Tianwen Note: As an independent researcher of the Chinese direct selling industry with limited proficiency in English, I have written this article for over 10 years. Despite the decline of direct selling in China, new retail models such as social e-commerce and WeChat business that are based on the core logic of doubling still thrive in China and never ceased. I believe that the fate and fatal flaws behind the industry that I pointed out continue to affect the new generation of micro-entrepreneurs. With the birth of ChatGPT, I have retrieved this article and asked it to translate and spread it in the English-speaking world to stimulate more thinking and discussion among professionals in various countries and regions, which may have some value.
Original text as follows：
For someone who has been immersed in the direct sales industry since the age of 20 and has tirelessly practiced and researched it for over a decade, it is surprising that they would suddenly begin to refute the direct sales industry. Clearly, this is an extremely special case within the direct sales community.
To refute direct sales is not to deny its historical significance and relevance in its respective era. Rather, it is to address the current context in which direct sales has become an outdated and unsuitable marketing model. To understand this, we must first analyze the larger context in which the direct sales industry was born.
1. The Background of Direct Sales
The early concept of direct sales was mostly defined from a sales perspective. It originated from Avon’s founding in 1886, where Avon ladies were hired to conduct single-level direct sales, i.e. Face 2 Face sales. The modern definition of direct sales, namely multi-level direct (or network) sales, was born with Amway’s founding in 1959.
Whether it is Avon-style single-level direct sales, Amway’s predecessor Nutrilite’s flawed multi-level direct sales, or the birth of numerous global multi-level direct sales companies in the 1970s and 1980s (such as Forever, Mary Kay, and Herbalife), they all carry distinct characteristics of the times. That is the result of fierce competition in the post-industrial era.
In the agricultural era when resources were scarce and demand exceeded supply, there was no possibility of modern marketing and advertising promotion. The invention of the steam engine brought about the first industrial revolution, directly resulting in an increase in production scale. The competition in this era marked the beginning of modern commercial competition, and people began to discern and pursue the quality of similar products. Hence, modern management represented by Drucker was based on this competitive experience.
The two world wars resulted in the advent of the automotive industry, which relied primarily on oil as its main resource. Production began to grow on a large scale, and the competition between countries after the war directly led to the establishment of the modern marketing system founded by Philip Kotler. The further fierce competition also gave birth to the birth of modern advertising. Therefore, marketing and advertising are almost two sides of the same coin, becoming the best means and weight for competition among large enterprises.
For small and medium-sized enterprises and entrepreneurial individuals who hold high-quality products but have no access to the marketing channels and advertising competition between large enterprises, they have entered a bottleneck that is almost stifling. Direct sales were born under such a demand for low-cost expansion and high-growth development.
The history is already far away. It is said that the boss of Nutrilite, Carl Rehnborg, was unable to market his high-quality products despite his passion for them. By chance, he met two Harvard students who creatively invented the current multi-level direct (or network) sales model that now rages worldwide.
This history has been mythologized, with some saying it was two Jews, and others claiming it was two mathematical geniuses. However, regardless of what the historical facts actually were, there is one reality: the purpose was to sell products through word-of-mouth marketing by personnel.
This era has already determined one concept, that multi-level direct sales is a typical personnel sales model. Its core is to establish a sales channel and pathway through marketing personnel (salespersons or direct sellers).
2. The Social Psychological Principles of Direct Sales
The birth of Amway Nutrilite’s multi-level marketing model is undoubtedly one of the greatest inventions of that era. As Amway’s corporate culture emphasizes, it provides the best quality products and a unique opportunity for everyone to have their own business.
Initially, if you asked almost all direct sellers why they wanted to participate in the direct sales industry, they would almost unanimously answer, “The products are great!”
If the product is so high-quality, almost all users will quickly experience a physiological pleasure of satisfaction! This physiological pleasure is bound to trigger a social demand as a social animal, which is irresistible to share. The sharing promoted by this social psychological demand undoubtedly reinforces the user’s pleasure.
Therefore, direct sales was born under these seemingly very reasonable conditions.
Then, someone asked why, under the same mechanism of physiological and social psychological satisfaction, it was born in the United States rather than other countries or regions? As an aside, this may have a lot to do with the hundreds of years of tradition of Protestantism in America. As we all know, Protestantism on American soil uses a family-style gathering and witnessing miracles sharing mechanism to achieve rapid dissemination and development. After World War II, the adjustment, growth, and competitive environment of the US economy were providing a more appropriate breakthrough and carrier for this evangelism mechanism (which is essentially sharing) in commercial behavior – multi-level direct sales.
Based on our understanding of the competitive environment of the era of large-scale production, we can basically determine that direct sales were invented when high-quality products could not be pushed into the market. Although this marketing model seemingly fits the social psychological mechanism of human nature at that time (remember, I said it seemed to fit, there will be a dedicated discussion later), it has led to the global prevalence of this model in direct sales for over half a century.
Only by understanding the social psychology mechanism that gave birth to this multi-level direct sales model can we understand why this model was eventually resisted and marginalized by mainstream society.
3. Why did the value system of direct selling collapse?
As previously mentioned, we can summarize the birth of direct selling as follows: the left hand satisfies physiological needs with high-quality products, and the right hand obtains happiness by sharing to fulfill social psychological needs.
However, is it really like this in reality? Few people doubt its rationality. Rather, most people see it as an American Dream – a dream where individuals can start a business from scratch by building a sales team through personal efforts and become rich.
This destiny rooted in direct selling thus came into being, and the rat race that was born with it also accompanied it. In other words, direct selling has been caught in a nightmare of demonization and coexistence since its inception.
