DBK’s online training platform, which included videos on a wide range of topics: how to put together a DBK party; how to display jewelry most effectively; using online tools such as Facebook and YouTube to drive sales. Sales representatives were generally women aged 25 to 50. Some were stay-at-home mothers; others worked full-time and used DBK as a part-time income source. The majority were college educated, but most had no experience in sales. There was no selection process for the position; anyone who purchased a Launch Kit could become a sales representative. Many of the large direct sellers eschewed a selection process for their sales representatives, viewing it as costly and challenging to implement and likely to deter new prospects. Creevey agreed with this, arguing, “We use very targeted marketing strategies. Our marketing plus the upfront launch kit fee ensures we attract mostly suitable, serious candidates.”
Most DBK sales occurred at DBK parties. A DBK sales representative would invite friends and colleagues to her home for a DBK party. The sales representative generally served coffee and pastries or hors d’ouvres (depending on the time of day) and displayed her sample jewelry and catalogs to allow guests to browse. If a guest wanted to order a piece of jewelry, the representative filled out an order form and collect-payment information. After the party, the representative would enter the orders into DBK’s database along with the payment information. DBK’s New Jersey fulfillment center then mailed the jewelry to the purchaser, generally within 7–14 days of the order being placed.
Sales representatives were instructed to market “DBK parties” as fun social events and to downplay the sales aspect. A typical invitation might read as follows:
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Please join me for a fun morning with friends. Stop by for coffee and to catch up. In addition, I will have some pieces from the new DBK line to show you. So, if we are looking for a gift (the holidays are coming!) or a little something for ourselves—there will be a lot to choose from!
Please let me know if you can make it. Meredith
At the parties, representatives didn’t “sell,” they simply displayed the products, socialized with friends, and took down any orders. As one representative commented, “DBK products are cute and wearable, but they are not particularly unique. To be honest, you could find similar pieces at any department store. What makes selling them so easy is the upbeat, relaxed setting of the DBK parties. My girlfriends and I love the excuse to get together, and the opportunity to buy an inexpensive piece of jewelry is just an added bonus.”
DBK representatives could also accept orders online—each sales representative was encouraged to build her own DBK website which could be accessed via the company’s main website, www.DBKJEWELRY.com. Online training provided representatives with the information to launch
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their websites and personalize them by featuring their favorite pieces of jewelry, their own style tips, or links to relevant media articles. Many also sold at local flea markets and fairs.
DBK representatives received a base commission rate of 25% on all sales. If a representative sold more than $1,000 in a given month, that rate increased to 32% across all sales.
DBK also encouraged representatives to recruit, train, and mentor new sales representatives. The management team had designed a detailed promotion system that paid “leadership dollars” to sales representatives who brought other sales representatives into the company. For example, if one representative recruited three friends to be representatives, those three friends constituted her Level 1 team, and in addition to the commission she received on her own sales, she received leadership dollars, between 5% and 12% of sales volume, on all sales made by her Level 1 team members. If those Level 1 team members then each recruited three friends, they became that original representative’s Level 2 team members; she then received leadership dollars, between 3% and 8%, on the sales made by her Level 2 team members, in addition to the commissions she earned on her own sales and the leadership dollars she earned on her Level 1 team members. This system continued with leadership dollars earned on Level 3 and Level 4 team members as well. All leadership dollars were paid by DBK; they were not deducted from the commission earned by the individual representatives.
