Is it a big scam?
A star is born.
Finding new stars.
Helping stars shine.
Igniting the star.
Multi Level Marketing
You've seen the ads saying how you can make $4,000 a week and how an easy life is yours for the asking -- all for a sign-up fee of $700. At the same time newspapers report how another "pyramid" organizer was arrested on fraud charges. Is MLM a big scam, or does it have a undeserved bad reputation?
More importantly, can an average person make money using Multi-Level Marketing techniques?
A closer look at MLM reveals both the potential for abuse and the opportunity for legitimate market leveraging.
"Pyramid" schemes are a scam. They're an elaborate numbers game designed to reward a few with money taken from the majority. "Pyramids" work by distributing sign-up fees to early organizers. As recruitment slows, new members don't get their share of the kickbacks and thereby lose their investment.
It's a mathematical reality that a high percentage of enrollees will lose money. That's the way it's set up. Sadly enough, these schemes urge the membership to prey on their friends and relatives. When someone does make money, it's at the expense of those who trusted them. It doesn't take long before you feel you can't trust anyone.
The good news is that it's easy to identify the scam operations -- simply look for a core product or service. If the business isn't based on a solid product, chances are it's a scam. Legitimate businesses succeed by selling products others find useful. Satisfied customers spread the word, and the business prospers. Exchanging products for money and creating satisfied customers is the nature of business. If the organization being touted doesn't follow this model, something is wrong.
The explosion of MLM.
MLM originated from a strange source: plastics and preservatives. These improvements in packaging created a need for better distribution and MLM provided a solution.
As packaging and delivery times improved, a fundamental chance in the marketplace took place -- distribution decentralized. For example, soap was no longer sold as a unwrapped bar out of a barrel near where it was made, it was individually packaged and sold off the shelf anywhere across the country. Vacuum packing and preservatives reduced spoilage. Furthermore, delivery no longer took weeks; the concept of overnight and next-day delivery became commonplace. The markets gained flexibility.
Once exposed to a wider range of products, customers begged for more. Multi-Level Marketing helped fill this need by offering a low cost way to expand sales channels.
Next, easy credit created a frenzy in the business climate. With outdated inventory requirements loosening, anyone with a credit card and an empty garage could be a broker. All the specialized warehouse requirements, bonded credit, and wholesale track record were no longer needed. If you had a phone and a credit card, you were in business.
Although the phone and credit card image of an MLM business is an oversimplification, the nature of selling continued to decentralize. Established businesses caught on quick. They saw an opportunity to bypass their slow and costly distribution channels with individual sellers. Lot's of them. Replacing a few traditional sales people with hundreds of sales representatives offered instant coverage of new territories. Since everyone was on commission, the risk of rapidly expanding was reduced.
Recruiting these extra people held little long term risk. If one rep didn't work out, there was no real damage. There were no warehouses to repossess, no loans to recover. The more reps, the merrier. The scene was set for MLM.
The ability to buy wholesale also opened the door for the average person -- they didn't need to invest their life savings in a franchise or an outlet store. They could start with a small product line and operate on a shoestring. Rather than using a formal store front, people sold over their kitchen table or from their backyard lounge chairs. From formal and impersonal, selling became more relaxed and personal. With minimal investment and a bit of drive the little guy could become a player in the retail world.
It didn't take long for individual selling to start bursting at the seams. Single sellers were overwhelmed with demand and couldn't cover all the opportunities. Enlisting the assistance of a friend or relative became common. Recruiting more sales help was a natural step -- it offered market coverage and camaraderie.
Several options were available for rewarding sales, but pioneers in MLM had the foresight to leave a majority of commissions with the first line sales person. They kept the sponsoring party connected by rewarding them with an on-going, although smaller, commission. A ratio of 15 to 1 was common (the seller got 15%, their sponsor got 1%).
These multi-level sales were a perfect fit for the informal sales channels.
