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2.

Introduction

This chapter presents an overview of the direct sales industry. The significance of this chapter is to provide the thesis with a concrete context for testing the applicability of the Expectancy Disconfirmation Paradigm and consecutively to develop a model of customer satisfaction within the direct sales industry. The discussion takes the following sequence: rationale of single-industry study; definitions and descriptions of direct selling; examining direct selling from three perspectives; the industrys outlook from a global perspective, with special reference to the Malaysian direct sales industry.

Direct selling is a vibrant and dynamic alternative method of distributing consumer products and services, which is progressively becoming prevalent (Laggos 1998). The direct selling industry has been keeping a low profile and at times is referred to as a hidden industry because it seldom advertises its products or services to the public (Crossens 1999). Instead, direct sellers are used to present live commercials specially tailored to their potential customers (Berry 1998). Interestingly, despite its low profile, over the past few years throughout the world, it has become one of the popular alternative shopping channels to the conventional retailing system. Direct selling is a people business (Berry 1998, p. xiv) with focal emphasis on the high touch approach, which is undoubtedly its strength (Bartlett 1994). As the conventional retail industry has grown in size over the past two decades, it has become unable to maintain close contact with its end consumers and to respond quickly to any changes in their demands and requirements. This constraint experienced by the retailers has been readily exploited by direct selling companies (Bartlett 1994). Despite its long history and its socio-economic contribution (Berry 1998; Crossens 1999; Endut 1999; Rehanstat 1999), direct selling is still under-recognised as a strong and significant retail sector. In most countries in the world, the direct selling industry is growing at a more rapid rate than conventional shop-based retailing (Berry 1998; World Federation of Direct Selling Associations).

Generally, consumers benefit from direct selling because of the convenience and service it provides, including personal demonstration and explanation of products, home delivery and generous satisfaction guarantees. Interestingly, it also provides an opportunity to 26

individuals who desire to earn an income and build a business of their own. Direct selling also offers an alternative avenue to traditional employment for those who desire a flexible income to supplement their household income or whose responsibilities do not permit full time employment.

2.2

Rationale of Single-Industry Study

The single-industry approach was used for the current study because it was widely acknowledged that it could provide some degree of control over the environmental characteristics of the industry, which might be distinctively dissimilar from others. Although this approach could enhance the studys internal validity, it will limit the extent to which the findings can be generalised to other contexts (Chien 1996; Crosby et al. 1987, 1990; Patterson et al. 1997). Furthermore, by narrowing the focus on the specific industry, the researcher is able to frame questions that are pertinent to the industry and would have a common meaning to the respondents, and could thus generate high validity and reliability measures (Armstrong and Tan 2000; Chien 1996). In addition, by restricting the context of the study to one industry, the study could address some unique aspects of the industry which are probably worthy of investigation, but which might have been overlooked by previous research. For example, the direct sales industry has been characterised as a high touch industry (Ingram 1992), but it was observed that no prior research has attempt to examine this relationship-heavy industry with regard to relationship selling, let alone the consumption system approach from the consumers perspective.

2.3

What is Direct Selling?

Despite being the oldest method of retailing known to humankind (Barnowe and McNabb 1992), the direct selling concept appears to cause some confusion (Peterson and Wotruba 1996); this is partly due to the fact that it falls within the wider concept of direct marketing, which in turns classified under the broader label of non-store retailing. Furthermore, it was noted by Bauer and Miglautsch (1992) that regardless of its pervasiveness and the fact that it is a topic that has widely touched consumers globally, it is often misunderstood. Often, direct mail companies are mistakenly assumed to be engaged in direct selling activities, as are companies that send their sales representatives to knock on doors to sell a variety of 27

consumer products or services. Even worse, direct selling is often inappropriately associated with deceptive practises such as the pyramid, quick-rich scheme and chain letters (Bonoma 1991). As pointed out by Peterson and Wotruba (1996), these misconceptions and misunderstandings could have an unfavourable impact on the development of knowledge about direct selling.

A direct selling company is a company that is incorporated under the Malaysian Direct Sales Act 1993 and holds Direct Sales Licence. These companies are legally permitted to organise and conduct the direct sales business. This is therefore a clearly defined sector, and one which excludes occasional door-to-door sales representatives who call to sell oneoff purchases of products or insurance schemes. Indeed, cold canvassing has become an unacceptable form of business activity and is decreasingly employed by reputable direct sales firms to sell their products or services to the public (Euromonitor 1986)

There are several views and perspectives used to define and describe what direct selling is. It is important to note that the current study embraces the holistic perspective in which direct selling is regarded as a consumption system that involves interaction of three subsystems; the product, the direct seller and the direct sales company. However, in previous literature, most authors have considered direct selling as a vehicle for marketing products and services to the ultimate consumer (e.g. Brodie et al. 2002; Peterson and Wotruba 1996) and some add a strategic flavour by referring to direct selling as a channel of distribution (Berry 1998; Laggos 1998; Rosenbloom 1995).

