MLM Consulting:
Starting Your MLM Company

The Holy Grail or Living Hell?
Why They Work - Why They Fail!

By Michael L. Sheffield

Multilevel Marketing began more than 60 years ago as part of the direct selling industry and has served a significant role in the introduction of many new consumer products and services to the marketplace. MLM, also known as network marketing, has had particular success as a vehicle to introduce many of the “new to the world” concepts in natural health products, weight loss and skin care products that we now consider commonplace in our everyday life.

In recent years, MLM has been adapted to technology-based products and services with amazing success. Dozens of companies have emerged to market telecommunications including long distance, local phone service, and even cell phones while others now encompass e-commerce and other web-based products. From life and health insurance to dental and legal services, every imaginable consumer product or service need is now fair game for this channel of distribution. As a result of this evolving marketplace, federal, state and local governmental agencies have recognized MLM as a legitimate channel of distribution, even as they have actively responded to the need for rational regulation within the industry.

The MLM industry currently consists of well over 2,000 companies in the United States, with sales of more than $28 billion annually. According to the Direct Selling Association (DSA), approximately 13 million Americans participate in this industry as independent sales people, and the number is growing every day as more and more individuals take part in the entrepreneurial explosion that is reshaping every sector of the economy.

The MLM industry currently consists of well over 2,000 companies in the United States, with sales of more than $28 billion annually.

Why Companies Choose MLM

The decision of how to bring a product to market is more complex today than the past. Years ago, if you had developed a new consumer product you wanted to sell, all you had to do was buy advertising on any or all of the three television networks to be assured that the vast majority of people would see your advertisements. Although expensive, building brand name was simpler.

But today, there are hundreds of viewing choices, thousands of magazines and millions of web sites. Competition has heated up. While 25 years ago each category of product may have offered three or four primary brands, there are now dozens. As the cost of securing a sustainable share of the market has skyrocketed many companies are actively looking for lower cost alternatives to launching their products and services.

MLM offers many advantages in this situation. MLM is still essentially a person-to-person system of marketing. The truth is: people like to buy on the basis of a friend, relative or a coworker’s referral. Word of mouth is still the most potent sales motivator. MML consulting experience suggests that, as a result, the cost of bringing a product to market through MLM is usually a small fraction of that of conventional marketing and distribution.

In addition, because MLM is based on the principle of multiplication where one person “tells and sells a few,” who each “tells and sells a few more,” who each continue the process, exponential growth shortcuts the traditional time and costs to build a product brand. Once critical mass is achieved, the growth can continue with little or no additional investment.

Another factor, contributes to this phenomenon: Typically in MLM, a high percentage of distributors are also regular customers. These people have bonded to the brand more completely than normal retail customers would, because their income stream from their business depends on loyalty to the brand. In most MLM companies, the purchases for personal use by distributors represent 50% or more of the total sales. And most of the other customers have some form of personal relationship with their distributor, so that their loyalty to that friend or family member extends somewhat to the commitment of buying the products.

Of course, there is always attrition, as there would be with any product subject to personal consumption. But a properly managed MLM company that has reached maturity can expect to overcome attrition through natural growth while experiencing some consistent level of increased geometric growth resulting from the MLM system itself. And when that company introduces new products, they will have an automatic customer base in its growing number of distributors and loyal customers.

What It Takes to Make MLM Work

At the foundation of any MLM Company are the three necessary major components required to operate successfully:

  1. An obvious product demand – The ideal MLM product must fulfill a widely experienced need while offering a cost-effective solution. It should be priced to match its perceived value making its purchase an easy decision for the buyer. Its benefits should be readily discernible following the purchase and should cause a level of confidence and satisfaction in the buyer to want to tell others about the service. It is essential that the sale of the product or service return a short-term income to the distributor as well as the potential of earning long-term residual revenues.
     
  2. A compelling compensation plan – Assuming the product or service satisfies these criteria the next most important ingredient is the compensation plan. While it is usually assumed that the only reason for the design of a company’s compensation plan structure is to define how commissions and bonuses are earned, the MLM compensation plan is much more. A properly designed compensation plan must serve as a road map to direct new distributors toward certain well-defined financial goals that result from personal sales activity while building of their own sales organization. It should never reward for the simple act of recruiting known as “head hunting”. The company should offer training programs designed to provide the necessary education and support tools to help the distributor reach his or her desired sales goals.