Let’s take a look at why the mainstream population resents direct selling fundamentally:
Firstly, the inventor of direct selling established the joy of sharing as a reward-based incentive system on the right hand, rewarding performance evaluation of your sharing behaviors. If you are careful enough, you will notice that the joy of sharing purely from your nature has been replaced by the pain of “sales” here. However, for most people, the excitement of the product and the dream advocated by this business mechanism have already covered up the fact that the joy of sharing has been replaced.
Statistics show that 97% of people in the world resist going into sales, and 100% of people do not want to be pushed to buy something. This is human nature. However, while they are excited as consumers of high-quality products, they are not mentally prepared to work as professional salespeople. Yet, they are led by this exciting entrepreneurial opportunity to a frenzy.
It is conceivable that when he believes that he has found the world’s best entrepreneurial opportunity and business with enthusiasm, and shares this business opportunity with his relatives and friends, he will inevitably face the consequences of a rejection rate that could reach 100%.
Most (about 80%) of those who accidentally enter the direct selling industry choose to give up under the pressure of rejection from their loved ones. However, no one is willing to find their own reasons for giving up. They are more willing to attribute their failure to this sales model being impractical or even to impulsive mistakes and deception. Because they are eager to regain acceptance and recognition from their former friends, and to return to the comfort zone of life. And their actions have reinforced the resistance and misunderstanding of this sales model among more mainstream social groups. This was the original pain that multi-level direct selling brought to practitioners.
If this primitive pain is not a big deal, then the few (about 20%) who are unwilling to give up their dreams and this business begin to embark on an irreversible path, even a devil’s path.
These few people continue to move forward on their dream path. However, they quickly discovered that people with the same qualifications, abilities, and efforts could earn very lucrative income in just six months, while others spent two or three years without progress or even stagnation. After summarizing the lessons, they found that the first reason was that the team leaders and recommenders of others were outstanding, while their own team leaders and recommenders were inadequate. So they entered the first growth trajectory in the direct selling industry – internal reshuffling.
The experience and results of changing teams were quickly verified. An excellent direct selling company needs to grow with an excellent team. However, many people soon discovered that the company they had chosen as their first love was likely to be unsatisfactory under the impact of other companies. The worst thing was that after jumping to another direct selling company, members of the team who used to be in the same battle trench as themselves soon earned a lot of money, making them envious!
Where is the reason? After summarizing the experience again, they found that the direct selling enterprise was not one, and in competition, direct selling enterprise owners began to constantly withdraw commission from direct sellers rather than increase it, or reduce the difficulty of obtaining commissions. Faced with this competitive background, the wise choice is to once again choose a direct selling partnership that is better than their original company. This is the second growth trajectory in the direct selling industry – corporate reshuffling.
At this point, we will find that the essence of the left-hand happiness and right-hand happiness in the direct selling industry is gradually changing with the intensification of internal and external competition in direct enterprises.
Firstly, in the competitive environment of direct sellers or even direct selling companies, products are becoming less and less important, while the bonus system needs to be increasingly adjusted to its optimal state. What is the optimal state of the bonus system? Withdrawal rate? Difficulty? Therefore, if you search for changes in the direct selling industry’s systems over the past half-century, you will find a shocking universal phenomenon worldwide:
From a zero-base to an accumulation base, from low quality to hierarchical bonuses, from solar lines to matrix structures, from matrix structures to dual-track systemsand hybrid systems, and from binary systems to unicorns, what has been added is not the improvement of product quality but the optimization of the bonus system. The original intention of satisfying physiological needs through high-quality products has been gradually replaced by the desire for monetary gain.
Secondly, in the competitive environment of direct sellers, the joy of sharing has gradually become the pain of sales. Direct sellers are no longer focusing on the joy of sharing their high-quality products with others, but rather on how to win bonuses and commissions by pushing people to buy products and join their team.
Therefore, the value system of direct selling collapsed because it became increasingly driven by monetary incentives and less focused on genuine product quality and the joy of sharing. The sales-driven approach led to high rejection rates and reinforced negative attitudes towards the industry among the mainstream population.
4. Direct selling is destined to perish in its evolution
Throughout the history of multi-level direct selling for over half a century, the author even looked back to Avon’s birth in 1886, researching and summing up three waves of growth based on the evolution of direct selling system: retail-oriented with Avon, Mary Kay, Jafra as early single-level direct selling representatives; recommendation-oriented with Amway starting from tiered direct selling such as Herbalife and Forever; consumption-oriented with hierarchical and dual-track models with companies like Mead Johnson and New Era.
Interestingly, with the intensification of competition, old-fashioned single-level direct selling companies such as Avon, Mary Kay, and Jafra have started to modify their single-level model to a multi-level one like Amway’s successful model. Meanwhile, Amway, Herbalife, etc., have increasingly realized the importance of locking in end consumers, while new-style companies have set their sights on sales elites of these old-school direct selling companies believing that capturing this group of successful distributors can directly take over the “pipeline” (marketing channel).
However, as mentioned earlier, the struggle for channels between direct selling companies directly brings about competition for high commission ratios with distributors, and almost all direct selling companies and distributor teams focus on how to increase sales and improve performance. This directly leads to the result that large numbers of direct selling companies’ distributors hoard goods for achieving performance and rank. The new generation of companies seems to have more tricks up their sleeves. To effectively solve the problem of hoarding and reduce the “difficulty of success,” they directly increase the membership threshold to a high level, hoping for rapid expansion and quick wealth.
The result of focusing on short-term gains and pursuing high profits and quick wealth is that products are repeatedly ignored or even virtualized, and it has brought more extreme phenomena such as cross-regional pyramid schemes and financial pyramid schemes in mainland China. The barefaced behavior of pyramid schemes has blurred the line between so-called legal enterprises and underground pyramid scheme enterprises. This is also what the author wrote in a special article last year, where mainland China has entered a comprehensive “licensed pyramid scheme era.”
