Does It Make Business Sense?- Femina

DIRECT marketing companies paint a rosy picture of business opportunities to homemakers looking to employ themselves. But before you leap headlong, take a look at the hidden costs.

Most direct marketing companies have a similar structure of operations. To start with, you have to register yourself as a distributor by paying a lump sum of around Rs 3,000. This becomes your investment. Once you register, you will be provided with a kit consisting of the products and some reading material on ‘marketing techniques’. This sum includes a non-refundable registration fee and the cost of stationery and other material. The balance will comprise the products you are required to sell. The cost at which you buy the products will be at a margin (usually 25 per cent), and you will have to sell them at the maximum retail price.

Now let’s assume you buy a start-up kit for Rs 3,000. Of this, Rs 1,000 will go towards registration charges and Rs 500 will cover the cost of stationery and other material. The balance Rs 1,500 comprises the goods you have to sell at a profit of say 25 per cent, that is, at Rs 1,875. So, you can potentially gain Rs 375 here (before considering expenses towards the sale). On the face of it, it seems an easy way to make a fast buck. But there’s more to this than meets the eye.

First, one needs to develop contacts, which calls for constant telephonic networking to set up appointments and follow up on customers’ orders with the company. One must be able to distinguish the cost of these calls as a business expense. Assume that goods worth Rs 1,500 are sold to five customers. You’d make calls to at least 10 people, of which five will make a purchase. Say, Rs 50 is spent on these calls, which is deducted from the gain of Rs 375.

Once you’ve received the orders, you need to execute them. This calls for filling up order forms and submitting them to the company (some companies charge fees for procuring brochures or order forms). This has to be followed up by a visit to the company’s office to collect the order and to the customers to make a delivery. This calls for heavy conveyance costs, which will vary, depending on the city you are in, and the mode of transport largely used. On an approximate basis, let’s assume conveyance costs amount to Rs 200. That leaves you with Rs 125, with a net margin of 8.33 per cent (Rs 125/Rs 1,500).

But remember that you must sell a lot more products to recover the Rs 1,500 paid towards registration and stationery. Assuming a net margin of 8.33 per cent, you will have to sell products costing a whopping Rs 18,000 to recover Rs 1,500.

Another area where people tend to be careless is when offering discounts, especially when selling to relatives or friends. Remember, even a meagre discount could make a big dent in your pocket. Instead of selling the products at Rs 1,875, if you sell them at Rs1,850, your net margin comes crashing down to 6.66 per cent.

Selling the product itself is often a problem as these products are usually much more expensive than similar others in the market. Further, the key in direct marketing is to establish a distribution network. The commission rate varies between three per cent and six per cent of the sales made and, hence, the larger the network, the more the commission earned.

This business then is not really a part-time activity. It is also very essential to maintain a check on cash flows, as also put in a lot of time and effort.

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