    The concept of direct selling of a product or service used by such companies as Avon, Fuller Brush, Prudential Insurance, etc. eliminates much of the retail store overhead since all administration and distribution efforts and costs can be centralized in one location with all sales activity taking place on a direct to consumer basis. This has proven to reduce cost of distribution and account for the direct sales company’s ability to pass on lucrative commission to its sales people. Even so, direct sales people are recruited on an “addition” basis. This means that the company hires a manager who hires the necessary number of direct sales people in a territory to create acceptable sales, adding to this sales force as necessary.

    The MLM model is unique in that it incorporates the concept of direct selling, but under the softer approach of “relationship marketing”. While there are many successful, full-time career MLM distributors, the vast majority of independent MLM distributors participate on a part-time basis, working their MLM activities around their full-time jobs. Their goal may only be to earn a few hundred dollars extra per week or month. They tend to sell to their “warm” market of friends and family. In most cases, they become their own best customer, creating a unique category called "distributor/consumer." They tend to be loyal to the company’s product as long as the company maintains its integrity and continues to earn the distributor’s confidence, provides reasonable value for the product investment and maintains product quality standards.

    The business model of MLM is one of showing the distributor how to leverage his or her time by sponsoring other independent distributors who buy and sell products. In turn this new distributor continues the process of sponsoring others, etc., growing the income stream of the original distributor through a predetermined number of levels. In fact, on just a part time basis, a distributor can create product sales volume that might overshadow what even a full-time direct sales person might produce, or even surpass the entire monthly sales of a retail store. This could all be done working from his or her home with the product sold shipped directly from the MLM company’s central warehouse to the customers.

    While the proper support system needed to establish an MLM Company can be expensive in the beginning, it is usually far less than the cost of launching products through other channels of distribution, and the distribution cost average goes down as sales increase. Efficiencies of modern technology can greatly reduce administration and distribution costs over traditional methods. The system provides rapid sales growth potentially launching the new company into positive cash flow in record time.

    It is not uncommon, even with anticipated attrition, for an MLM sales organization to continue to grow and prosper as long as the company’s product quality is consistent, checks are paid on time to downline distributors for their sales activities, and a continuity of confidence by the distributors of the company’s business model is intact. While many factors can affect an MLM sales organization’s growth, in the early stage, growth of 25 to 30 percent per month is common. As the organization matures, most organizations settle down to a growth of between 10 and 15 percent, after attrition has been accounted for, without the accompanying need for increased overhead.
     
  3. Capable corporate leadership – As the leadership goes, so goes the Company. The corporate leadership determines the company's character and personality and is responsible for maintaining this character and personality throughout the entire field marketing organization. The leadership must also be competent to deal with the explosive growth which every successful MLM Company experiences.

    The marketing leadership is especially critical to an MLM company's success. MLM is so unlike traditional marketing that prior MLM experience in the company's marketing leadership is especially valuable. The entire sales and marketing momentum will take its shape, substance and values from the company's marketing leadership.

Momentum is the Magic of MLM. Momentum can also be the death knell — if not properly managed. The marketing leadership can create momentum. But the leadership team must also include administrative leadership to make certain the company can properly service the growth which marketing creates. Staffing at each growth level must be planned for and must be implemented in anticipation of growth. Cash flows become substantial and these cash flows must be managed according to a well-developed plan.

The ideal combination for an MLM leadership team is a counter balance between a boldly optimistic marketing professional and a practical, conservative administrator who works behind the scenes providing the required organizational structure, financial management and technical support to allow the marketing growth and momentum to continue unimpeded.