All of these lead to the formation of a set of internal operating rules within the direct selling industry, completely detached from the valuable “manufacturer-channel distributor-end consumer” marketing chain and becoming a speculative gamble, a game of chance. The result of self-circulation and marginalization will inevitably cause it to move further away from mainstream society and towards a path of inevitable death and irredeemability.
To rejuvenate the direct selling industry, external forces are needed when internal solutions cannot be found.
With the advent of the Internet in the 21st century, no one could have predicted its birth, which accelerated the death of direct selling companies. This unexpected information revolution quickly brought all products with inflated prices for high commission ratios, through hoarding sales by direct selling refugees and the operation of organized scalpers, back to the real value law on e-commerce platforms.
The cancer of direct selling has since been terminal. Distributor leaders of major direct selling companies can only switch companies with their teams in a carousel-like manner to seek a reshuffle, rather than exploring new markets. The mainstream society’s perception of the direct selling circle is getting worse day by day.
It is worth noting that since the beginning of this century, the Chinese market, due to WTO entry and direct selling legislation, seemed to have started to recover superficially. In fact, this is only a special expression of the lagging Chinese mainland market and economic imbalance.
If you lose rational thinking about the global economic integration of the information age and indulge in this superficial prosperity and vanity, you will inevitably head towards death without realizing it. If you have insight, you can conclude that the death knell of direct selling has been sounded by the Internet!
No destruction, no construction. Only by being reconstructed and breaking free from the fate of direct selling itself can the direct selling industry undergo a thorough transformation and possibly have a truly promising future. As a marketing model, it may disappear or need to be redefined to be viable.
In 2003, the author creatively proposed a concept called “Direct Consumption” in mainland China, and gave it a new double meaning in 2006: consumption and disappearance.
It can be foreseen that in the Internet age, if direct selling companies expect their quality products to be accepted and recognized by the market, they must first pass the hurdle of inflated prices and truly return to the origin of consumer benefits. The demonization of quick profits and the fate of direct selling on its roots must come to an end.
The greatest pain of foreseeing the future is that you may be a prophet or a martyr. What kind of business model can bring about a comprehensive solution for the direct selling industry? Has it already been created? Does it already exist and succeed?
Tianwen Note: This article was written more than 10 years ago and has been circulated on several WeChat platforms. Despite being copied and spread, its value and commitment to the social e-commerce model – the new “pyramid scheme” flooding the market today – remain relevant.
I have just finished the defense for my project on the ICB program at the University of Hong Kong, and now have some free time. Here, I am re-publishing this old article, updating it with some official pictures as illustrations, and reorganizing my thoughts. I will also come up with new works based on the current situation to share with you.
Melaleuca – The Terminator Model of Direct Selling
Since 2008, when I learned about the business model and operational philosophy of Melaleuca under the guidance of my teacher Wei, I boldly put forward that Melaleuca is a model that opposes and terminates direct selling.
This astonishing statement almost made me an enemy of the direct sales industry.
I often shared my observations of the direct selling industry over the past decade and the reasons for my ultimate disappointment with it- that the value system of the industry had collapsed, and the entire direct selling industry was showing signs of obsolescence, degradation, and inefficiency.
Many in the industry criticized my views as extreme and radical. On the one hand, my grasp and analysis of trends often gained recognition from many old friends in the direct selling industry, but they were also very unhappy about them. It’s not difficult to understand why – after all, many people depend on the industry for their livelihood. Most of my friends in the circle have been in it for three to five years, and some for more than ten years. They have accumulated a lot of experience and can use it to make big profits. Why would they be willing to let go and join me in rejecting the industry’s values and significance? My views have become a sharp sword that threatens their livelihoods. How could they be accepted by direct selling experts who have enjoyed considerable success in recent years? It is unfortunate!
However, every time I dissected the essence and drawbacks of direct sales, it often won the support of mainstream society, especially friends who were averse or victimized by direct sales. The market verifies everything. This is the reason why I believe in the future of “direct consumption” – consumer-oriented organizational marketing. Since 2008, my “Wealthy System · Secret Team” (now evolved into the “Chengmei System”) has become one of the few Melaleuca operating teams on the mainland with more than 80% of its core members from mainstream society.
Can Melaleuca really solve the problems inherent to the direct sales industry, such as hype, hoarding, large orders, unstable performance, and team hopping?
Media outlets, experts, major team leaders, and distributors in the domestic direct sales industry seem to be dismissive of this. There are even media articles pinning Melaleuca’s lack of recognition as direct selling as the reason for its poor performance. However, these ideas and opinions are absurd to those who understand Melaleuca, just like how they perceive Melaleuca people’s absurd views.
Why is that? The reason is simple: when Melaleuca, an innovative marketing model or business model, entered China, most people did not understand or comprehend it. It was even controversial and difficult to classify in the United States itself. Inertia prevailed, and the first to initiate and participate in the market had to be direct selling professionals who originated from there. Moreover, because Melaleuca also belongs to the field of organizational marketing, it must apply for and obtain the so-called “direct selling license” in mainland China.
Is Melaleuca really direct selling? Or multi-level marketing? Even the global wisdom of Wikipedia has not reached a conclusion. It wisely and impartially proposes a brand new concept – the “Consumer Direct Purchase System (CDM)”- and makes a comparison and distinction table between it and multi-level marketing (MLM).
This controversial model moves forward and grows dynamically. However, it is almost certain that Melaleuca’s business model will take time to become familiar and recognized by the general public, and for direct salespeople to understand its qualitative differences. Therefore, this process of popularization and in-depth understanding is also Melaleuca’s market timing and growth process. Therefore, we can only smile lightly at the unfounded criticism from outsiders about the “poor performance” and “failure to recognize” Melaleuca.