Berry (1998, p. xxi) views direct selling as a channel of distribution, which involves: The obtaining of orders and the supply of consumer goods to private individuals away from normal retail premises, usually in their homes or places of work, in transactions initiated and concluded by a salesperson. Direct Selling is acknowledged by the Direct Selling Association (DSA) as: The sale of a consumer product or service, person-to-person, away from a fixed retail location. Products are sold primarily through in-home product demonstrations, parties and one-on-one selling.

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The Federation of European Direct Selling Associations (FEDSA) describes it as: The marketing of consumer products and services directly to consumers in a face-toface manner, generally in their homes or homes of others, at their workplace and other places away from permanent retail locations.

As described by the definitions, in direct selling, products and services are primarily marketed to the customers by salespeople, and it typically occurs through explanation or sales demonstration by the salesperson, who is generally known as a direct seller. Depending on the company, the direct salespeople may be called distributors, representatives, consultants or various other titles. In this study, the generic term direct seller is utilised to refer to salespersons from the direct sales industry.

The main difference between direct selling and direct marketing is that the latter relies solely on the print or electronic media to disseminate product information, whereas direct selling relies prominently on the presence of their direct sellers to communicate, promote and sell products. Direct sellers may also use catalogues and other selling aids, but the physical involvement and personal consultation create a powerful marketing strategy (Berry 1998).

As described earlier when discussing what direct selling is, it is important to acknowledge what it is not. Direct selling is not selling by Internet, by telephone or mail order. The latter are forms of distance selling. In addition, direct selling is not pyramid selling. A pyramid scheme is any plan or operation by which a participant pays or promises to pay for the opportunity to receive compensation, primarily derived from the person's introduction of other persons into a plan or operation, rather than the sale of goods and services by the participant or other persons introduced into the plan or operation. They are mechanisms by which promoters of so-called 'investment' or 'trading' schemes enrich themselves in geometric progression through the payment made by recruits to such schemes (FEDSA 2003). Figure 2.1 visually illustrates the distinction between direct selling and other forms of non-store retailing.

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Figure 2.1 Direct selling is a Form of Non-Store Retailing

Non-Store Retailing

Direct Selling

Direct Marketing Direct Services

Distance Selling Distance Selling

Internet Selling

Person to Person

Mail Order

Telemarketing Telephone Selling

Party Selling

Direct Mail Television Marketing

Home Delivery Selling

Selling by catalogues Specialised mail order Selling by video text

Order Collectors

Selling by ads in printed media

Teleshopping

Others Collector

Others

Others

Source: Federation of European Direct Sellling Associations (FEDSA)

2.4

Examining Direct Selling: Views from Three Perspectives

Peterson and Wotruba (1996) suggest that in order to accomplish a full understanding of direct selling, it should be separated into three perspectives: operational, tactical and strategic. Consistent with their suggestion, the following section will discuss direct selling based on these three perspectives.

2.4.1

Operational Perspective

Drawing from the definitions of direct selling as described previously, it is exclusively concerned with the personal selling of consumer product to the public. It is a form of nonstore retailing that takes place outside the traditional retail establishment (WFDSA). Hence, 30

direct selling companies such as Avon, Amway and Tupperware have no retail stores from which customers can purchase their products. As such, from the operational perspective, direct selling is viewed as a process which involves a mutually beneficial transaction between seller and prospective buyer. As noted previously, it is the personal interaction aspect which distinguishes direct selling from direct marketing,

For years, many consumers all over the world have appreciated direct selling as a convenient way to shop (Peterson et al. 1989; Raymond and Tanner 1994). In contrast to other modes of direct marketing such as telemarketing and direct mail, direct sales representatives take their products directly to consumers' homes or workplaces where they give demonstrations and answer questions for individual consumers or groups of prospective customers (Frenzen and Davis 1990). Clearly, direct selling offers customers the opportunity to see, test and judge a product at their leisure in their own homes or among friends. More importantly, direct selling typically occurs through in-depth explanation and the sales demonstration can be individually customised, so that potential customers are thoroughly educated about the product. Direct selling is especially useful for consumers in rural areas and small towns, making goods and services available through sales representatives in the area. Furthermore, products could be delivered directly to the customer's home. As such, the hallmark of direct selling is customer satisfaction with personal attention and service.

