Tuesday, March 17, 2015

Understanding the Party Plan Business Model

We asked Dan Jensen and Andi Jensen Sherwood, premier compensation plan designers who designed Vessel's plan, to share a few thoughts about the various business models within the direct sales spectrum and why Vessel's plan is designed the way it is.  If you have worked with party plan companies before, this may be familiar information.  However, if you're new to direct sales or have only worked on the "internal consumption" end of the spectrum, this will help you understand the basic differences of the various models.

Direct selling companies come in many different flavors. Some invite recruits to purchase products for their own personal use and then share with family and friends ("Internal Consumption").  Others teach recruits to find customers to whom they sell their products for a retail profit ("Retail Bias" or "Retail Customer").  Internal Consumption plans tends to sell in a one-on-one manner, while the Retail Customer plans tend to sell via the party plan model.  Many companies have a mixture of these approaches.  Vessel is basically a party plan business model, and our compensation plan is best described as a Uni-Level Hybrid. 
It is important to understand that a company's approach to field compensation should align with their business model.  A traditional multi-level marketing company, or MLM (like Xango, Herbalife, NuSkin, etc.) compensation plan, for example, would not work with the Vessel business model.  They are incompatible, and such a combination would eventually lead to stagnant sales if not outright business failure. 
The following table illustrates some of the characteristics of the Internal Consumption and the Retail Customer models:
(MLM Model)
(Party Plan Model)
Inexpensive for new recruits
Higher sign-up cost protects retail profits; fewer customers sign up only to get a discount.
Stronger team overrides paid early
Strong incentives for higher sales volumes
High attrition is assumed
Low attrition is achievable
Earnings per hour depends on overrides from recruiting
Earnings per hour are felt immediatel through retail selling
Requires more recruits to achieve sales targets
Requires fewer but more productive recruits to achieve sales targets
Requires less training
Requires more training
People love the product naturally
People love the product naturally, but it might take a compelling demonstration
Eventually collapses if product demand is primarily opportunity driven
Product demand is less opportunity driven, and business grows organically
Business is focused on recruiting
Business is focused on selling, and then recruiting
In the Internal Consumption model, everybody buys at the wholesale price.  Rarely does a distributor sell the product at retail because the prospective customer is offered a compelling reason to "sign up" by purchasing an inexpensive "kit" so they can enjoy the distributor discount on their purchases.  So these companies tend to offer products that are consumed on a daily basis.  Even if the kit is expensive, it would often be loaded with high product value so that it compels them to join to get the product at deep discount through the kit.  When the customer signs up as a distributor in order to get the wholesale price, there is no retail profit margin to the seller/recruiter.  Instead, the company must have margins adequate to pay the recruiter a team-building commission sufficient enough to be worth their time.   We see, therefore, that the Internal Consumption model requires a higher payout in the compensation plan to compensate for the lack of retail profits.  To be competitive, companies typically must pay out at least 38% of the wholesale revenue, otherwise the company will have high attrition rates as distributors look for a better opportunity. 
In the Retail Customer business model with a stronger emphasis on selling to customers who pay the retail price, there is a retail profit margin to the seller.  Note that Vessel's standard Retail Commission of 30% would be equivalent to a 43% commission on the wholesale price of a $100 retail order ($100 Retail = $70 Stylist price; $30 of $70 = 42.86%).  In other words, an Internal Consumption business model would have to offer a 43% payout to be competitive with Vessel's model!  And that's not even taking the Vessel Team-Building Commissions into account. 
Because we do not want everyone to sign up simply to buy products at the wholesale price, our kit pricing becomes a "barrier to entry" - in other words, we want only people who want to build a Vessel business to sign up.  The kit price, and specifically the ratio of included product to kit price, is designed to discourage purchase by those who simply want the product.  We want people who only want to buy the product to buy at the retail price - to become our customers. 
There are many positive points in both business models, and as noted before, many companies employ a mix of characteristics.  The critical point is to understand the purpose and structure of each, and to understand the logic behind Vessel's unique and generous compensation plan. 

To Your Success!



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