In this product oriented form, MLM has little scam potential. It's not possible to take advantage of the last person in the chain. The last person always makes a reasonable profit from the direct sale, 15% in the above example. At the same time, the 1% commission rewards the sponsor's organization and expansion effort. Although 1% might not seem like much, it is proportional to effort and becomes substantial as more people are enrolled. The operation is a very nice fit for MLM.
MLM gave manufacturers the ability to expand distribution channels without additional investment. Companies realized the advantages and MLM became a force in the open marketplace.
As the little guy began to make substantial sums of money, they were startled with the amounts and the ease of operations. They asked, "Is this legal?" It is definitely legal. Most people don't realize these are the same figures successful sales people are making in big businesses. MLM open these profit channels to the small business person.
If you are involved with a MLM effort, the following suggestions will help you manage your operation more efficiently. If you have your own product or service, you will learn how to integrate the leverage of MLM into your business.
How MLM Works
Multi Level Marketing (MLM) distributes sales commissions and recruitment bonuses to several layers in the company. For example, a sales person sells a car and receives 5%; the site manager gets .4%; and the regional manager gets .2% of the sale. Enlisting a new sales person might result in a $50 bonus.
Typically, MLM organizations reward two events: the sale of the product, and the act of recruiting another sales representative.
Rewarding sales with commissions is not unusual. Most sales people receive a percentage of the sales price. Real estate sales people might receive 5% of the selling price; car sales people might receive 1%.
Both the sales person and the company benefit from a commission system. Sales representatives are paid in proportion to their contribution. The more they sell, the more they make. It's a reward and incentive. The company, on the other hand, isn't burdened with high fixed salary levels. When sales are up, it pays out more commissions. If a slowdown happens, expenses also drop. This self-correcting expense makes it easier for the parent company to launch new products and not worry about extra salaries. If the item doesn't sell, the company restricts the loss to material costs. New product risk is reduced.
In terms of MLM, it means that a parent company can take a chance on new sales representatives with minimum financial investment (some expense comes from accounting overhead).
Focus on recruitment.
With little financial risk, companies began to explore the benefits of an expanded work force.
Companies whose products didn't require a flashy showroom realized they could bring in more sales people. Each new sales person came with a circle of friends and relations.
Kitchenware, cosmetics, cleaning products all did well in this expanded sales environment. The new sales force was familiar with the products and required little training. Since these had reps on-going contact with customers, customer support and satisfaction levels rose dramatically.
As sales began to exceed all forecasts, the need for additional sales reps grew. The customer base was still largely untapped. With the sense that a great deal of revenue was as yet untapped, a push began to enlist more representatives.
Rather than simply selling products, reps were given a mandate to bring in new people. In fact, the emphasis shifted from selling to bringing in more rep's. For example, a company could move more product if a sales person went from selling from 20 units a month, to 3 units and one new person each month. Thus each sales person would sell 3 units and bring in one new sales rep each month. Surprisingly, it doesn't take long to run up very large numbers.
More reps and lower numbers (each month every rep brought in one new member and sold three units) :
Even if the numbers aren't hit exactly, the power of bringing in addition representatives is clearly visible.
With the lucrative nature of having more and more rep's, companies began to reward enlisting others into the program.
Unfortunately, in some companies recruitment took on a life of its own. The mentality became: "Forget whether the person could sell or not, just get them in." This "body count" approach to recruitment diluted the ranks with people who couldn't sell the product. Morale and sales lagged. Remember, the recruitment multiplier effect only works when everyone does a reasonable job of selling.
Returning the focus to core sales usually reoriented the effort. As a safeguard against headhunter abuses, many companies instituted sales minimums and gently removed those without a talent (or network) for selling.
The Ideal MLM Product
The occasion may arise when you have a chance to start the business from scratch. If that is the case, you have the opportunity to avoid many of the pitfalls other operations have experienced. Selecting a marketable product is a key element.