Therefore, from the above descriptions, it could be summarised that from the operational perspective, inevitably direct selling could induce the development of a relationship between the seller and buyer. As previously stated, it is surprising to discover that no prior research has examined the selling relationship between direct seller and buyer in the direct sales context. In this regard, the current study attempts to explore this motivating research avenue by incorporating this phenomenon in the conceptual framework of the thesis. As observed by Peterson and Wotruba (1996), maintaining relationship is no trivial matter under the direct selling or other business setting, because it might be an important determinant of repeat business. Consequently, this issue leads us to discuss the tactics used in direct selling.

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2.4.2

Tactical Perspective

There are several different tactics that are generally utilised by direct selling companies. These tactics could be achieved by organising the company on various characteristics, such as:

2.4.2.1

Type of Direct Seller

It was reported by DSA of various countries that a vast majority of direct sellers act as free agents and therefore are independent and self-employed, rather than being employees of the direct sales firm (Brodie et al. 2002a). The independent direct sellers earn percentagecommissions or margins and pay their own expenses and taxes (Wotruba 1990b). Earnings of direct sellers depend on the volume of their sales, not on their working hours. For direct sales companies that utilise independent direct sellers, no fixed cost and salary related compensation is incurred (Peterson and Wotruba 1996). Perhaps independent direct sellers are more motivated and committed because they are operating their own business, sometime conceptualised as a form of mini-franchising or popular franchising (Brodie et al. 2002a). Literally, they are compensated directly based on the efforts they put into the business; this means that the more retail sales they personally make or their Personal Sales Organisation1 (PSO) generates, the higher the retail profit plus bonuses and other incentives they are awarded (Laggos 1998).

2.4.2.2

Part Time or Full Time Direct Seller

The most prominent trend in the direct sales organisation is that majority of the direct sellers are part-timers. Part-timers are characterised as working less than 30 hours a week in the direct selling activities. For instance, the DSA, UK (2000) reports that only about 3% of the direct sellers are considered full-time (i.e. work more than 30 hours per week in direct selling activities). Similarly, a large percentage (about nine out of 10) of direct sellers in the USA work part-time in direct selling (DSA, USA 2000). 80% of direct sellers in the European Union prefer to work part-time and only 20% operate their direct selling business on the full time basis (FEDSA). It was reported by a previous study (FEDSA) that
1

The personal network (team) of other direct sellers recruited and trained (down lines) by the direct seller. The direct seller is eligible to receive commissions and bonuses from purchases and/ or sales made by their team. Each direct sales company has its own compensation plans.

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Germany accounts for over one third of the direct selling revenues in the EU, and it was speculated that this was due to its higher proportion of full-time direct sellers compared to other countries in EU (Berry 1998).

2.4.2.3

Location of Sales

This refers to where the direct selling process takes place. As previously stated, direct selling primarily involves face-to-face selling (e.g. in the potential customers home, workplace, or other locations) between the seller and potential buyer. However, new trends have recently emerged; for example, it was reported that the transactions might also occur by remote selling (e.g. phone and internet). For instance, the DSA, USA (2002) revealed that approximately 24 per-cent of sales occur by remote selling. Although direct selling organisations or direct sellers occasionally use certain forms of direct marketing or distance selling techniques and employ information technology to enhance their businesses, the face-to-face or personal presentation remains the core aspect of direct selling.

2.4.2.4

Format of Direct Selling Companies

Typically, direct selling companies operate on two plans: i. Person-to-person: It can operate on a one-to-one basis; an explanation and

demonstration of products is given by a direct seller to a customer and the cust omers family, usually by prior arrangement (Barnowe and McNabb 1992; Ingram 1992). ii. Party-plan: The selling is organised through explanation and demonstration of

products to a group of prospective customers by a salesperson, usually in the home of a hostess who invites other friends and relatives for this purpose. A recent trend is for sales presentations to be held in offices. The hostess receives merchandise/products as compensation for the use of her home and her help in getting her friends together. The strength of home parties is that they will ultimately involve a mix of social and commercial activity (Frenzen and Davis 1990). It is worthwhile to highlight here that as more women are out working and fewer are at home to answer the doorbell, the so-called cold canvass of neighbours has run into hard 33

times. For example, from the latest report on labour force participation rate in Malaysia, it was revealed that nearly 45% of women are in the workforce (Department of Statistics of Malaysia 2000). Direct sellers quickly responded to this trend by changing their marketing strategies by approaching consumers, particularly women, at their places of work. Indeed, prior research has provided evidence that women were significantly more in favour of this marketing system than men (Barnowe and McNabb 1992; Endut 1999). Obviously, it has become a prevailing phenomenon that product demonstrations are held during lunch hours, particularly in Malaysia, during the Friday lunch break, which is longer than usual (12pm to 2.30 pm). This emerging sector was also recognised by Berry (1998) in the UK market, and he further points out that it is largely welcomed by employers, particularly in the situation where their offices are located away from shopping centres and a time sho rt society which has reduced time to shop is recognised, specifically experienced by their female employees. It was acknowledged by Frenzen and Davis (1990) that the main attraction of party-plan selling is that the selling process could be infused with a social and entertainment atmosphere, and importantly the likelihood of purchase is considerably higher as a result. Perhaps this could be influenced by the strength the social relationship between the guests and the host or hostess. In retrospect, Tupperware has been pioneering this selling approach in Malaysia since the late 60s and early 70s (Mohd 2000). Interestingly, it is worthwhile to note that it was recently reported that this trend is making a comeback; in the USA, it was estimated by the Direct Selling Association that almost twelve million Americans participate in home parties each year (http://web.lexis-nexis.com/executive/) and this time around Americans have moved way beyond Tupperware, and the types of products available are of a better selection than is found in the conventional retail environment (Puente 2003). Further, the author observed that it appears that millions of Americans loathe shopping in retail stores, so much so that many are choosing to do their shopping in private homes and offices - anywhere but at the mall. To further express this burgeoning trend, Puente (2003) writes: Shopping at home on a computer? Convenient but lonely, and there's no merchandise to handle. Shopping at the mall? Lots of choices but also nightmarish crowds and parking. Shopping at a friend's home while sipping wine, examining the merchandise and gabbing with pals? Now there's a concept 34

The concept of mixing business with pleasure has been long recognised and practiced by the direct sales companies. However, despite the renewed trend as illustrated above, individual (person to person) selling still remains the dominant technique used to generate sales (DSA 2003).

2.4.2.5

Compensation Structure

Fundamentally, a direct selling organisation can be classified by its compensation structure (Laggos 1998; Peterson and Wotruba 1996). These structures are as follows: i. Single level organisation

In this compensation structure, the direct sellers main function is selling the products or services of the direct selling companies they represent, and they are not involved in building their own network of direct sellers (down lines). In this regard, the support functions such as recruiting and training and account administration are the responsibility of the direct sales companies (Berry 1998; Brodie et al. 2002b). The direct sellers in this type of compensation structure are rewarded by receiving retail profit on their personal sales (Brodie et al. 2002b; Laggos 1998). Examples of well-known single level companies are Avon and Tupperware.

ii.

Multi-level organisation

The term "multi-level marketing" is a term relating to a tiered sales structure that has proven successful both in Malaysia and elsewhere in the world. In principle, the method is also referred as network marketing. In the 1980s, this term was used by the direct sales companies as an effort to seek distinction from the fraudulent pyramid schemes. Moreover, it is a better description to portray a mechanism of building personal business contacts, and further this term is closely associated with the computer terminology (Berry 1998).

In this form of compensation structure, goods and services are supplied to consumers for final consumption through sales made by a network of independent direct sellers (Coughlan and Grayson 1998). True multi-level direct selling firms compensate their direct sellers for retailing products to consumers, and for recruiting and training their network, which is

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made up of other direct sellers that have been enrolled into the business (down lines2) to perform sales (Msweli-Mbanga 2001). This has an equivalent in many sales organizations through roles such as Sales Managers, who receive rewards for the efforts of their sales teams. This clearly implies that if there is no sale of a product or service made, then there is no financial compensation, unlike the Pyramid schemes, which are disguised as multi-level marketing companies but in which the selling of products or services is considered unimportant because compensation is mainly awarded on the basis of recruiting new participants into the schemes. Network marketing allows the direct seller to manage and service a large network of distributors (down lines) and some ambitious direct sellers may even build their business networks across states and countries (Croft and Woodruffe 1996). However, those interested in participating in this plan must first be sponsored by an existing distributor of the company (Berry 1998). Consequently, with the help of this distributor (up line3), he/she then builds a monthly sales volume to qualify for higher monetary incentives and to achieve a higher level of recognition (Laggos 1998). Direct sellers are compensated by receiving retail profit on their personal sales volume, and in most cases they earn commissions and bonuses on purchases and/or sales made by other direct sellers (down lines) in their Personal Sales Organisations (PSO). For example, Figure 2.2, under the multi-level marketing organisation, hypothetically illustrates that Nadine has a PSO which is comprised of other direct sellers, in this case, Ali, Zamani, Ben, Sim, Pam, Nad, Sim, Sam and Liam and they are also known as Nadines down lines. Interestingly, Brodie et al. (2002b) provide empirical evidence that single level direct sellers placed significantly greater emphasis on proving themselves to others and felt that their job expectations were distinctively not met, as compared to the direct sellers from the multi-level firms. However, job satisfaction and the image of direct selling were not significantly different between these two types of direct seller. Most importantly, they demonstrate that there were substantial differences between these two plans with regard to organisational commitment; multi-level direct sellers showed significantly greater commitment than the single level direct sellers. Some examples of multi-level companies

Is a term used to individuals recruited by specific direct sellers. The recruiter (up line) assumes the role of mentor and leader of that particular group. Up line is the term used to refer to individual (s) that are in higher positions in the particular network (group). The direct seller who recruits the new member is the up line to the new member.

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are Amway, CNI, Mary Kay, Kleeneze, Cosway and Zhulian. Figure 2.2 depicts the differences between single level and multi-level marketing organisations. Figure 2.2 Compensation Structure of Direct Selling Organisation

Direct Selling Industry

Single level Marketing

Organisation

Multi-level Marketing Organisation

Nadine Nasirah Nadrah Nadhirah

c c

c c

Ali (DS)

Zamani (DS)

c c

c c

Ben (DS)

Sim (DS)

Key c DS
Customer

Pam (DS)

Sam (DS)

Direct Seller

Nad (DS)

Liam (DS)

Source:

Adapted from Msweli-Mbanga (2001)

2.4.3

Strategic Perspective

From a strategic perspective, direct selling is viewed as a channel of distribution, a range of methods of penetrating the market and generally as a way of operating a business.

2.4.3.1

Direct Selling as a Distribution Channel

As described by Berry (1998), direct selling can be viewed as a channel of distribution of products or services, in this regard to the ultimate consumer market. Direct selling is 37

considered the oldest distribution channel in history. It began with farmers, craftsman and traders walking around towns and villages soliciting and selling their products at customers homes. Rural areas and small towns obtained their basic goods only through these travelling sales representatives. Generally, business organisations are dependent upon the effectiveness of distribution channel as a competitive advantage (Rosenberg and Stern 1971). Importantly, in the selection of the distribution channel, the motivation of the participants (intermediaries) is considered to be the crucial factor as it could contribute significantly to the company success (Shipley 1984). As noted by Anderson and Warshaw (1995), over the last five decades, an alternative distribution channel, (i.e. direct selling) has make it presence felt and in fact is becoming a growing trend globally in term of sales and number of direct sellers (see Figure 2.3 and 2.4). In Malaysia, direct selling or direct retailing is a diversified business with sizeable product categories. It is increasingly becoming a significant distribution channel within the country's total retail system. It offers a high growth alternative to the conventional in-store retail system, which is still lagging behind in accommodating the changing and increasingly busy lifestyle of Malaysian consumers (Direct Selling Association of Malaysia 2003). In the direct selling distribution system, the direct seller (distributor) performs multiple roles such as wholesaler, retailer and promoter by purchasing products in bulk from the direct sales company and distributing them to her/his distributors who in turn sell them to the consumers. All income earned by a direct seller is based upon the volume of sales and no other considerations. There is one standard distributor price for products to distributors and one standard retail price for products to customers. In this regard, rather than the organisation being involved in promoting, selling and distributing the products, in the direct sales business the direct seller assumes the same function as the retailer.

2.4.3.2

Direct Selling as a Market Penetration Strategy

Direct selling is characterised according to sales initiation, which implies that the direct seller initiates the sales transaction and must drive the purchase decision. In contrast, in instore retailing, the consumers themselves initiate the transaction and usually make their 38

own decisions (Sudbery 1990). This distinguishing characteristic of direct selling exemplifies the fact that direct sellers adopt the push marketing strategy, which entails them to prospect and contact their potential customers, instead of waiting for the customer to come to a store or some permanent place of business as typically practised in conventional in-store retailing (Bartlett 1994; Direct Selling Association of Malaysia 2003). Furthermore, direct sales organisations generally adopt differentiation strategies, which necessitate the company to formulate a perceived uniqueness in an attempt to distance themselves from their competitors, specifically the in-store retailers (Ingram 1992). This indicates that the direct sellers must be able to sell non-price benefits and be extremely responsive to the customers needs. Characteristically, direct sales organisations rely strongly on personal selling, which uses a more proactive approach and thus enables the direct salesperson to customise their presentation to suit their potential clients instead of employing impersonal mass promotional efforts such as advertising (Peterson and Wotruba 1996). In todays knowledge-explosion era, those who possess the most valuable information will prevail (Ingram 1992). In the direct sales environment, a direct seller could successfully respond to this emerging trend by adding utility to the products or services they sell through disseminating and educating customers with pertinent information. This strategy has proven very effective for products and services that critically require detailed explanation and demonstration (e.g. skincare and cosmetics, nutritional and dietary supplement, water treatment units and even computer and information technology gadgets). Direct selling as a channel strategy in gaining access to the international markets cannot be disparaged. Accordingly, Yarnell (1994) convincingly asserts that, No industry (Network Marketing) is better suited for global expansion. Much has been written about the difficulty of gaining access to the Japanese market (e.g. Artz 1989; Berry 1998; Lazer et al. 1985; Kaikati 1993), and the problems were mainly attributed to the extremely convoluted multi-tiered and over-regulated distribution system, coupled with tremendously expensive retail establishment property. However, in spite of these unfavourable conditions, Amway, one of the worlds largest direct selling companies, has successfully overcome these obstacles with a very impressive level of penetration in the Japanese market, and is ranked 39