“City people want to go out of the city, and people outside the city want to enter the city.” This is a famous assertion invented by the great scholar Qian Zhongshu. However, recently, I heard an idea called the “anti-city wall concept.” That is, “city people don’t want to leave the city, but people outside the city don’t want to enter.” Interestingly, this concept applies to Melaleuca. In other words, those who truly understand Melaleuca will definitely operate it and never give up, while those who do not understand Melaleuca are generally unable to enter it.
Many people are curious and perhaps even strange about what my teacher Wei told me that made me stay in Melaleuca for three years and become more convinced of it.
The Core Concept of “Five Twos” in Melaleuca
Three years ago, I met Mr. Wei and at that time, I did not know about his classic summary of the “Eight Characteristics of Melaleuca”. However, I later customized his most important points into the “Five Twos” concept. These points allowed me to fully understand Melaleuca and commit myself to its mission of solving the problems of the direct selling industry. The core values of Melaleuca, as explained by Mr. Wei, include how Melaleuca can end direct selling and how its consumer direct marketing (CDM) model is superior to traditional direct selling.
In this article, I will discuss the “Five Twos” core concept that I have observed in Melaleuca’s values.
1. Two Gifts
1）The first of the “Two Gifts” is safety:
a gift that is ordinary but precious, and one that many people in the direct selling industry often overlook. Melaleuca’s tea tree oil products are of such high quality and popularity that it made sense to sell them directly to consumers without any intermediaries. To achieve this, Melaleuca removed the pressure on its members to sell products and instead allowed them to use the products without the risk of stockpiling. Members are only allowed to purchase a certain amount of products each month to prevent excessive buying, with additional compensation levels set even lower than the maximum purchase limit. This means that even if a member recommends a purchase beyond the limit, they would not receive any benefit. Melaleuca’s innovative approach provides a safer and more sustainable business model that eliminates the negative aspects of traditional direct selling, making Melaleuca more appealing to mainstream society. Plus, anyone who likes the products can try them without fear of getting stuck with unsold inventory, which solves the risk problem commonly found in direct selling.
2) The second gift: simplicity – easy to do.
When it comes to simplicity, it’s also a difficult realm for direct sellers to enter. In fact, to successfully operate direct selling as a marketing model, it often requires high comprehensive qualities and stress resistance. Therefore, operating direct selling is not a simple task. It is almost impossible for someone who has not been in the direct selling industry for three to five years to occupy a place in the industry. And now, almost all people who can make money in the direct selling industry have abundant experience, meaning they paid tuition fees.
However, this reality was broken again by Melaleuca. You will find that in countries and regions where Melaleuca is already mature, early Melaleuca successes often do not have strong overall abilities. Their biggest characteristic is that they like products and consumption. Similarly, from my personal experience building a Melaleuca team in mainland China for three years, most of the members are not highly talented or have a direct selling background, yet they often perform better in Melaleuca than direct sellers.
Why is this? Melaleuca’s business has an uncommon simplicity. Therefore, Melaleuca has a very famous course in its operation mode and education training called “Simple Recommendations.” In the traditional direct selling operation mode, due to the company’s orientation and the orientation of the team system education, the main focus is on finding operators rather than real end consumers. Therefore, when you start recommending, you must inevitably launch a simple and profound OPP entrepreneurial briefing to help your recommended targets deeply understand the benefits of various direct selling and earning opportunities.
But not for Melaleuca. Melaleuca only needs to find consumers. Throughout the entire recommendation process, the company solves all problems related to cash flow and logistics. All you need to do is casually and naturally recommend to friends and tell them to try a different brand and take care of you. There is no need to stock up, collect money, sell goods or ask them to operate.
For Melaleuca’s business positioning of members, their identity is more like that of a celebrity endorser. What they advocate for with gestures and actions is nothing but a lifestyle, a quality of life, and an opportunity to choose environmentally friendly products with the highest cost-effectiveness. And this is already the start and operation of your career.
Melaleuca has become a way of life, and it is no longer a choice. Choices are often a painful either-or situation, but what if you just add to your life, add points, and change your shopping habits once a month? The answer is self-evident! All major paths are hidden in simplicity!
2. Two powers/
1) The power of Cumulative
One of the greatest power in nature is accumulation, as drops of water can wear away stone and sand can build a tower. In almost all traditional business and sales fields, what you see is the result of your personal efforts being constantly sold out. The reason is simple: you earn as much income and commission as the amount of sales you make.
Direct selling, once considered a “pipeline business,” means building a sales pipeline (known as a pipeline in traditional marketing concepts). The story of “Pipeline” is almost sacred to all direct salespeople. However, in an era where sales are about to be terminated and consumer-oriented trends are emerging, I declare loudly that “The Story of Pipeline is being terminated, and may have even been terminated.“
Why? Because the pipeline you work hard to build is undergoing ruthless competition in the market. Early direct sellers were able to build excellent sales pipelines, but with intensified competition and the struggle for pipeline benefits, people began to advocate a competition that ignores end consumers: splitting pipelines and taking over other pipelines.
Your pipeline is leaking!
You are still in a leaky pipeline, competing to see whose water flows in faster and stronger. This is the essence of the comparison between direct selling companies and direct sellers! The result of their performance comparison is that they must use more methods to stimulate the influx of water (deceiving new recruits to buy large orders). However, the larger the influx of water, the greater the risk, which is that the pipeline is at risk of bursting at any time. Therefore, the collapse, opening, start-up K-value, restructuring, and chaos have become the norm in the industry. As a result of constant inflow and leakage, you can only pursue monthly new recruits to obtain profits. There is no difference between this kind of profit and the story of carrying buckets back then. You are just doing another kind of work, a disguised form of carrying buckets.
Almost all direct sales team leaders talk about the extraordinary freedom brought by the story of the pipeline. However, you will find that the bigger the leader, the more unclean things they do with both hands. They set fires on the left hand-digging other people’s teams; and put out fires on the right hand to prevent their own teams from being dug. They call it “integration.” The bigger they are, the harder they work. Extraordinary freedom, where does it come from?
Everyone is extraordinary, but everyone is not free.
Understanding this cruel reality, you will surely ask: “What about Melaleuca? What is Melaleuca doing?”
It says that its focus is not on the size of performance or the size of the “inflow” of this pipeline. It cares about whether these water flows into the pipeline leak or how much they leak. Almost all direct selling companies are ignoring or even abandoning end consumers, but Melaleuca picked them up.
Melaleuca has established a system that no other direct selling company has—the “Consumer Retention System.” It is this system that has transformed Melaleuca from a failing “Pipeline Story” to an era of “Reservoir Story.”
The first focus of Melaleuca’s “Consumer Retention System” is not the “inflow” (of course, the larger the inflow, the better), but rather to provide comprehensive services through a carefully crafted system for all consumers who come in through simple referrals, allowing all members to ultimately be retained after a trial period of up to six months and make recurring purchases every month.
When a reservoir is established and the inflow is always greater than the outflow, have you noticed that a great force-cumulative force has been generated?
For the direct sales field, the biggest problem is either no end users (companies that speculate can only recruit distributors from other companies) or end users cannot be retained. Its essence is the problem of customer churn rate. Most direct sellers are not lazy or unable to recommend. The key is when they are recommending customers (rather than direct sellers), after spending a lot of effort using various OPPs, product demonstrations, and recommendations, these customers quietly leave after purchasing the products they joined in the second month.
Poor direct sellers keep looking for customers every month and bring people to the venue again and again to create new results in the following month. An ordinary direct seller with limited abilities is stuck in a vicious cycle of continuous recommendations and losses, accumulating more and more stocks and heavier burdens until finally dying out. Even if a direct seller with strong capabilities understands one truth: “Sales are not terrible, but lifelong sales are terrible.”
As for Melaleuca, this set of customer retention system it created helps you retain the efforts you make every month—every customer you recommend is accumulated and retained for you.
Assuming that you found 2 customers in the first month, you made money from 2 customers; in the second month, you found2 more customers and retained the previous 2 customers, so you made money from 4 customers; in the third month, you found 2 more customers and retained the previous 4 customers, so you made money from 6 customers. This cumulative force is like a snowball rolling down the hill, getting bigger and bigger.
Why? You only made 2 new referrals each month, but the company’s customer retention system helped you retain the previous efforts. Continuing for a year, you could theoretically earn the money of 24 customers.
In reality, can the company retain 100% of customers? Of course not. The proportion of Melaleuca’s customers that can be retained will be discussed later. But the key principle to note here is that if Melaleuca is a reservoir, as long as your inflow is always greater than your outflow, what happens? Your reservoir water level will continue to rise.
If you don’t have the ability, can you slowly accumulate customers? If you don’t have time and are only part-time, and Melaleuca doesn’t give you performance pressure, can you slowly accumulate?
This is exactly where Melaleuca solves another major problem that no other direct selling company has solved: “Can I succeed? Can my friends around me succeed?”-the issue of success rate.
Many outstanding talents in the industry would rather work for hype companies, not just because they make money faster. It’s because they are afraid that a constantly selling company will trap them into the quagmire of performance, so they prefer to gamble. Only by understanding this point about Melaleuca can their confidence be rebuilt from scratch.
If the security of the Melaleuca business makes me feel like becoming a Melaleuca member can have a certain lifestyle, then the accumulation of the Melaleuca business truly touched me and made me willing to gather the courage to start from scratch again after leaving the market frontline for eight years.
2) The power of doubling
If accumulative power brings about the accumulation of individual strength, then the power of doubling brings about the accumulation of team strength. It is also the real business leverage for Melaleuca to grow.
Melaleuca’s accumulative power is actually similar to that of a franchise system. It helps each operating member to accumulate their own store’s customers. The doubling system is a process of opening more direct sales stores and franchise shops.
The idea is simple: if I am a Melaleuca member who loves and uses their products, I can influence around 20-30 friends to use them as well. But I don’t need all those 20-30 members to operate Melaleuca with me. However, I can find three to five friends with the same values as me to do the same thing – influence 20-30 users of Melaleuca products.
Many people say that Melaleuca’s doubling principle is the same as that of direct selling. But it’s not entirely true. Direct selling’s doubling often involves finding five operators through one operator, then finding 25 operators to build a sales team where operators take up 80-90% of the group. Melaleuca’s doubling is finding 5-6 operators who are among 20-30 product lovers influenced by an operating consumer according to the 20/80 rule. This is the typical difference between operator doubling “1-5-25” and consumer doubling “1-25-5.”
It is this difference in doubling that determines the different organizational stability. For example, with the same monthly revenue of 200,000, five operators in a direct selling enterprise may each complete 40,000 to achieve it. Meanwhile, at Melaleuca, it is achieved by 500 customers (including around 20-30 operators) spending 400 yuan per month. If any of the five operators in the direct selling team have problems in a given month, it could cause significant fluctuations or even result in failure. However, even if all 20-30 operators at Melaleuca have problems, it would only affect a maximum revenue of 30 yuan x 400 people = 12,000 yuan.
This shows that Melaleuca’s doubling system is more like a traditional franchise system where profits from the base store enable the expansion and opening of branch stores. In contrast, direct selling often has no customers in the base store but has already developed the “store owner” throughout the city. A direct selling team with an empty network and a claimed million members is nothing but a group of zombie teams with only ID profiles and no practical meaning.
The existence of zombie teams’ emptiness and meaninglessness determines that in direct selling, two old friends meeting and greeting each other will ask, “How is your monthly performance? How much is your monthly income now?” because performance determines income. But in Melaleuca, two knowledgeable people meeting and greeting each other will ask, “How many customers do you have now?” because the number of Melaleuca customers means how many are actively consuming and how stable the operator’s income is.
The market extension of the doubling principle has completely different essences and outcomes. The key essence lies in Melaleuca’s focus on “people,” i.e., real end consumers. Only by understanding this can those experts who come from operating businesses and direct selling backgrounds avoid falling into the trap of “performance orientation” when entering Melaleuca.
What does it equal? Let me tease you for a moment, and I will explain later.
1) 95% Customer Reorder Rate
How can we understand the 95% customer reorder rate in Melaleuca?
Many people interpret it as meaning that if 100 new Melaleuca members join, the company can help you retain 95 of them to continue using the products next month. This directly leads to many people not believing that such a thing is possible, and that the 95% figure is false.
The more accurate definition is this: if 100 new Melaleuca members join, after the six-month product trial period (during which the company gives half-year welcome gifts to new members who continue to consume), 95 will be retained by the company’s customer retention system.
Without Melaleuca’s 95%, the cumulative force discussed earlier cannot be achieved. Therefore, only when discussing Melaleuca’s 95% reorder rate does it mean that the value of Melaleuca’s business is gradually improving.
It is impossible to retain 100% of customers. Mr. VanderSloot set a target for the reorder rate – 95% – 26 years ago, and built a customer retention system around this number. When people first hear about this system, they usually ask with great interest, “What strategies did Melaleuca adopt to retain customers?”
Most members operating Melaleuca are eager to answer with various methods and strategies adopted by Melaleuca, except for Wei Laoshi, the founder. Whenever someone asks this question, Wei Laoshi smiles and answers, “You don’t really need to know the specifics of how it’s done. What you need to do is believe that it’s already a fact!”
I understand it this way: Melaleuca, as a 26-year-old American company, cannot lie about this number. The reason why Wei Laoshi answered in this way is to tell the other person that 95% is the company’s belief and a totem of its business strategy.
Imagine if an enterprise from the founder to the management team, from the management team to the employees, from senior team leaders to ordinary members all have this belief, then this enterprise would naturally use systematic thinking to use every means to retain new members who join.
To give a less appropriate analogy: if the police surround a building with robbers inside, won’t they do everything possible to prevent them from escaping? And the robbers will do everything possible to try to escape? Both sides may be studying all the possible escape routes, including the front and back doors, windows, even sewers and rooftops. Similarly, Melaleuca studies customer loss and adopts the same strategy to pursue customers in all directions.
Let’s take a brief look at one of the impact strategies of Melaleuca operators and the company’s customer retention system:
Assuming that the member you recommended initially joined Melaleuca simply out of respect for you and used the products for six months after you took the lead in ordering and the company followed up on service for 4-6 months. When the amount of products used by this member increases to more than 20-30, and he or she falls in love with five or six of the 20-30 products, the habit of using Melaleuca’s products every month for 340 RMB (or 35 points) can be formed and continued – reorder is not a problem.
Here is a scale of personal influence decay and the impact enhancement of Melaleuca’s customer retention system:
Global CD6 Ed. Bestoso, once summarized the experience of retaining Melaleuca customers into four key elements:
Four Key Elements of Customer Retention:
1. A healthy and environmentally friendly concept
2. Correct use of Melaleuca products
3. Use more than 20-30 types of products, with 5-6 that members cannot do without
In my three years of running Melaleuca, I have encountered countless mainstream consumers and direct sellers who do not understand why Melaleuca requires a monthly consumption of 35 points (or RMB 370 in mainland China). The reason is that it may seem like forced consumption.
To this, I always ask them with a smile: “Think about what monthly expenses you have at home that are subscription-based?”
The answer is revealed immediately: our home’s closed-circuit fees, broadband fees, mobile phone fees…there are always a few things that are subscription-based, and as our consumption habits extend, we subscribe to more and more things. For example, my member QQ and my Thunder account are both subscription-based. The problem is, do you feel like you’re being forced to consume with these subscriptions?
Therefore, the 35-point monthly consumption cycle is actually related to your habit construction. Melaleuca did not initially require you to participate in 35-point monthly consumption forcibly. It only suggests that you try it for six months, giving you many benefits and gifts within six months to cultivate your habit. Finally, you will think that this is a company that provides you with essential products that you cannot live without.
In this sense, it is a true family necessity – after water, electricity, gas, closed circuit, and telephone (and network broadband), it is the “sixth channel.”
Why do I have to use Melaleuca? Can’t I choose other direct sales companies or products from big supermarkets?
Right. This thinking is not wrong. I think it mainly depends on two points: the product is really so good that I cannot live without it, and it makes me feel cost-effective and without economic pressure when using it.
There is a very famous book and video called “The Gold in the Home” in the direct sales industry. In fact, the principle it talks about is very correct: treat household daily expenses as an investment asset and develop a business. However, in the direct sales field with high prices and sales pressure-oriented sales, real consumers cannot participate in and construct such a “gold mine” business. Only Melaleuca, a company that truly focuses on consumer orientation, constructs essential products into your life habits and controls product cost-effectiveness within the most reasonable range, can achieve this.
