MARY KAY COSMETICS
On September 13, 1963, 49-year-old Mary Kay Ash and her son, Richard, started what was to become a large and successful cosmetics business named Mary Kay Cosmetics. The company specialized in the manufacture and sale of a specialized line of skin cream and related products. What made the company somewhat unusual was the use of a direct sales force that numbered about 197,000 at the end of 1982. Most of these individuals were women working part-time. All made their sales through demonstrations held in private homes. Within the direct sales market segment, Mary Kay, the company, was widely regarded as having the most product sales force. And Mary Kay, the woman, was widely regarded as an outstanding example of entrepreneurship at its best. This is that story.
Youth and First Marriage
Mary Kay Wagner was born in Hot Wells, Texas, 25 miles from Houston, in 1915. Her parents ran a hotel and restaurant, which drew customers from Houston, 25 miles away. When she was seven her father became ill with tuberculosis and had to enter a sanatorium. Her mother sold the hotel and moved to Houston where she ran a small café. Mary Kay did the housework and cooking, developing confidence in her abilities to take care of herself and others.
Religion was an important part of the young girl’s life. Later, as an adult, she began tithing once her income reached eleven dollars a week. Her tithing and attendance went to the Baptist Church. But she was truly ecumenical in her love for others. Her three husbands were, respectively, Catholic, Protestant and Jew.
In school Mary Kay developed into a fierce competitor. She attributed that trait to a friendly rivalry with a neighbor girl who, “Had everything I wanted to have and did everything I wanted to do”. So motivated, Mary Kay won a junior high school typing contest and took second place in the state extemporaneous speaking contest. She earned straight “A’s” in high school.
After graduating from Houston’s Reagan High School she wanted to enter Rice Institute. But she had no money and was unable to get a scholarship. Reluctantly, she gave up the idea of going to college.
Instead, she married Ben Rogers, a guitarist whose radio program made him something of a local celebrity. The marriage lasted eleven years and produced three children. But Rogers was drafted during World War II and while away on military duty asked for a divorce. Mary Kay later commented, “It was the lowest point in my life. I felt like a complete failure as a woman”.
Learning to Sell
Before the divorce Mary Kay had first taken a few premed courses at the University of Houston and then obtained not one but two jobs. One was as a secretary at the Tabernacle Baptist Church. That paid $125 a month.
The other job was selling for Stanley Home Products. That company marketed by direct selling. Its representatives put on “home shows” at the residences of selected customers. A number of ladies would be invited to each show where salespersons like Mary Kay would demonstrate Stanley home products and try to sell them on the spot. The salespersons were actually independent contractors who bought the merchandise from Stanley and sold it at the home.
In Mary Kay’s case the profit came slowly. After three weeks on the job her “shows” were averaging $2.01 in net income, hardly enough to support her family. Many persons in that situation would have quit and looked for other work. But Mary Kay was convinced that money could be made selling Stanley products. That led her to believe that her sales methods weren’t right and she dedicated herself to finding out what she was doing wrong.
In search of the answers she went to a regional sales convention in Dallas. She asked many questions, made notes of ideas that sounded helpful and left the convention a much wiser salesperson. A highlight of the convention was the crowning of the “sales queen.” That ceremony had a galvanizing effect on Mary Kay. She set a goal to be the company’s sales queen at the next convention. She even got up the courage to approach the company president, F. Stanley Beveridge, to tell him of her goal. As she later recalled that moment, “He took my hand in both of his, looked me square in the eye and after a moment said, ‘Somehow I think you will.’ Those five words changed my life.” A year later she was named the sales queen.
Having mastered the art of selling, Mary Kay next had to learn how to recruit and manage other people. The direct selling business she was in was primarily an occupation for part-time workers. A person wishing to make it a lucrative full-time business had to recruit other salespersons. Stanley’s policy was to pay the person doing the recruiting a small percentage of the sales revenue of each person who was recruited.