as the 10th largest foreign firm in Japan, among IBM, Coca-Cola and ESSO (Croft and Woodruffe 1996). Similarly, Avon, the worlds leading direct seller of beauty-related products, has successfully operates its business across 143 countries and garnered a remarkable US$6.2 billion in annual revenues. In 2003, Avon products, Inc of the US was once again named in Fortune magazine in its list of Americas Most Admired Companies (Ahmad 2003).

2.4.3.3

Direct Selling as a Way of Doing Business

Direct selling has been acknowledged as a preferred channel by many entrepreneurs, even large companies, because of its favourable characteristic of being invisible (Peterson and Wotruba 1996). The reason for this is that it is physically inconspicuous, with no products being displayed in stores or advertised aggressively; hence competitors may find it is difficult to crack its business strategies. Furthermore, direct selling is a popular mode of distribution channel for relatively undercapitalised firms and entrepreneurs who cannot afford to compete with the established market leader with enormous advertising and promotional budget to secure space in retail shelves (WFDSA 2003). The reasons are that the direct sales business requires only a small start-up capital and relatively low advertising expenditures, as opposed to distributing products through the in-store retailing system. In the direct sales industry, it is possible to launch a company with minimal inventory and a relatively small number of distributors and customers. Instead, resources that might be spent on advertising and other fixed cost could be used effectively for recruiting, training and compensating direct sellers and to develop new products or improve existing products quality and offerings by focusing on research and development (Peterson and Wotruba 1996).

In addition, direct selling provides a channel of distribution for entrepreneurs, scientists or inventors with innovative or distinctive products which are not readily available in traditional retail stores, or who cannot afford to go nationally via traditional means of retail distribution. For these reasons it was observed that quite a number of highly innovative and high quality products have been marketed successfully by direct selling companies, which are generally known as outlets of products with these characteristics (Berry 1998; Chen et al. 1998a; Endut 1999; Laggos 1998; Rehanstat 1999). Undoubtedly, direct selling 40

enhances the retail distribution infrastructure of the economy and serves consumers with a convenient source of quality products. For example, Amway has set the trend in the marketing of bio-degradable ingredients and phosphate free washing detergent (Pardue and Wolfson 1994) and in Malaysia, Luxor was the first company to produce and commercialise sea cucumber based products nationally, and successfully marketed them to neighbouring countries via direct sales channels.

2.5

Products Sold Through Direct Selling

Virtually every product category of consumer goods sold in a typical supermarket or department store is now available from direct selling companies, with the exception of fresh food, furniture and large electrical appliances. It was reported that the two most popular product categories purchased by the direct sales customers in Malaysia are beauty care products (e.g. skincare, cosmetics) and healthcare products (e.g. vitamins, nutritional supplements, diet plans) (Rehanstat 1999).

It is generally believed that for products to be successfully marketed through direct selling, it should be economically practical for the direct seller to gain a competitive edge over the conventional retail competition (Berry 1998; Laggos 1998; Peterson and Wotruba 1996). Drawing from over twenty-five years of observing and investigating direct sales organisations in Europe and North America, Berry (1998) proffers the opinion that a product can be successfully distributed through the direct sales channel if it meets at least one of these criteria; that it be novel, have mass appeal and be easily demonstrable.

On the other hand, Laggos (1998) postulates that direct sales companies in the US employed three basic criteria for selecting product which could evidently maximise the chances of business success; these are that the product is unique, is of higher quality than similar or competitive products that are available through other purchasing channels and is innovative. He further suggests that a companys product must generally have at least one of the above characteristics in order to be distributed successfully through the direct sales channel. For example, Laggos (1998) observed that nutritional and herbal products perform well when marketed through direct sales companies, these products are considered as innovative products in the US market. Similarly, since the emerging interest in natural 41

and alternative healthcare products in Malaysia, it appears that there have been an increasing number of healthy lifestyle products (e.g. food supplements, herbal products) being distributed via this channel (Rehanstat 1999). Generally, products marketed by direct sales companies are backed up by a guarantee and after sales service; these provisions sometimes exceed the legal requirements and often extend to a product's lifetime or a 100 per-cent guarantee. For example, Zhulian, an established producer of gold plated jewellery in Malaysia, provides a lifetime warranty for its jewellery; customers can have jewellery re-plated once a year free of charge. Laggos (1998, p. 145) asserts that Since product provides a most important platform for a companys success, product evaluation by companies and representatives is critical to their success. However, it was suggested by the researcher that the assessment of the products from the customers perspectives is crucial too. Therefore, in the current study, evaluations by the customers concerning the product characteristics and performance are incorporated in the study. Suffice to say that only a product which has its own intrinsic value and can be easily explained and demonstrated to the consumers will prevail.

2.6

Customer Service and Follow-Up

Prior research provides evidence that one of the most critical factors in any business is customer service and follow-up (Ingram 1992; Laggos 1998; Raymond and Tanner 1994). Unique to the direct sales industry, both the direct sales companies and independent distributors share the responsibility for customer service and follow-up. When a direct seller recruits a new member into their PSO, this new distributor is automatically enrolled into the company, hence both the company and the direct seller share the responsibility for providing adequate training, resources and other support for his/her success (Laggos 1998). Beside the above roles, direct sellers are personally responsible for providing customer service and follow-up to their potential and existing customers. Whereas as suppliers of product, the direct sales companies are also responsible to these customers by providing customer service at the corporate level, such as product guarantees, product returns and adjustment, and handling enquiries and complaints (Bartlett 1994; Ingram 1992).

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In essence, a sales axiom that applies to every industry also applies to the Direct Sales Industry: A good product provides a foundation for a company, but it is excellent customer service and follow-up that ensures the success of the business (Laggos 1998). Hence, by increasing commitment toward providing excellent customer care, better growth in this industry could be promoted, which consecutively reflects a positive image. Indeed, realising the importance of portraying a positive image, the direct selling industry has continued to strengthen its image and reputation by promoting a better understanding of direct selling in an open and honest manner by the support of the national Direct Selling Association and relevant local government.

2.7

The Worldwide Direct Sales Outlook

Across the world, from the United States to Japan, the two largest direct selling markets, direct selling is now firmly established as a recognised channel of retail distribution with companies operating in over 50 international markets (http://wfdsa.org). Direct selling is a growing industry, which now exceeds $85 billion a year and provides earning opportunities to over 47 million direct sellers (see Table 2.1). Japan, the United States and Europe are the three largest markets and women (80%) are clearly the driving force of the industry (FEDSA 2003). Figures 2.3 and 2.4 illustrate the estimated worldwide direct selling retail sales and estimated global sales force respectively and Table 2.1 presents total sales generated by each country which is a member of the World Federation of Direct Selling Associations (http://www.wfdsa.org).

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Figure 2.3 Global Retail Sales

Source:

1997 -2002 World Federation of Direct Selling Associations

Figure 2.4

Global Sales Force

Source:

1997 -2002 World Federation of Direct Selling Associations

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Table 2.1 International Statistics

Source:

World Federation of Direct Selling Associations (2003)

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According to Price Waterhouse Coopers survey of the socio-economic impact of the direct selling industry in the European Union (19992000), the industry was acknowledged to be ahead of its time in anticipating consumers' desire for non-store retail. This non-store retailing sector has been defined as well established, organised and well regulated. Additionally, the survey found that this industry provides convenience, quality, value for money and service to many Europeans. It was estimated that this singular non-retail sector provides work both directly and indirectly to approximately 3.8 million full time equivalent people and generates annual revenues of over 40 billion. In the UK, the direct selling sector is recognised to be the largest provider of part time, independent earning opportunities (DSA, UK 2002). It was reported to account for sales in excess of 1.6 billion in 2000. In 2000, the total volume of Direct Sales in the UK showed an increase of 10.1% over the previous year and a decade of sustained growth. The direct sales of consumer goods accounted for 17% of the 10 billion home shopping market in the UK. Figure 2.5 below illustrates the annual direct sales sector revenue of United Kingdom Figure 2.5 Direct Selling in the United Kingdom

Source:

Direct Selling Association of United Kingdom (2000)

There are Direct Selling Associations in most countries in the world. For example, Malaysia has its own national association known as the Direct Selling Association of Malaysia (DSAM). DSAM has 75 members, comprised of both local and multinational 46

direct selling companies. Worldwide, the majority of countries now have Direct Selling Association (DSA), which are all affiliated to the World Federation of Direct Selling Associations.

