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
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:
- 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.
- 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
- 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:
- 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.
- 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:
- 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
- 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.
- 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
- 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.
- 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
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
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.
- 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.
- 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
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
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: