Direct Selling Association
29 Floral St. London WC2E 9DP Tel: 020 7497 1234 Fax: 020 7497 3144 E-mail: info@dsa.org.uk Website: www.dsa.org.uk
Direct Selling in the UK – a fact sheet and guide to new businesses.
Direct selling is a channel of retail distribution in which contracts for the sale of goods and services are concluded: • Away from permanent retail locations; • Normally in the homes of consumers; • In face to contact with a direct seller; • Through personal explanation and/or demonstration. In the UK almost £2 billion of goods and services are sold each year through the direct sales channel. This business is achieved by 130 substantial companies and several hundred much smaller micro business enterprises. All these businesses rely mainly on independent, mainly part time, direct sellers who value the opportunity to supplement their family incomes with a low cost small business activity that can be carried out at times and a level of commitment of their own choosing. For anyone wishing to start their own business, unconnected with an existing direct selling company, direct selling has many advantages. At the start-up stage, it does not require retail premises; major investments in stock nor substantial advertising and promotional costs. Using independent direct sellers, paid on commission, means that sales costs are directly related to sales achieved. Although the direct sales format is relatively simple, some previous direct sales experience of working with another established company would be an advantage to anyone setting up business on their own. Direct selling is also subject to specific legislation and care must be keen to ensure that independent direct sellers are given proper contracts and that retail customers are provided with receipts that comply with the law. Basic information on these requirements can be obtained, free of charge, from the Direct Selling Association www.dsa.org.uk
Some frequently asked questions
What is the difference between direct selling and direct marketing? Direct selling is a form of direct distribution that enables a manufacturer or principal supplier to obtain orders from its customers in personal, face to face, manner. Most direct selling businesses communicate their message to potential customers through the personal contacts of direct sellers– who are frequently friends and neighbours.
The Direct Selling Association Limited. Registered office as above. Registered in England Number 851537 Member of FEDSA – Federation of European Direct Selling Associations Member of WFDSA – World Federation of Direct Selling Associations
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The main difference between the two channels is that direct marketing communicates its message to potential customers through the media; mail and telecoms. Many direct mail businesses rely on the use of advertisements; the production of mailing pieces; list rentals; postage and other associated services to obtain orders directly from the consumer. In law, this is distance selling and is subject to specific consumer protection legislation. If a business uses direct marketing techniques to generate sales leads which are then followed up by sales person who obtains an order in the consumer’s home, this is direct selling. All orders obtained through direct selling are subject to slightly different consumer protection legislation ( see below ). What products are best suited to direct selling? Virtually all consumer goods and services can be direct sold. However, with a part time sales force, the distribution channel works best with a range of modestly priced products that direct sellers can recommend on the basis of their own experience. Higher value products normally require, full time professionally trained direct sellers. Direct selling is particularly suited to products that: • Benefit from explanation or demonstration • May be novel • Are significantly different to retail brands • Do not respond to conventional advertising or store display. Currently, UK direct selling businesses account for 70 million consumer transactions with an average value, for one or more items, of £21. The top product categories were: • Personal ( cosmetics, toiletries, jewellery & clothes ) • Household ( kitchenwares, decorative and household cleaning items ) • Family ( books & leisure items ) • Nutrition and wellness products Does direct selling represent a less expensive form of distribution? The answer is no - it approximately the same as through conventional retail distribution. With equivalent manufacturing costs, direct sales commissions, bonuses, management and distribution costs can be no more than the costs incurred in advertising and in wholesale and retail distribution margins. Person to person or group demonstration – which method is best? Direct selling in which a direct seller demonstrates a range of goods to a group of people in the home of a hostess, is commonly called ‘party plan’ sales. This method is successful where products benefit from demonstration in a friendly home environment. The method is unsuited to high priced goods, as the principal objective of the demonstrator is to conclude the ‘party’ by encouraging a number of guests to agree to
The Direct Selling Association Limited. Registered office as above. Registered in England Number 851537 Member of FEDSA – Federation of European Direct Selling Associations Member of WFDSA – World Federation of Direct Selling Associations
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be hostesses at subsequent parties. This is only possible if a majority of guests had made purchases and there were other items they would like to buy on another occasion. The person to person approach is best for businesses that: • Market ‘big ticket’ product lines that benefit from personal demonstration; • Use product catalogues that can be left with customers prior to a return visit; • Market health, educational or other products that meet specific customer requirements. Is multilevel marketing ( MLM ) or network marketing the same as direct selling? The answer is that, if it is legal, it should be. The field sales organisation of many direct selling businesses is similar to that used by most businesses: sales people, both employed and self-employed, are recruited to perform a sales role in a defined territory. They are then trained, managed and motivated by corporate managers who are usually employees. Multilevel marketing is a direct sales organisation structure that meets both the demand for part time earnings and the demand from enterprising individuals, with organisational and motivational skills, who are attracted by the opportunity to build there own sales groups from the day they join the business. Such businesses may also