2.8

An Overview of the Direct Selling Industry in Malaysia

The direct selling industry as a whole is well regulated, efficient and closely in touch with consumers lifestyles and trends. Recognising the potential of the direct sales industry, which has contributed positively to the nations economy, the Ministry of Domestic Trade and Consumer Affairs aggressively supports the growth of this industry (DSAM 2003). The Ministry of Domestic Trade and Consumer Affairs is empowered to license direct selling companies, while the Health Ministry holds the responsibility to approve medical drugs and cosmetics products. Nevertheless, in some circles direct selling has a mixed reputation, arising particularly from the unscrupulous sales practices by some irresponsible companies. In this regard, the stringent actions implemented by the government were to ensure that the direct sales industry continues to flourish and ultimately make a positive contribution to national growth.

The Direct Selling Act, 1993, came into force in June 1993 with the objectives of protecting the rights and interests of consumers, encouraging and promoting the growth of ethical direct selling activities, preventing fraudulent practices and promoting fair competition in the market place. In 2001, the ministry froze the issuance of new multi-level marketing plan licence in order to review the activity and performance of the licence holders. The move was also to investigate the status of existing direct sales firms that were suspected of breaching the Direct Selling Act 1993. This cleansing act of eliminating the bad companies is clearly reflected by a drastic decrease in the total retail revenue of the industry to MYR 3 Billion in year 2001 (see Figure 2.6). Table 2.2 depicts the number of valid direct selling licences from 1994-2003, which shows that in 2001, the number of licences was significantly reduced as compared to 2000. The 2002 sales turnover has recorded a 30 per-cent growth (DSAM 2003).

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Figure 2.6

Estimated Sales Turnover of Direct Selling Industry in Malaysia (1994 2002)

(Billions of Malaysian Ringgit)


MYR 5.00 MYR 4.50 MYR 4.00 MYR 3.50 MYR 3.00 MYR 2.50 MYR 2.00 MYR 1.50 MYR 1.00 MYR 0.50 MYR 0.00 1994 1995` 1996 1997 1998 1999 2000 2001 2002
S ource: Domestic Trade and Consumer Affair Ministry, 2003

Table 2.2

Number of Valid Direct Selling Licences ( 1994 2003 )


1994 1995 340 401 1996 300 472 1997 314 436 1998 316 349 1999 446 205 82 32 2000 202 427 199 69 17 2001 213 117 31 24 2002 230 124 28 31 2003 234 132 26 28

Marketing Plan MLM SL MO SL & MO


Note:

MLM Multi-Level marketing MO - Mail Order

SL - Single level SL and MO - Combination of Single Level and Mail Order

Source: Domestic Trade and Consumer Affair Ministry, 2003

Malaysia is one of the major success stories of the boom of Direct Sales in Asia. The growth of the direct selling industry has not been affected by the recent economic downturn in 19971998, and the industry remained resilient during this period. Sales values from the industry climbed significantly year by year (see Figure 2.6). The World Federation of Direct Sales Associations, in August 2000 report, placed Malaysia in the top 10 of the worlds top direct selling nations and the first in the South East Asia region. However, in 2001, Malaysia dropped to 18th position worldwide, although the recent estimated figure reported by WFDSA (2003), exhibits that it has moved up five ranks based on 2002 figures (see Table 2.1). 48

2.9

Concluding Remarks

This chapter presents an overview of the context of this study. The principle themes that have emerged from the discussion are the definitions of direct selling and attempts to provide a better understanding of this much misunderstood industry. This has been approached by disentangling the concept of direct selling into three perspectives; operational, tactical and strategic. The direct sales industrys global performance based on past and present data, undoubtedly, the opportunity for direct selling to transform the world economy is bright, but it must be guarded against unscrupulous business practices, which could tarnish its image and reputation. It is strongly believed that this unique distribution system is worthy of further investigation in an endeavour to shed additional insights, particularly by pursuing empirical research.

Despite being one of the most dynamic and fastest growing marketing channels in the world, very little empirical study has been undertaken on this topic. Nevertheless, a few exploratory studies on the perceptions of consumers of this channel have been conducted (Barnowe and McNabb 1992; Kustin and Jones 1995; Sargeant and Msweli 1999). It was noted that the limited research on direct selling has focused predominantly on sales management issues such as job satisfaction, recruitment and training (Delgado 2000), distributor retention (Msweli-Mbanga 2001; Msweli-Mbanga and Lin 2003) and direct sellers role/performance (Brodie et al. 2002a; Ingram 1992; Wotruba and Tyagi 1991). However, no prior study pertaining to direct sales has examined direct selling from the consumption system approach, as viewed by the consumers. Therefore, the current study attempts to take this route by examining customer satisfaction with this distribution channel in one holistic conceptual framework. Building upon this background, the next chapter will document a literature review on customer satisfaction theory and the conceptualisation of key constructs examined in this study.

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