Mary Kay was a good communicator. Not only was she able to recruit other women as independent contractors for Stanley Products, but she was also able to teach them her secrets for successful selling. Eventually she had a group of 150 women whom she had recruited and who were succeeding in the business. Her income was supplemented by a small percentage of the sales of each of those recruits.
At that point in her career Stanley insisted that she move to Dallas to develop that territory. In addition, the company refused to let her continue to receive “commissions” on the sales of the women she had recruited in the Houston area. She made the move and successfully recruited a new group of women. But she deeply resented not being allowed to share in the earnings of her Houston recruits. Years later when she started her own company she remembered that injustice and adopted a policy of letting her saleswomen keep commissions without regard to geographical territories.
In 1953 May Kay left Stanley Products to embark on a business venture in St. Louis. The venture aborted and she returned to Houston where she became a salesperson for the World Gift Company. World Gift was another direct sales organization and her past experience made it easy for her to boost her earnings to $1000 a month by the end of the first year. Impressed by her performance, World Gift eventually made her its national training director. Traveling three weeks every month she developed 43 states for the company. She also developed a strong power base among the field personnel.
Mary Kay’s success was also her undoing at World Gift. In 1963, “an efficiency expert told the company Mary Kay’s power was too great and the pot began to boil.” The company offered her a change of assignment. It was, in effect, a demotion. Mary Kay refused to accept it and resigned, waiting for the company to reconsider. But World Gift had no intention of doing so.
After 25 years in direct sales Mary Kay found herself suddenly and unexpectedly retired.
Founding A Business
Retirement was not healthy for Mary Kay. As she later explained:
The boredom of retirement caused a deepening sense of discontent. I had achieved success, but I felt that my hard work and abilities had never been justly rewarded. I knew that I had been denied opportunities to fulfill my optimum potentials simply because I was a woman. These feelings were not mere indulgences of self-pity, because I had personally known so many other women who had suffered similar injustices.
She attempted to put herself in a positive frame of mind by, “making a list of only those good things that had happened to me during the previous twenty-five years.” In the process of making that list her thinking once again turned positive.
Once the first list was made, Mary Kay realized that she might have the beginnings of a book. But for such a book to be truly helpful to others, it would also have to warn the reader of problems encountered in direct selling and offer advice on how to solve them. And so a second list was developed.
As she reviewed the lists in the following weeks she began to develop a new dream. In her words,
I had been introduced to the skin care products by a local cosmetologist when I had called on her during my direct-selling days. Her father had been a hide tanner who noticed that the skin of his hands was like that of a young man. Realizing that the tanning solutions he worked with every day were possibly responsible, he began to experiment and eventually developed a modified version to use on his face. His daughter became a cosmetologist and using his formulas, she developed creams and lotions for customers of her small, home-operated beauty shop. In addition to myself, many of her relatives and friends had been using these wonderful products for several years, so when the cosmetologist died, I bought the original formulas from her family. From my own use and the results I had personally received, I knew that these skin-care products were tremendous, and with some modifications and high-quality packaging I was sure they would be big sellers!”
With the product identified and a marketing plan in place, Mary Kay and her second husband prepared to go into business. Their life savings of $5,000 was used to make arrangements for a small office with two desks and the manufacture of an initial inventory of products. Ten saleswomen were recruited as independent agents who would pay for their supplies in advance. And Mary Kay gave the new recruits a thorough introduction to the techniques of successful direct selling under the so-called “party plan.”
A month before the company was to open for business, Mary Kay’s husband died of a heart attack. Realizing that the best way to overcome her grief was to be busy, she went ahead with the scheduled opening. Her twenty-year-old son, Richard, accepted a $250 a month job to run the financial and administrative ends of the business and on September 13, 1963 (a Friday) Beauty by Mary Kay began its first official day of business.
Nature of the New Company
1. Basic structure of the Sales Organization
Beauty by Mary Kay followed the basic party plan model. The company manufactured proprietary products, which it then sold through a network of saleswomen. They were, in fact, independent contractors. Mary Kay called them “Beauty Consultants”. To become one, the woman had to sign an agreement and pay for her initial product inventory called a “beauty showcase.” The new recruit would immediately be taught how to schedule and conduct the sales session at parties to be held in private homes. Then it was up to the consultant to book the parties or “skin care classes.”
