What the gig economy can learn from the direct sales industry

Gig worker startups such as Uber, Homejoy, and Instacart have taken the world by storm. But as companies employing this model continue to scale, they are discovering that managing large, independent workforces requires competencies beyond building software.

Having grown up in the direct sales industry, first as a sales manager at Dupree and then in my own startup, I’ve wondered why these startups have not adopted the successful worker retention strategies that companies like Avon, Tupperware, and Amway have employed for decades. While these types of businesses may seem like dated pyramid schemes to many, in 2013 they accounted for record high industry sales in the USA of $32.67 billion, representing 16.8 million 1099 workers and a 2.5 percent YoY growth rate over the past four years.

What is the secret sauce that has enabled these businesses to remain relevant so long?

Two Products

Ask any direct sales executive what they sell, and they’ll tell you they have two products: the products in their catalog, and the business opportunity of joining their company. This is because in this industry, sales rise concurrently with the number of workers joining the business opportunity and selling product. Knowing this, direct sales companies have put workers at the center of their business model.

Gig worker companies have a different model. Their primary challenge tends to be attracting the customer demand side of their business directly from HQ, and as a result, contractor earnings and relations are often left as an afterthought rather than being used to create the most end-user value possible.

In the long term, as these companies continue to grow to IPO levels, high levels of churn and dissatisfaction among workers will make it difficult to retain a talent pool that can provide quality service at scale economically.

The Key to Retention

The difference between what one expects when joining an income opportunity vs. what one experiences has been statistically proven to be the key controllable driver behind retention. What this means is that it’s not necessarily how hard a job is or how much you earn that makes a difference in whether you stay, but instead, it’s about how your expectations when joining a job match your on-the-job experience.

In practical terms, this insight translates into two key best practices for 1099 worker retention.

1. Start with the equation

In direct sales, every decision related to the salesforce is usually aimed at increasing income and incentives opportunities while reducing time and effort required by the salesforce.

Income + Incentives > Time + Effort

The rule of thumb for a healthy direct sales business opportunity is earnings of $25/hr. This, of course, takes into account hidden costs, like the time required to get to customers and fulfill orders, and is why you see companies selling high margin, repeat purchase nutritional and cosmetics products with subscriber or collectible sales models baked in.

2. Support their dream

Perhaps most importantly, for sellers who want to put more time and effort into an opportunity, the number one selling point of direct sales is “the dream” that you can earn recurring revenue in the future by earning commission on others that you recruit to sell for your company.

This is why, when you join a direct sales opportunity, company reps explicitly ask you what your dream is, and according to this, provide weekly goals and targets for your first 90 days. Supporting this are complex compensation plans and social support systems crafted to encourage behaviors that align with the company and provide a path forward, including generous use of cheap but effective incentives like prizes and verbal recognition.

Applying Best Practices

Although these best practices are universally applicable, how each gig economy company implements them depends on the operating margins they are able to generate. Via product innovations that increase worker utilization and customer willingness to pay, companies in the gig worker economy can provide worthwhile earnings opportunities for their workers. Those that enable people to earn and build towards a better future for themselves will be the ones that last beyond the hype.

Jonathan Friedman is a Partner at LionBird, an early-stage fund investing in digital health, commerce, and enterprise software. He blogs at Venture Capital Point of View.