Humans do not necessarily need services such as tap water, electricity, gas, closed-circuit, telephone, and broadband in every household from the beginning. The development of these industries is constructed by the habits that consumers increasingly rely on, and the huge business opportunities and prospects of these industries are what all entrepreneurs covet. The problem is that you and I do not have the strength to participate in these nearly monopolistic, state-owned business opportunities.
Melaleuca is just such a company that operates on consumer habits. 35 points (or RMB 370) – in this sense, it is no longer simple sales and promotion, nor is it a small single sales business. Perhaps, it does start as a product endorser or a widely recognized advertiser, but what you create is an entrepreneurial opportunity at the level of an entrepreneur.
Because what is precious is that it creates a consumer direct purchasing system, using the same principles as the other “five channels” of the family, but giving us a starting point as consumers to establish a great business opportunity.
What is more valuable than 35 points/month (RMB 370/month)?!
4. Two types of income: temporary income vs. passive income
Initially popular in China, direct selling brought several misconceptions to Chinese entrepreneurs who started from scratch: “This is the last chance for quick (or even explosive) wealth in the 20th century.” “Whoever owns the network (or channel), whoever can achieve extraordinary freedom!” These so-called “quick wealth,” “explosive wealth,” and “extraordinary freedom” have largely led direct sellers down a greedy path. They pursue speculations, success shortcuts, and even effortless gains. Among them, more experienced “leaders” increasingly professionalized and specialized the operation of direct selling. The professional form eventually reduced direct sales to “a business in which a few people who think they are smarter go and fool a group of fools and train them to become swindlers” (popular slang in the industry).
What is most heartbreaking is that the essence of direct selling has become a naked exploitation of the only primitive accumulation ordinary people have – their limited time, energy, and social networks. It directly turns a large number of participants into socially bankrupt refugees at the bottom of society.
The manipulative tactics of direct selling possess typical short-term effects, mutual conflicts, and vicious competition, which determines its unstable and temporary nature of income. So where does the so-called channel income and extraordinary freedom of direct selling come from? To understand the real meaning of these concepts, we need to start with the “Rich Dad” series of books that have been popular in China and introduced some unfamiliar concepts to the Chinese. Direct sellers often quote the theory of “Rich Dad” and claim that the pipeline income in “The Story of the Pipeline” by author Robert Kiyosaki is a type of passive income.
Let’s first define passive income. Passive income refers to income that can be automatically obtained without spending much time and effort or taking care of it. At first glance, it may seem like “getting something for nothing,” but in reality, it often requires long-term labor and accumulation before obtaining passive income. Passive income is a necessary prerequisite for achieving financial freedom and early retirement.
With passive income comes corresponding active income. Here, we need to clarify some corresponding income concepts: from a financial perspective, active income, also known as temporary income or salary income; passive income, also known as continuous income or asset income.
Temporary income refers to income that “exists only when you do it, and disappears when you don’t.” Most people today have temporary income, so it is also called active income. The advantage of active income is that it is easy to obtain – you just need to find a job and work hard for a while. However, the disadvantage is the lack of sustainability, meaning that it is like a “bucket-carrying” job where you have money if you work this month, and none if you don’t work next month. After your work stops, the length of time you can maintain your expenses is your financial life span. Most people with temporary income have a financial lifespan ranging from two months to two years, but there is always a deadline. People with temporary income are simply selling their time and labor. As they age and become less energetic, their income will decline. Sales income and business income are typical types of active income.
Continuous income means “income without doing anything,” or “once worked hard for a while, enjoy an everlasting harvest and no worries about retirement.” The biggest difference between the rich and the poor lies in the former’s possession of continuous income, while the latter constantly strives to increase the size of temporary income rather than change the structure of their income. In theory, people who have continuous income and achieve financial freedom have a financial life span close to eternal life. True continuous income generally exists in three areas: real estate, such as having a house or shop rented out to others, with monthly rental income offsetting your expenses and leaving more than those of salaried employees; intellectual property, including royalties and patent rights; and businesses that can run automatically.
Careful consideration reveals that the so-called “pipeline” income that direct selling has been talking about is just a pseudo-concept. The vast majority of direct selling income comes from the performance created by new members who are recruited every month, rather than genuine “pipeline” income. Rather, it is a type of active income obtained through active management, a typical sales income – “bucket-carrying” income. It is far from true passive income because of the instability and cut-throat competition in direct selling, which has shattered any possibility of pipeline income becoming passive income.
The concept corresponding to continuous income is assets, which means that only by having assets can one have continuous income.
Now it’s time to reveal the answer to the formula of Melaleuca’s two numbers: 95% repurchase rate × 370 yuan/month/person = continuous income.
From this formula, we can see that the Melaleuca business, through your recommendation to customers and the operation of the company’s customer retention system, eventually locks in these customers as members with continuous consumption, even lifetime members. That is, you and the company jointly own assets that generate stable benefits.
So what kind of income does Melaleuca really make? If the customer is disloyal, it is just a sales object that occasionally sells, and you can only earn active income. If the customer is locked in as a loyal user with continuous cycle ordering, you no longer need to actively sell and serve them. At this point, it has entered Melaleuca’s consumer direct purchase system, and each of its repeated purchases generates a qualitative leap, producing asset income shared by you and the company.
Therefore, it can be concluded that the income generated by the Melaleuca business is real continuous income. Understanding the meaning of asset income allows us to truly understand the value of Melaleuca’s continuous income and how great its asset value is.
In mainland China, for example, if you have 500 customers in Melaleuca, you have stable continuous income or asset income of RMB 15,000 per month, which is roughly equivalent to five houses in mainland China rented out at RMB 3,000 per month. The asset value of these five houses is approximately RMB 5 million, and they are debt-free assets.
In Melaleuca, how many customers you have corresponds to how much asset you have.