The beauty consultant’s income was to come from two sources. One was the sale of Mary Kay products to the consultant’s customers. The consultant bought the merchandise from the company at a fifty percent discount from retail list price. The other source of income was the bonus paid for recruiting new beauty consultants. In 1985 the bonus system paid a consultant 4 percent of the GROSS product orders of recruits if one to four persons had been recruited and 8 percent for 5 or more recruits.
A beauty consultant was expected to work part-time (leaving time for another full-time job or taking care of the family). Consequently, a consultant’s income was expected to be low. In the period 1981-1983, for example, the average sales per consultant was $1,705 with 50% going to the company.
For salespersons intent on making a larger income, Mary Kay created the position of Sales Director. A person in this position remained an independent consultant. But she was given the additional responsibility of organizing the weekly sales meeting for the beauty consultants in her unit. In 1982, the 4,100 Sales Directors had an average annual income of just over $25,000.
2. Issue of Pyramiding
The structure of the sales organization at Mary Kay raises the question of exploitation of the bottom level salesperson. Reporter Kim Wiley offers this example of the company’s response:
The firm is sensitive to the fact that this manner of operation may be interpreted as pyramiding and it sends out full legal documents explaining why it isn’t. In a pyramid scheme, the recruiter gets a piece of each recruit’s commission (or forces the recruit to buy products from her at a marked-up price), thus making it necessary for the recruit to bring in recruits of her own just to stay afloat. In Mary Kay, everyone receives the same 50% discount on the cost of cosmetics; the recruiting bonus does not come out of the recruit’s earnings, but is paid directly from the home office.
3. Unique Features
With the exception of the care taken to avoid pyramiding, the organization was similar to most other direct selling organizations. But Mary Kay expected her organization to outperform the others because of the structure and procedures, which she had formulated.
The structure was designed to help the independent contractor make the most of the market opportunities. Key elements of the structure were:
(1) Limiting the product line so that the salesperson could be thoroughly knowledgeable about each item and so that on-the-spot deliveries could be made at the time of the sale. (2) Putting the emphasis at the sales parties on teaching rather than selling. Mary Kay believed that not only would the teaching make the claims for the products more credible, but it would make the experience more enjoyable for both customer and salesperson. (3) Restricting the number of people at a party. Mary Kay had learned through experience that women who actually participated in a demonstration were more likely to buy. But since a beauty consultant could not give personalized attention to more than six women at a given party, that was the maximum number allowed. (4) Insisting on delivery on the spot. By having the beauty consultant deliver the orders at the time they were placed, the company took full advantage of impulse buying. Furthermore, by having the beauty consultant collect payment on the post, the hostess was relieved of the burden of trying to later collect from the guests. (5) Not allowing the beauty consultant to buy on credit. This policy eliminated the cost of policing a credit system and protected the consultant from getting herself too deeply in debt. Mary Kay felt that other firms unnecessarily created bad feelings between the company and sales force because of credit problems. (6) Not limiting sales territories. Mary Kay believed that more beauty consultants would be recruited if any consultant could recruit anywhere in the country (or outside of it). As she explained the system in 1978, “We have what we call the adoptive system. It works like this: say you recruit a consultant while you’re on vacation in Hawaii. You leave her with a director of consultants in Hawaii who trains her. Meanwhile, you draw a small percentage of your recruit’s sales. But the company pays that commission, not the recruit. The Hawaiian direct does not get any percentage except to count on the recruit’s sales as a part of her unit, but the Hawaiian director will have a recruit somewhere else, under some other director and it balances out. Most of our 900 directors have adoptees. Now this system is almost unexplainable to men, I’ve found. But it works. Everyone helps everyone else”. (7) Offering superior compensation. “Gross profit margins for salespeople were typically 35% to 40% when Mary Kay launched her company. She set that level at 50% to help attract career-oriented women”. (8) Sweetening compensation with an array of performance bonuses. Sustained high levels of performance were, of course, rewarded by promotions to positions of sales director or national sales director. But short run effort was further encouraged by a generous array of cash bonuses and such in-kind awards as the use of a pink Cadillac for a year. “In 1982, 358 sales directors earned between $30,000 and $50,000 in commissions and prizes (in addition to their regular sales income). Another 166 earned between $50,000 and $100,000 and 45 earned more than $100,000”.