Representatives could increase the percentage of leadership dollars they derived from their team members’ sales by getting promoted up the DBK sales ladder. The only requirement for becoming a Leader and earning leadership dollars on team members was that the representative had to be generating at least $500 in monthly sales. The next sales level was Manager—to become a Manager, a sales representative had to have built a team of at least 5 other representatives and be generating $1,250 in monthly sales on her own. (To qualify for Manager, those 5 representatives could be Level 1, 2, 3, or 4 team members.) A Manager also had to assume regular managerial and training responsibilities including: a weekly team email updating team members on new promotions and new products; providing “best practice” sales ideas; and a tally board, showing how team members were performing. As a Manager, a representative qualified for a higher percentage of leadership dollars. Finally, a representative could become a Director once she had a team of at least 10 representatives (again, these representatives could be any Level) and was generating $1,500 in monthly sales on her own. Directors had to host monthly meetings for their teams and attend, at their own expense, the DBK Director’s Meetings in New York four times a year. Despite the expense involved, DBK directors were generally very positive about the New York meeting. Comment cards filled-in at these events showed that attendees enjoyed meeting DBK representatives from all over the country; they found the jewelry shows that were part of the meetings exciting and fun; and they picked up new ideas and practices which enabled them to improve their productivity. (See Exhibit 1b for a detailed breakdown of leadership dollars by category.)
Because many representatives had no background in sales, training was an important part of the DBK sales process. Among Juanita Thomas’s reports were five full-time sales professionals, referred to as the DBK Designers, who created training materials including online videos, brochures, and periodic email blasts that were sent to all sales representatives and contained ideas for improving productivity. The team also created boilerplate materials for distribution to Directors and Managers, which they could in turn personalize and distribute to their team members. The DBK Designers traveled around the country hosting regional seminars and hosted the quarterly DBK training sessions in New York.
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However, the bulk of the training responsibilities rested with the Leaders, Managers, and Directors. While the company established minimum requirements for team communication, it encouraged frequent communication. From the sales data Creevey and her team had gathered, it was evident that as representatives were promoted up the sales ladder, they also generated higher sales volume. Also, the amount of communication between a Leader and her team members, as measured by email traffic and meetings, was positively correlated with the sales productivity of those team members.
DBK had generated $5 million in revenues in 2006—its first full year of operations—and was on- course to generate nearly $75 million in 2010. With the average price point remaining virtually constant over this period in the mid-$50s, this growth was entirely volume-driven. Volume growth was a function of growth in the number of sales representative and increasing productivity per sales representative.
The net number of sales representatives had been increasing at a CAGR of approximately 87% since 2006, helped by strong recruitment efforts, driven largely by existing sales representatives, and a relatively low attrition rate.2 Sales volume per sales representative had also increased at a robust rate. While there was a huge variation in the amount that individual sales representatives generated, on average, a first-year representative generated $648 in sales per month. With each year the representative worked for DBK, that yield increased by 20%. However, Creevey knew that this ability to increase sales 20% annually would not last forever. She believed that after a sales representative had been with the company five years (by then that representative would be generating just over $1,340 monthly on average), that growth rate would decline, and productivity gains thereafter would be broadly in line with industry growth (i.e., approximately 1% annually). Based on DBK’s limited experience and the experience of its peers, Creevey believed that the average tenure of a representative was approximately three years. (Exhibits 2a and 2b show key financial statistics.)
Industry Background: The Direct Sales Industry
In 2009, the direct sales industry in the United States generated $28.3 billion in sales, according to the Direct Selling Association.3 Direct Sales had remained relatively flat over the past nine years, growing at a 0.7% CAGR from 2001 to 2009 (see Exhibit 3a).
In the United States 16.1 million people were working as direct sales representatives in 2009; 82% were women, and 92.5% worked on a part-time basis (fewer than 30 hours per week).4 Direct sellers were usually contractors compensated solely via commissions. Commission rates varied but tended to range from 25% – 50% of sales.5 As of 2009, 74% of US adults had purchased products from a direct seller.6
The largest product group in direct sales was Home & Family Care/Home Durables, including cleaning products and kitchen products such as tableware, which together constituted 23.9% of all
2 The attrition rate among sales representatives had averaged approximately 20% per annum.
3 Direct Selling Association website, http://www.dsa.org/research/industry-statistics/#SALES, accessed December 2010.
4 Direct Selling Association website, http://www.dsa.org/research/industry-statistics/#SALES, accessed December 2010.
5 http://www.usatoday.com/money/industries/retail/2009-05-13-direct-sales-jobs-recession-unemployment_N.htm, accessed November 2010.