Each of your customers is a cash machine worth RMB 10,000, which prints passive income of an average of RMB 30 per person per month. Stable “assets” of 500 customers mean that you have RMB 5 million and are called Senior Director in Melaleuca; stable “assets” of 1,000 customers mean that you have RMB 10 million and are called Executive Director.
When explaining the income characteristics and value of Melaleuca, Wei’s most classic saying is: “Poor people focus on the size and speed of income; rich people pay attention to the structure and source of income.”
Only by understanding the value of continuous income can you truly see through the illusion and bubble of getting rich quickly in the direct sales industry. Only by understanding that managing Melaleuca is building assets can it truly motivate you to manage Melaleuca.
Melaleuca solves your lifelong financial security problem, that is, it changes your income structure and source. For this reason, I often share with my friends that if you find the feeling of “settling down and living a meaningful life” in Melaleuca, you have basically understood the value of this business.
5. Two Speeds: Speed of Life and Death vs. Tourist Train
Three years ago when I first joined Melaleuca, I wrote a blog post specifically discussing the huge difference in speed between Melaleuca’s business and traditional direct sales, and all sales businesses. In a direct sales company, driven by the design concept of “sales force,” salespeople must chase their “group performance (or new performance)” requirements every month as the company runs forward. “Performance” is actually a nightmare for a distributor. For a salesperson, the scariest thing in the world is not selling, but continuous selling. This principle also applies to all sales and business-related industries because each practitioner must pursue new performance every month.
This reminds me of a famous movie, “Speed,” where a bus full of passengers is rigged with a bomb by terrorists. As long as the bus’s speed exceeds 50 miles per hour, it cannot slow down below that speed, or the bomb will explode, and everyone on board will die. Similarly, the system and performance requirements set by sales-oriented companies determine that the company is like a dangerous train, and salespeople are exhaustedly selling and stocking up performance, while the company is rushing to push sales. Because once it stops, the whole enterprise will decline and die, and distributors mean that all previous efforts have been in vain.
Melaleuca’s consumption concept revolutionary locks the target on building the market with consumption power. It uses the power of the company’s four major service systems to successfully retain old customers who have been developed in the past, repeat consumption, and reorder. This makes the efforts of every Melaleuca accumulate, further settle, strengthen and superimpose.
Compared with the bus in “Speed,” Melaleuca is more like a tourist train, with more and more tourists (consumers) constantly boarding along the way. Perhaps the train is not moving too fast, but due to its purely consumption-oriented characteristics, its safety and comfort give people a pleasant tourist feeling. In the end, you can completely reach your target and achieve your respective desired success destination.
Comparing Melaleuca to a tourist train mainly illustrates its safety, comfort, and accessibility of the destination. However, many people draw the conclusion that Melaleuca is too slow! Sales business can allow me to earn satisfactory income in the shortest time.
As a result of my three years as an Executive Director at Melaleuca, it impressed a good friend who had struggled in sales for many years: “Sometimes, fast is slow, and slow is fast.” The reason is that in these three years, he was still struggling in various companies and sales businesses, while my efforts have accumulated results at Melaleuca.
“Time is Melaleuca’s greatest weapon,” said Mr. Wei.
The more sales experts and business elites are, the more likely they are to be blinded by the quick income from sales and immersed in the high commission and sense of accomplishment from closing a big deal. If you look at it over time, in your life, your efforts may never have been accumulated, and the income you earn has always been temporary. And tomorrow, you still have to continue!
As the Buddhist saying goes, this is called karma.
Is it fast or slow? What is true speed? What is true slowness? You need wisdom to understand.
Conclusion: Delivering Prosperity
From “The Fate and Demise of Direct Sales” to “Analysis of Melaleuca’s Business Model,” perhaps you have seen the end of an era, a future trend, a new model in the over 10,000 words I wrote after a week of seclusion, and also understood Melaleuca for the first time.
“Enhancing The Lives of Those WeTouch by Helping People Reach Their Goals.”
Melaleuca In.
This seemingly ordinary sentence is a mission at Melaleuca. It allows every ordinary person to connect with this outstanding enterprise, and its goal is to help you achieve your goals. Through it, you can truly leverage your life and your future. Once and for all!
All of this is thanks to an outstanding entrepreneur 26 years ago who had a vision. He achieved an almost impossible 95% customer retention rate and created a brand-new business model called CDM. Most importantly, he provided a unique career opportunity.
Thank you, Melaleuca’s founder and president, Mr. VanderSloot.
Traditional direct sales businesses are easy to understand but difficult to do, while Melaleuca’s business is difficult to understand but easy to do.
We are even more grateful for my mentor, Mr. Wei Zhaoyang, who was the first Chinese person to understand and succeed in this business with wisdom 14 years ago. Without his initial analysis of the essence of direct sales, I would not have come up with a solution to my ten-year confusion about direct sales. Without his wholehearted efforts across the Taiwan Strait, I would not have achieved some success at Melaleuca. Without his three years of teaching, the content of this essay would not have been presented.
“It’s like climbing Mount Jade, some people walk alone, some people help others build roads during the climb. I think about where those who lack motivation and cannot keep up with the pace will stop and turn around. I will supplement what they lack.”
As a pioneer, Mr. Wei’s achievements are not just because he has many firsts, but because of his educator’s mindset every time he talks about Melaleuca’s business.
Melaleuca:The Wellness Company.
Without VanderSloot’s grand and compassionate vision, there would be no outstanding Melaleuca enterprise; without Wei’s correct interpretation and success, Taiwan’s Melaleuca would not be successful today. The future of Melaleuca in mainland China and even globally depends on our joint efforts to delivering wellness!
by Tianwen, mid-January 2012, at home in Chongqing.
