The current growth of Designs by Kate’s (DBK) business model is not sustainable for a future success of the company. In order to maintain, respectively improve its performance and thusly its position within the direct sales industry, it is essential that Kate Creevey realizes, how important the monetary reward for the sales representatives is. Therefore it is recommended that the compensation structure as a motivational tool should be changed in order to guarantee maximizing the key financial objectives, which can predominantly be defined as further volume growth.
Sales growth is driven by two factors: in the first place by the number of sales representatives and secondly, by their increased productivity, when they become team leaders. This means, it is vital for DBK to “invest” in the acquisition and the keeping of sales representatives. One can think of two variants on how to approach a modification of the compensation structure, motivating the sales staff to develop their own team structure. The management of DBK could think of adapting leadership dollars or leadership dollars and commission rates.
With the purpose of educating sales representatives of the advantages of a team build-up, Creevey should definitely invest the $1,000,000 into the four full-time trainers. Since the trainers will demonstrate to the prospective leaders, why it is good for them to move up the career ladder by acquiring new sales representatives, this will be a profitable step (for further explanation see Arguments). Moreover, it is vital for the company to understand, how relevant incentives are – beyond non-monetary benefits.
For the purpose of driving team building within the company, Creevey should consider team incentives as a possible appealing and attractive enticement that goes further than the pure cash payout. Furthermore, Kate Creevey should consider how her business is overall positioned in the direct sales industry. Tupperware, Mary Kay or other competitors can rather be found in the high-price segment. This implies that the value proposition is higher for their products. This mere fact does not result in the conclusion that DBK should necessarily reposition, but it is definitely an option, which could further boost sales.
Jewelry is highly suitable for selling in an upper price segment. Arguments Industry and Competitor Analysis Direct sales is a stable industry, with a steady, but low Compounded Annual Growth Rate (CAGR) of 0. 7%. Although, the volume of sales, decreased from 2005 to 2009 (which can partially be explained by the economic crisis, which started in 2007), it still is an attractive business sector for DBK, as it is positioned in the third strongest segment (Personal Care) with a niche product lineup, as no other noteworthy competitor is selling jewelry directly.
As mentioned above, DBK is positioned as a company, which sells inexpensive jewelry. This might be a factor, which differentiates it from the competitors. However, as may be extracted from the interviews with one of the sales representatives, the reason why the direct sales approach is so successful, can be accounted for the “parties” and the resonant atmosphere, and not primarily because the products are cheap. If DBK wants to improve their financials, it can be worthy to think of reposition its business to a more exclusive, not department store-like jewelry.
Appendix A shows that in comparison to its major competitors in the Personal Care segment (Avon and Mary Kay) DBK is behind in all areas (sales, market share, # of representatives and commission rates). This can be explicable by the fact, that the competitors are much longer in the business than DBK. However, this implies, that Kate Creevey needs to ensure that the company is further growing, to endure its continuance in the market. The SWOT-Analysis exhibits, that the occurring threats can all be shunned, when adapting the compensation structure as mentioned above (for a more detailed delineation see KPI-Analysis).
The opportunity of having a greater pool of prospective recruits to choose from is positive. As this implies, if DBK manages to successfully employ plenty new sales representatives, it will have a good basis of jobholders to further grow its business, due to the fact that DBK’s attrition rate is very low. DBK needs to reduce its weakness, that most of their sales representatives have no experience in sales by make use of trainers (see KPI-Analysis), in order to share in the high potential of direct sales customers. KPI-Analysis
Appendix B clearly shows, that from a sales representative’s point of view it does not pay to build a team. Assuming that a successful sales representative, who is in the company for about 2 years (meaning that his own sales are still on the rise of 20% annually and not declining, because he is shorter than 5 years in the company), acquires one sales representative in his circle of friends, it can be seen that already in their first month, let alone year together, it diminishes the sales of the leader. The more members he accepts in his team, the greater are his losses from his own revenue and hence, his profit.
This is amplified with the number of years the team works together (in Appendix B, there is the assumption made, that the prospective recruits will be three years in the company, as this is the average duration of employment of a sales representative). The pure adjustment of commission rates to solve this problem would mean that DBK must raise them up beyond 50% – which is the maximum in the industry standard – to avoid the aforementioned effect. Appendix C illustrates an alternative approach (as a possible example), which has been calculated by an iterative process.
Here, DBK could make an adaption of leadership dollars to 7% for leaders and an assimilation of commission rates to 30% to avoid the cannibalization of sales within a team. This would change the situation for the future leaders and make it attractive for them to recruit more people. It is constructed, that the more members the sales representative accepts, the better for him (0% for one level 1; 5% for two level 1; 10% for three level 1). However, it is presupposed that the team members are de facto sales representatives. The system is only working for the leader, when his team members are constantly increasing their sales, too.
Managers and directors are not negligible, however, they are required to build a team to gain that status, which means, that DBK’s focus should in the first instance be on the potential leaders, because they promise a fast solution, as Creevey demanded. The adaption of their leadership dollars should be ensued in the next step.
The hiring of the four full-time trainers can be substantiated by the fact that this investment can be balanced by recruiting 1. 060 sales representatives for the same time period of one year. Since one average sales representative’s value equals $2. 30 (see Figure 1. ) – including the costs directly associated with one sales representative (40% COGS and 30% SG&A). Those trainers need to make sure, that the sales representatives understand, how building up a team, can firstly boost their own sales, and secondly help the company to grow (which should be in their interest, too). Action steps A key action step should be the implementation of a firmer team structure by strengthening the cohesion within teams through adoption of team rewards into the incentives structure. Those team benefits can be of monetary or non-monetary nature.
For instance, following the example of Mary Kay, the most successful teams could be annually invited to a special event, created only for them, where they can win an award for the “best team of the year”. This can be conducive for employee motivation and further enhance the sales representatives’ loyalty for DBK. Creevey can follow the proposal of one of the representatives, to give “longevitiy bonuses” in the form of special jewelry pieces that they can sell only when they fulfill certain criteria, other incentives such as premium magazine subscriptions, etc. r cash payout.
As aforementioned, further steps include hiring full-time trainers, reconstruct compensation structure – monetary-based and non-monetary-based, team-based and individual benefits, see above –, analyze potential of repositioning towards an upper-middle to lower-high-prize segment and improve overall communication within DBK of the advantages of teams and the effects it has for each individual.