Where Does Your Money Go When Supporting Small Businesses
Find out where your money goes when you support a friend who has their own business
I have seen a few friends who work for direct sales companies post things on social media recently saying stuff like "by supporting my small business, you're helping to buy my kids new shoes, not lining a big corporation's pockets". As much as it's true that you're helping them to support their family, there is sometimes still a big company who get a cut of what you're spending. With this in mind, I wanted to share my own thoughts on shopping from small businesses, who gets the profits and how different business models work...
Direct Sales Consultants:
If one of your friends has become a consultant for a direct sales company, they are likely to be paid 20% commission on sales to begin with. (This is after VAT, so you need to take approximately 20% off the cash sales you make). So for example if you order £50 of make up with a friend, they will get around £8 commission on your order (before tax and national insurance).
If your friend had £1000 worth of orders in 1 month, that would earn them £160 commission, so still not enough to give up their day job - it will help them to make ends meet though, and is a good way to earn a little extra money from home. They will still have expenses to pay, so won't keep every penny they earn. Most direct sales companies charge £10 per month for their website, plus they have to pay for their business cards, petrol to deliver items, packaging for samples, tax, national insurance, etc.
What About Franchises?
If you buy from a franchise, the owner you buy from has paid a considerable sum of money to use the company name. They choose to do this so that they don't have to start from scratch building their company's reputation. Maybe your friend decided to go for a cleaning franchise opportunity rather than starting from scratch setting up her own business, or perhaps they've bought a franchise coffee shop, and are now owners of a new branch of a well known coffee shop? They'll always have to pay up to 9% of all sales generated to the franchise owners, but the rest of the earnings will be theirs. (After they've paid all of their expenses of course).
Small Business Owners:
When you buy goods or a service from someone who has set up their own business from scratch, they get all of the money, but they have to then pay any manufacturing, insurance, admin fees, etc.
What About Expenses?
Whoever you buy from, the majority of the money you pay will be used cover costs, then the rest is profit which goes to the company share holders or owners, depending on the company setup. The costs may include things like manufacturing, storage, packaging, employees wages, factory premises, marketing, tax, national insurance, pension, etc.
The majority of the profit for direct sales goes to the main brand. Individual franchise owners and small business owners keep the remaining profit after they've paid all of their their expenses.
Is supporting small business owners really necessary?
For me personally, it depends what I am buying. If I am booking a holiday, I want to use a reputable travel agent. One who I am confident will still be trading next year, and who can help should anything go wrong. This means I'd use a well known agent who offers ATBA protection. The brand name would be important to me, so a franchise or chain travel agent would always be my preference in this instance.
If I am buying make up, I'd happily order a reputable brand via a friend, rather than go to the shops for it. I hate visiting make up counters, where they try to up-sell, or suggest products which I would never use. Seeing a friend apply her make up on a facebook live video, watching her go from sleep deprived mum to actual human being in 5 minutes is more my kind of pitch, so I'd favour a direct sales consultant for things like this, every time.
When I am looking for a dog walker, I'd take recommendations from local friends, rather than based on the brand name. It's more important to me that the dog waker is confident with large dog breeds and knows the local area well, than it is she has a reputable logo on her van. Our local pet shop owner is far more helpful and knowledgeable than the guy in the big chain store is, so I go to him and happily pay 10% more. (It helps that he remembers my dog's name, of course)!
For me personally, there are times when I definitely want to shop local, but also exceptions to the rule. As much as I want to support local businesses, I need them to be able to support me too.
What's your take on shopping local? Are you a big brand shopper, or do you prefer to support small businesses?