Other Factors Affecting Outcomes

While MLM offers extraordinary benefits to businesses that make effective use of this method, you should not mistake that the process is easy. Regardless of the product, if a company chooses to use MLM, it will have to adapt both its products and its business practices to the method in order to make it work. MLM has certain critical areas of sensitivity that are very different from traditional business. These are factors that must be managed properly for the business to succeed. Obviously, this is where a competent MLM consultant that has “been there – done that” can be valuable. I have described some of these sensitive areas already, but there are two intangible considerations that are very real in this business:

  1. Psychology – MLM is based on people’s emotions and attachment to concepts that make them feel good rather than pure logic. In general, the formula for success in MLM is to build the business around a legitimate company story that leads people to an understanding of the unique benefits offered by the company’s products while generating the enthusiasm to share the story with others. This is then combined with an exciting profit plan combined with a simple system that anyone can duplicate. Once someone hears the story, understands the system, and enthusiastically embraces the belief that he or she can be successful, it is up to the company to avoid sabotaging that distributor’s dream.
     
  2. Trust – When someone decides to join an MLM company, he or she is making a certain leap of faith. First among these is that he or she trusts the company. I believe it is critical to examine the elements of trust that are essential to maintaining a viable relationship between the company and its distributors:
     
    • Integrity – MLM represents a unique form of business “partnership” between the company and the distributor. When the company enters into a distributor agreement by accepting business submitted by that distributor, it is saying to that distributor that it will do its part to enable the distributor to make his or her business successful. If the company fails to honor that commitment, it will have breached the trust that is essential to the partnership
    • Performance – Beyond trusting that the company intends to keep its word, the distributor must also be able to trust that it is able to perform. At some point the distributor must consider whether the people who are running the company are capable of running this type of company. Do they consistently deliver their product in a professional manner? Are their commission reports and procedures clear and accurate? Do they respond with satisfactory answers when asked questions about the business? Do they appear to operate effectively and efficiently? Do they “have their act together?” If not, the distributor knows it will ultimately reflect negatively on his or her business.
    • Non-competitive – One of the most basic conventions in MLM is that the company never competes directly with its own distributors. To do so would be to betray the partnership between company and distributor. A company may have other distribution channels, but at the very least they would market products that differ in some material way from the ones offered through the MLM Company. There are at least three reasons for this:
    1. As previously discussed, it is important to have a compelling story that sells the benefits of the products. By definition, that story should be exclusive to the products and brand being offered by the distributors.
    2. If the company does not protect distributor exclusivity, it becomes very difficult for them to see the company as a partner committed to their success.
    3. If they don’t have a partner committed to their success, they no longer have any basis for the belief system that says, “I can do this!” The psychology upon which MLM is dependent is destroyed, and the model will no longer work.

Why They Fail

There are two things every MLM company must protect in order to have any potential for success — its integrity and its momentum. If it loses either one of these, it will find it extremely difficult, if not impossible, to recover. To protect these two crown jewels, the company has four very basic responsibilities:

  1. Deliver a quality product – Whatever product the company sells must meet or exceed the expectations of its customers. Whatever benefit it claims to offer, it must at least fully deliver that benefit. Otherwise, there will be no credibility. If a company is in the vitamin business, the product better make you feel good. If the company is in the soap business, the soap better get your hands clean. And if the company claims to be in the business of saving you money on your long-distance, then, all else being equal, you’d better have a lower long-distance bill.
     
  2. Deliver the product on time – MLM is a business of managed psychology. Distributor enthusiasm is literally the life-blood of any MLM business. Peoples’ feelings wax and wane. However, they do so in a predictable cycle.
    When a new distributor signs up, he or she will be very enthusiastic for a few days. Chances are, the distributor will either sell to or recruit a few of his or her closest friends and family members during this time. If a company can reinforce that distributor’s decision to become a distributor by promptly and professionally delivering the product they have ordered, the distributor will look good in the eyes of those whose opinions matter most to him or her. The distributor will then settle in to build his or her business, secure in the knowledge that the company is reliable.
    But if the company is late delivering the product, the company will have embarrassed the distributor in front of his or her friends right at that distributor’s greatest point of vulnerability. Chances are, the distributor will get a serious case of buyer’s remorse and quit, thereby eliminating all future sales that might have resulted from that distributor and that distributor’s entire potential downline.
     
  3. Pay the distributors, accurately and on time – Most people who join MLM companies begin as part-time independent contractors. They usually keep their “day job.” But they typically begin with a tremendous amount of enthusiasm for the opportunity, and an expectation that they may eventually be able to replace their day job with a full time income from their own business. If so, they will be able to live where they want to live, spend their time as they choose, and be freed from the drudgery of, and dependence upon, their job.