Those were the key elements of the structure within which the Mary Kay Cosmetics sales force would operate for the next two decades.
3.2 Corporate Culture
Mary Kay was fully aware of the fact that structure or formulas work only if they function in a manner that brings out the best in the people involved. And so she sought to create a corporate culture, which encouraged people to make that kind of effort. The culture contained a set of attitudes including:
(1) Pride in the organization (2) A belief that one could not be satisfied with past accomplishments but should seek to constantly improve (3) A willingness to take risks (4) A belief in the dignity of selling as a profession (5) A view that work was the third most important element of a person’s life. God was first and family second. (6) A belief that one could and should have fun at work (7) A belief that the Golden Rule was a practical guide to conducting one’s business affairs.
The culture also contained a set of guidelines for anyone with a supervisory function. Those guidelines summarized the way Mary Kay herself tried to deal with her employees. They included the following admonitions:
(1) Make each individual feel important (2) Praise them frequently and in public (3) Whenever necessary, criticize them but do so constructively and sandwich the criticism between two layers of praise (4) Be available to listen to them and hear what they are trying to say (5) Make an effort to eliminate the factors that put stress on them (6) Don’t hide behind policy in dealing with their problems (7) When developing a plan or project get the people who will implement it involved in planning it so that it becomes their project.
Those were the principles learned by Mary Kay during her decades of apprenticeship working for others. Her challenge was to make them a way of life in her new company.
Two Decades of Rapid Growth
With her plan in place, Mary Kay lost no time in implementing it. Given her decades of experience in recruiting and training direct sales forces for Stanley and World Gift, she skipped the trial and error period which many new business founders must endure.
In 1964, the company’s first year of operation, sales totaled $198,514. The number of consultants stood at 318 at the end of the year. That pace was rapid enough to cause Mary Kay to think of ways of covering the nation. She considered franchising, but decided against it because she thought women would have to get a man to put up the capital and that would make the man the boss. Instead she decided to offer stock to the public and use the proceeds to fund a company-directed expansion. The offering was made in 1967.
For the next 14 years the company’s sales grew at an average annual rate of 28%. There was a sharp slowdown beginning in 1975 and lasting through 1978. But the company reacted by increasing compensation for consultants and growth rates returned to a range of 29% to 82% for the next four years.
Growth required some capital investment. In 1969 the company built a 275,000 square feet manufacturing and packaging plant in Dallas. In the early 1970s four regional distribution centers were built. And in 1977 an eight story home office building was opened in Dallas. By 1981 that facility would house 400 of the company’s 1,000 payroll employees.
From the beginning Mary Kay Cosmetics held an annual convention to recognize the top performers in the company. By the end of the 1970s this had become a stunning emotional event for the participants and a highly effective public image builder for the company. Mary Kay once described this motivational tool as follows:
Every August we have what we call Seminar. It’s a grand party, three days of spectacle – part beauty pageant and part Academy Awards night. It’s the climax to a whole year of Mary Kay enthusiasm.
But there’s more than spectacle. There is a chance to share ideas and techniques with people from all over the country. There are classes in selling, goal-setting, leadership, charm and poise and even bookkeeping. We also have a workshop for husbands on how to be a helpful Mary Kay spouse.
On Awards Night we get 8,000 people, all of whom come to Dallas at their own expense. Thousands of prizes are awarded, ranging form the keys to a (pink) Cadillac to diamond bumble bee pins (the company’s symbolic way of saying that the recipient did more than anyone thought she could). We crown the queens of sales and recruitment and present them with prizes and flowers and scepters, accompanied by standing ovations and musical fanfares. And there are also inspirational speakers and top-notch entertainment.”
Seminar was the centerpiece of a well-orchestrated program of motivating the sales force. As one observer put it, “Mary Kay Ash urges managers to ‘praise people to success’ and she does not take the maxim lightly. Her consultants, from the most lowly to the most exalted, receive tremendous recognition. Monthly prizes are mailed to their homes. Each consultant gets a card on her birthday. And top performers are listed in Mary Kay’s monthly magazine, aptly called Applause.
The company’s expansion was directed by two persons. Mary Kay herself set the direction, created the culture and served as a highly visible cheerleader. Richard Rogers, her son, handled the management functions. From the beginning Mary Kay needed her son to handle that aspect of the business because all of her experience had been in selling. Rogers gradually built a management team that by 1985 consisted of the following full-time executives in addition to the chairman of the board (his mother) and president (himself):
- Vice president of marketing
- Vice president of finance
- Vice president, secretary and general counsel
- Vice president for administration
- Group vice president for manufacturing
- Vice president for research and development
- Vice president for quality assurance and engineering
- Vice president for manufacturing operations
- Director of personnel
- Director of public relations
- Director of public affairs
- Director of product services
- National director of distribution
- Four directors of the regional distribution centers
By the mid-1980s the company was no longer a small entrepreneurial venture but a mid-size corporation which depended for its success on a team of more than a dozen professional executives.
Tough Times in the 1980s
The heady success of the 1970s was not to last. Changes in the American labor force caused direct selling in general to run into difficulties and Mary Kay Cosmetics experienced a decline in sales in both 1984 and 1985.
The basic problem was an increase in full-time job opportunities for women. The number of beauty consultants working for Mary Kay fell from over 200,000 to 100,000 between 1983 and 1985. As a result, the company’s sales fell from $323 million to $260 million over the same period. The reason? The cause? In the opinion of reporter Mei-Mei Chan, “(The industry) simply lost their vast pool of workers. By 1982 when inflation fell and the economy improved those who had wanted ‘pin money’ during the lean times dropped out. And job opportunities for women opened up dramatically in the late ’70s and ’80s, prompting more and more women to snap up 9-to-5 positions instead of part-time sales work. Not only weren’t they available to sell the product, but the USA’s 53 million working women weren’t home when firms like Avon, the industry giant, called”.
The company responded first by developing an improved compensation package for the consultants. Then, as the founder and her son looked at the costs involved, a decision was made to buy all of the outstanding stock and make the firm a privately held corporation once again. In December 1985, the two paid $315 million to buy the company back. And in 1986 the newly-created Mary Kay Cosmetics saw sales rebound to $280 million.
One era ended and another began when Mary Kay Cosmetics experienced its first sales decline in 1984. The old era was a case study in entrepreneurship. The new will be a study in the efforts of an established corporation to retain its excellence in a changed business environment. Mary Kay Ash created a remarkable corporate culture in the old era. Her son, Richard, who helped her create that culture faces the challenge of adapting it to the changed environment.
There is no question that Mary Kay Cosmetics is a business success story – a story of the creation of wealth through effective implementation of a sound business plan. But it is also clear that the company’s founder had an additional goal in starting the business. As she put it:
You can do it! So often a woman comes to us who desperately needs to hear that. Frequently she is a housewife who has been out of the job market for many years, or who has never worked outside the home.
When I see a woman like this, I want to do for her what nobody did for me, in the way of providing opportunities… We make sure she learns the necessary skills. We encourage her to improve her appearance so she looks the part of a beauty consultant.
And when she does that, she begins to improve in other ways, too. Her confidence builds. She becomes more efficient and begins to set goals. Very often a Mary Kay career is a self-improvement and a way of life – not just a way to earn money.”
*This article originally published in The Journal of Business Leadership Volume 1, Number 1, Spring 1988.
*Copyright 1988. The American National Business Hall of Fame. All rights reserved. No portion of ANBHF may be duplicated, redistributed or manipulated without the expressed permission of the ANBHF.
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