The NPR reporter interviewed a highly successful Mary Kay rep (as evidenced by her 12th pink Cadillac SUV!), who touts direct sales as the way to wealth. The story's intro states: "For many women the opportunity to be their own boss in difficult times has a strong appeal."
Well, yes. That's undoubtedly why many are reading this. But is direct sales really a good business to enter in a bad economy?
Maybe not. It is certainly more complicated than the enthusiastic Mary Kay rep in the story explains, while at the same time, as simple as the theory of supply and demand.
If the "lipstick index," which says that cosmetic sales go up in a bad economy, is accurate (The Economist is doubtful of that.) and that sales increase extends to brands like Avon and Mary Kay, then that's a rising demand. The problem is supply rises as more people turn to direct sales as new careers or to supplement their income.
The NPR story states that in August Mary Kay reported a 40 percent increase in new sales recruits over on the same month in 2007. (It did not give corresponding product sales figures.) Bandying about numbers like a potential income of "close to $50,000" a year for a full-time new rep, the Mary Kay rep in the story bragged about recruiting 60 new beauty consultants in the last six months. That's an awful lot of competition for a new rep.
In direct sales (also called multilevel marketing or MLM), representatives earn money not only by selling a product but by recruiting new sales reps, which are called their downline, and collecting a commission on downline sales. So the more people a rep recruits into the company, the more money she will make. However, all that recruiting can mean an overabundance of supply in an area with only so many customers. And because direct sales is a face-to-face business, that means a rep's downline tends to be in one geographic region, all competing against each other for new sales leads.
The direct sales reps with the most potential to rake in large incomes in a recession are the ones who were in the business before the economic crisis hit, not the new recruits.
And does that $50,000 figure mean that if you only have 20 hours a week to put in your business, you'll make $25,000 a year? Probably not. Sales isn't like that. It takes a certain critical mass of time and effort to achieve sales goals. Also direct sales is not without start-up costs, there are fees and inventory expenses for sales reps.
Mary Kay and Avon are some of the most reputable direct sales companies, and they have quality products that sell even in a bad economy. But many other direct sales organization sell items that are less popular in tough times. People are less likely to spend on fancy kitchen gadgets and jewelry when they could lose their job at any moment.
Now, the direct sales companies with less potential in a bad economy probably have fewer people signing on as new reps and therefore less competition for sales leads than more popular ones like Mary Kay. And that's one of those neat little balancing tricks that markets do.
But as we've all been reminded in the last few months, the market does not always balance itself in a way that helps the rest of us balance our checkbooks.