be described as having tiered earnings opportunities. Whatever the term used, all participants start in the same way and receive both commissions on their personal sales and further bonuses based on the sales of those they have recruited trained and motivated. The extent to which anyone divides their time between personal sales and group building is up to them. The multilevel concept is gaining in popularity and is particularly attractive to husband and wife teams or partners who want to share the responsibilities of running their own small business. From the company’s point of view, they are delegating field sales management to independent distributors and the savings in the costs of employed managers are used to pay bonuses to group leaders based on the volume of business for which they are accountable. What is the difference between a multilevel businesses and pyramid selling ? The difference is that in any sound, multilevel direct selling business, commissions and bonuses are only paid out on the basis the direct sales made to consumers. In contrast, pyramid selling is a term used to describe any scheme in which participants are encouraged to make substantial investments in the belief that they can earn money by doing no more than encouraging others to invest in the scheme. Such schemes are likely to be illegal and in breach of Trading Schemes legislation. (see below ) As with most direct selling businesses, it is common for every participant in a multilevel
The Direct Selling Association Limited. Registered office as above. Registered in England Number 851537 Member of FEDSA – Federation of European Direct Selling Associations Member of WFDSA – World Federation of Direct Selling Associations
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direct selling business to make a modest investment in a business kit. Usually this is less than £100. Commissions should not be paid on the sales of business kits to new recruits. The great merit of direct selling business opportunities is that they very rarely require the purchase of goods before sales have been made. This means that the risk is low and the opportunity widely affordable. Do direct selling businesses and direct sellers have to be licensed? The general answer is, no. The rules governing the establishment of a direct selling company are the same as for any other business – although VAT treatment is different. (see below) Similarly, direct sellers who collect orders for subsequent delivery do not have to be licensed, although some licensing requirements are required in the Isle of Man and in the Channel Islands. What legislation governs direct selling? There are only two pieces of consumer protection legislation and one VAT rule that are of specific concern to direct selling: • Order cancellation rights. These apply to all direct selling businesses as defined at the beginning of this Fact Sheet. This is governed by The Consumer Protection (Cancellation of Contracts Concluded away from Business Premises ) Regulations 1987. The law requires that any unsolicited transaction over £35 in value, requires that the customer be given a statutorily prescribed notice giving them seven days in which to cancel an order and get there money back. Any business that adopts the DSA Code of Practice (see the DSA website www.dsa.org.uk ) is required to give customers 14 days cancellation rights, for an order of any value and no matter whether the order was solicited or unsolicited. Multilevel legislation. If any business opportunity permits participants to benefit from the sales of those they introduce in the business, they are likely to be required to conform to the Trading Schemes Act 1996 and the Trading Schemes Regulations 1997. The law limits to £200 the value of any investment, within the first seven days, and requires that participants be given a contract which contains the terms of business; defines a specific recruitment offence and also contains two prescribed warnings. Participants have 14 days in which to cancel any contract and get their money back and all promotional material has to contain a prescribed warning. In practice, this legislation applies to all multilevel businesses and has proved to be fair and reasonable. VAT. In conventional retailing, VAT is payable on the retail sales made by VAT registered businesses or individuals. Under a special derogation of a VAT directive, Customs and Excise may require direct selling businesses to remit VAT on the value of retail sales made by independent non VAT registered direct sellers. New businesses should consult their local VAT office for guidance.
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The Direct Selling Association Limited. Registered office as above. Registered in England Number 851537 Member of FEDSA – Federation of European Direct Selling Associations Member of WFDSA – World Federation of Direct Selling Associations
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What is the normal employment status of direct sellers? Most direct selling businesses offer independent earnings opportunities. This is appropriate, as most of those to whom direct selling appeals are in other employment and wish to work on a part time basis in hours of their own choosing. The usual tests of self employment for direct sellers are that they: • Dictate their own hours and place of work – although a company may offer them advice ; • Can delegate, at their discretion, all or part of their work to others; • Could lose money. This could be by incurring losses in a buyer/reseller relationship or in the incidental costs incurred in running their own small business. Do a direct selling businesses have any responsibility for the tax and social security liabilities of direct sellers? The answer is no, if the direct sellers are self employed, although companies may be required, periodically, to submit details of commissions and payments made to direct sellers. Independent direct sellers are personally responsible for: • Declaring their earnings to the Inland Revenue for income tax purposes; • Registering with the Inland Revenue within three months of taking up an earnings opportunity In practical terms, very few independent direct sellers are liable for NIC contributions as these are only required when a direct seller’s annual profits exceed £3,955. This means that all direct sellers with average earnings expectations, should register for exemption as soon as they take up an earnings opportunity with a direct selling business.
16 September 2008
The Direct Selling Association Limited. Registered office as above. Registered in England Number 851537 Member of FEDSA – Federation of European Direct Selling Associations Member of WFDSA – World Federation of Direct Selling Associations