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direct sales. Wellness products (vitamins and weight loss supplements) composed 22.8% of direct sales, and Personal Care products, including cosmetics, skin care, and jewelry generated 21.3% of total sales. (See Exhibit 3b for more industry data.)
Some of the largest U.S.-based direct sales firms included Avon Products (cosmetics and skincare products, over 5.8 million distributors globally); Alticor Inc. (Amway Corp.; 3 million distributors globally), May Kay (cosmetics and skincare products; 2 million distributors globally), Herbalife (vitamins and weight loss products; 1.9 million distributors), Primerica Financial Services (financial products, 100,000 licensed distributors), Tupperware Brands (kitchen products, 2 million distributors), Forever Living Products (aloe vera-based products; 93 million distributors), and Nu Skin Enterprises (skincare products, more than 750,000 distributors).7
In setting up DBK, Creevey looked closely at Mary Kay and Avon as successful models she would try to emulate. Mary Kay had been founded in Texas in 1963, and its sales representatives, known as Independent Beauty Consultants, sold cosmetics and skincare products globally. By 2009, May Kay had a sales force of 2 million independent sales representatives; 2009 sales totaled $2.5 billion, and May Kay products were sold in 35 markets globally. The Mary Kay sales force was managed by 37,000 Independent Sales Directors, and the highest level a sales representative could attain was an Independent National Sales Director.8 The MaryKay starter kit costs only $100, although sales representatives had the opportunity to “invest in additional product inventory and business tools to help them maximize their selling opportunities.”9 Mary Kay sales representatives earned 50% on all sales. Since its inception, Mary Kay had garnered a lot of publicity for the sizable financial rewards that its top sellers earned (including the unmistakable pink Cadillacs awarded to top sellers). In 2009, the Mary Kay website noted that “nearly 300 Independent National Sales Directors in the United States have earned more than $1 million in lifetime commissions.”10
Avon began in 1886 as the California Perfume Company—a direct seller of perfume. By 2010, Avon skincare products and color cosmetics were being sold in 100 countries by over 6.2 million independent sales representatives. In 1955, Avon created the Avon Foundation, and since then the company had become known for its commitment to women’s causes, particularly breast cancer. Avon sales representatives earned a profit percentage on all sales. Avon also operated a Sales Leadership program which paid bonuses to sales representatives on the sales of individuals they recruited and trained. (These bonuses were limited to three levels, and compensation remained focused on the individual’s own sales.) Avon was constantly tweaking and updating its sales commission structure. As stated in its 2009 annual report, “As the largest and oldest beauty direct seller, Avon’s business model and strategies are often highly sought after, particularly by smaller local and more nimble competitors who seek to capitalize on our investment and experience. As a result, we are subject to significant competition for the recruitment of Representatives from other direct-selling or network marketing organizations. It is therefore continually necessary to innovate and enhance our direct-selling and service model as well as to recruit and retain new Representatives. If we are unable to do so our business will be adversely affected.”11 In 2009 Avon had revenues of $10.4 billion.
7 Brittany Glenn and Barbara Seale, “The $100 Million Club, Direct Selling News, 2010, http://www.directsellingnews.com/index.php/site/entries_archive_display/the_100_million_club, accessed December 2010.
8 Company website, http://www.marykay.com/content/company/images/cpk_thecompany.pdf, accessed March 2011.
9 Company website, http://www.marykay.com/content/company/images/cpk_theopportunity.pdf, accessed March 2011.
10 Company website, http://www.marykay.com/content/company/images/cpk_theopportunity.pdf, accessed March 2011.
11 Avon 2009 Annual Report, http://phx.corporate- ir.net/External.File?item=UGFyZW50SUQ9NzI2OTF8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1, accessed March 2011.
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