So people often wonder WHY the Multi-Level Marketing business model doesn’t work, or WHY people continue to get into the “GROUND FLOOR” opportunities but they don’t last. I have an interesting perspective on this, and in the context of this post I will attempt to explain my personal understanding and beliefs on WHY MLM companies almost always (99.9% of the time) fail. Let me first give you some background. According to the Direct Selling Association (DSA) there are over 1000 brand new “GROUND FLOOR” opportunities that enter into the marketplace every single year. Of those companies, less than 1/2 of 1% ever make it through 5 years.
First of all, there are quite a few similarities between all companies in the network marketing/direct sales/Multi-level Marketing industries. Here are a few:
- All companies choose to distribute their products via WORD OF MOUTH.
- All companies pay on MULTIPLE REFERRAL GENERATIONS.
- All companies have some sort of SALES PRESENTATIONS.
- Most companies offer the opportunity to work from a home based location.
Let’s explore these for just a minute because there is a huge misconception on WHY these points above seem to define the MLM world, but in actuality do not define the MLM world.
- All companies choose to distribute their products via word of mouth. Most people think that because you call them and ask them to sit down with you to look at a new business opportunity, or new products, they automatically throw you into a MLM BUCKET and tell you they don’t do one of those things… So that is supposedly the first thing that identifies MLM companies right? WRONG!!! Word of mouth (Referral) marketing is the least expensive, most effective way to generate new business. Go ahead, ask any business owner what is their most effective way to generate new business and they will all tell you the same thing, referral from happy customers. So point number one does not define Multi-Level Marketing.
- All companies pay on Multiple Referral Generations. Alright, you’ve got me. That’s Multi Level Marketing… The industry pays people to help other set up accounts or bring on new distributors, representatives, etc. Hold on… How is that different from any from any sales organization? Let’s take for instance sales organizations. If you work for a sales organization there are multiple people who collect commissions based the sale of one product or service. For instance, when you buy a new car think about all the hands that are in the cookie jar. The sales representative gets a piece of the cookie, the sales manager gets a piece, the finance manager, the broker, the store owner. So does that mean that a car sales operation is a MLM company? IF this is your definition, then YES, a car dealership is an MLM company. But no one looks at a car dealership as an MLM deal. So in my opinion this does not define MLM Companies.
- All companies have some sort of sales presentation. I’ll be very brief here. Every sales organization of any sort has some sort of sales presentation, period!!! Whether you educate, sell, etc. it is all the same. This DOES NOT define MLM.
- Most companies offer the opportunity to work from a home location. How many corporations right now are allowing the opportunity to work from home, or work virtual? I worked as a consultant in the engineering field for 4 years from my home. However, I worked for a large corporation. So do I work for a MLM company then? Nope, not at all. So again, this does not identify or define MLM companies.
So what then defines MLM companies? There are a few things that really identify MLM companies. Just like stripes identify a zebra. Keep in mind that almost all companies have either point 1 or 2 or points 1&2 both.
- LARGE BUY IN. Here is the first point that everyone tries to hide until the end of the HYPED up sales presentation. There is typically a large buy in for all companies for one simple reason. The large buy in pays the sales commissions that are paid to the distributors. It is a front loaded system, get rich quick scheme. Most companies range anywhere from $299-$10,000. Again the reason they do this is because they have to pay the people who are “SIGNING” people up.
- LARGE MONTHLY COMMITTMENT. The second point, I believe, is more telling than the first. Have you ever wondered why 90%+ of the companies out there require some LARGE MONTHLY COMMITTMENT? The corporations will never tell you, but here is the truth. I received this information from someone who was a CFO for one of the Juice Companies. His explanation was simple… He said, “In order for the algorithms of the compensation plan to work, we have to commit our distributors, customers to a minimum of $120 per month.” So in other words, in order for the compensation plan to work they need to price gauge their distributors!! I don’t get that. Here is an interesting note… These companies price their products based on getting people to spend $120 per month, therefore, the math behind the pricing of products is simple. They need $120 per month. Most of the products in the MLM world cost anywhere from $2-$10 to manufacture. Therefore, if we were talking about products that competed in the normal marketplace (Target, Wal-mart, etc) then they would price those products based on the marketplace demand. However, because they need to get $120 per customer, they price based on their business model. The average household can only consume 4 units per month. Therefore the price of one unit (juice, vitamins, etc.) ends up being $30 per unit ($120/4=$30). Not rocket science. There are all sorts of variations of products and prices, but just know that the model is the same. They need $120 out of each person per month. Anything more than that is just gravy to make the compensation plan more attractive.
So in other words. What defines a MLM company is the business model. Based on the above explanation, an MLM company is defined by their business model. If you have a “LARGE BUY IN” and/or you have a “LARGE MONTHLY COMMITTMENT” then in my mind you are an MLM company. Now whether or not that is a bad thing is debatable. But just one note, no one wants to be known at the MLM guy, cause typically the MLM guy becomes the NFL (No Friends Left) guy as well.
The next blog post will be focused on how the $Money$ flows in a typical MLM company.