    It is this dream of freedom and self-determination that is at the very heart of MLM. In pursuit of this dream, people are willing to overcome their fears of rejection and put forth the effort required to become successful in sales. For many people, it is the very first time in their lives they have really accepted that they are in control of their own future. Their belief system becomes, “I can do this!”

    But if the Company fails to pay the distributor as promised, the distributor is suddenly confronted with the fear that someone else is actually still in control of their financial future – that he or she might do everything they are supposed to do, and yet the company could sabotage their dream. As a result, the confidence is destroyed and the enthusiasm evaporates. The distributor feels betrayed. Almost always, the distributor will immediately stop working.

    Sometimes, the depth of the distributor’s faith is such that he or she will give the company the benefit of the doubt for a while, hoping that it’s just a clerical error, or some other problem that will soon be resolved so they can get on with the dream. But if the pattern continues, the distributor will become embittered and will want no further association with the company. In fact, in many cases, the distributor will go out of his or her way to share his or her disappointment with others, shifting the power of the referral marketing system into reverse, and creating a permanent negative.

    This can have a very long-lasting impact, in that the distributor may not distinguish between the company and the apparent leadership, in the form of senior distributors who may have made the group presentation, or otherwise been visible as representatives of the organization. Even if these people move on to other, more reputable companies, they may never again have the opportunity to do business with someone whose dream was shattered by the company with whom that leader was previously associated.
     
  4. Support the distributors – In order to build their businesses, distributors must have access to certain information about their production, qualification levels, flow of business, downline performance, etc. The company should make this information readily, and accurately, available to its distributors.

    Another part of supporting the distributors is providing attractive, easy-to-understand marketing materials and appropriate distributor training. Of course, all reference information should be available either in the manual (including periodic updates published in the company’s newsletter), or on the company’s website.

    The most important part of supporting the distributors is communication, both collectively and individually. The company should have a regular newsletter in print or electronic form and a password-protected “distributors only” section in its web site, to assure prompt, consistent dissemination of collective information, such as schedules of events, updates on products and prices, upcoming changes in materials or training procedures, etc.

    The distributor will ask these questions related to communication:
    • Is my company proactive in its efforts to communicate?
    • Does it volunteer information in a spirit of openness, or does it only “cough it up” when forced to do so?
    • Does the company get the word out quickly?
    • Is the information provided accurately?
    • Can I count on what the company tells me?
And when distributors call the company’s distributor support representatives to ask questions about specific customers, or to reconcile their commission accounts, or to complain about problems or offer suggestions, they should always get prompt, courteous, knowledgeable and accurate service.

But above all else, whatever the company says must be true! In order for any dream to survive, there must be trust. When a distributor enrolls in the business, he or she is entrusting that company with his or her dream. Implicit in the decision to invest time, money and personal reputation into their business is the belief that the company operates from a basis of integrity and will always treat them fairly. Furthermore, since they are usually referring the products to, and sharing the business opportunity with, family and friends, they are attaching their personal reputation to the integrity of the company. If the company tells them something that turns out to be untrue, the cornerstone of trust crumbles.

This channel of distribution can fast forward success for the aggressive yet wise entrepreneur. While it is not easy, there is a proven pathway that has been paved by many before you. Learn from their mistakes and apply the historical success formulas of others to turn your own dream into a solid and respected business model.

Michael L. Sheffield is the CEO of Sheffield Resource Network, a full-service direct sales and multi level marketing (MLM) consulting firm. He is a Co-Founder and Chairman Emeritus of the Multi Level Marketing International Association and in 2001 he was inducted into the MLMIA Hall of Fame. He and the Sheffield team have assisted in hundreds of national and international MLM corporate start-ups as well as offered a full line of services for established direct sales companies.

As the most noted expert on compensation plans, he has been a guest lecturer on the subject for the DSA, University of Illinois, University of Texas, Berkeley and Harvard Alumni Association. He has helped launch over 200 new products marketed by direct selling companies around the globe.

He can be contacted at 480-968-6199, Sheffield Resource Network, 2239 N. Hayden Road, Suite 103, Scottsdale, AZ. 85257, website address: http://www.sheffieldnet.com


Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

www.mlmlegal.com

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