The ideal profile for a multi layered marketing product:
The Sales Force
Determining the structure of your sales force is the biggest sales decision you must make. In traditional business settings, high volume, high pressure sellers were considered the best. In a pure MLM operation, the maximum numbers of reps would seem best. The optimum structure points to a combination of these approaches.
Traditional sales people.
Good sales people are a pleasure to watch. They're incredibly quick on their feet; they develop instant rapport with total strangers; and they would talk you out of your ear lobes if you stood around long enough. Their ability to generate excitement from nothing is a wonder.
Real estate sales people are an excellent example of the traditional sales person. Solid commissions made it worth investing time and energy in each customer. As a result, these high powered reps can unleash the full range of their persuasion skills. Also, their listening skills allow them to translate a customers' image of a dream house into the not- so-perfect house dwelling before them.
After the sale, in a traditional setting, the buyers are happy. They feel the sales reps are their friends and had helped them find the best deal possible. Most likely that was the case. Everyone feels good about the interaction. Even years later they continue to exchange holiday greeting cards.
When traditional sales professionals attack the commodities markets, however, they aren't very successful. Usually, the products are low cost, and if there is any competitive advantage, it's tied to price. As sales people turn on their persuasion skills and point out the pennies to be saved, it comes across as overkill, as manipulative. Having a highly professional, polished, articulate person pitch a bar of soap doesn't come across well. It almost seems like a scam.
It's because a mismatch exists between the product and the sales effort. Soap selling needs a casual, off-handed manner. Everyday commodity products need to be offered as an aside, not with a presentation.
In real estate, for example, home buyers come to the table highly motivated and looking for assistance. That relationship doesn't exit in the commodity world. The customers don't care which soap they use. All the facial creams seem identical. As a result, if someone starts overselling a product, the interaction becomes antagonistic. Since buyers doesn't care about the product brand, it gives them a chance to exercise their power as a consumer. The more a sales person pushes and conjures up benefits, the more customers resist.
Commodity sales are a stark contrast to traditional large item sales. Without a motivated buyer, the dynamics of selling change markedly. In a traditional sale, the sales rep needs to understand the buyer's needs and shape the product offerings to that image. In a low cost commodity sale, with no pre-existing needs, sales pitches quickly degenerate into individual power struggles. Traditionally oriented sales approaches are no longer effective.
Low cost commodities and services, the heart of an MLM system, requires a new set of motivations. It needs a new type of sales person.
Since ideal MLM products are widely used, there are often several competing products in the same price range. This makes selling on price difficult -- a new motivation is required. Relationship selling fills this void. In relationship selling, someone buys your product not because it is noticeably better than others, but because of their relationship to you.
Showing favoritism and buying from those you know is nothing new. Given the chance, most people support their friends' effort to succeed in businesses. Most likely, relationship selling began with the urge to support others in your own family. If your brother operated a gas station, it was only natural you would buy gas from him. There was no sales resistance, no hard sell. It was the natural thing to do.
This support spread to others in the community. If your neighbor had a fruit stand, of course you bought your peaches and apples there. This extended to local organization and charities. If your church sponsored a magazine drive, you bought from them. The same held for clubs, organization, and business relationships. In fact, most of these relationship became self-reinforcing -- as you help others they were more than happy to reciprocate.
This urge to reciprocate and buy from a fellow business person is exactly the type of motivation that works with commodity sales. Sales are made regardless of the product's brand and price (within reason). Others buy because of their relationship with you, not because you have a better product.
With the need for relationship selling in MLM commodity businesses, the reign of the fast talking, smooth pitching sales person ended. The high pressure sales pitch no longer worked. The plaid jacket sales person was dead.
Individuals with extensive contacts, friends, and business relationships became the new top sales people. They were naturals. Over the years they built networks where they helped others and others helped them. Adding a commodity here and a service there was no big deal. They rolled in the sales, effortlessly.
The give-and-take nature of the relationships make requests like these easy. Most of the time the sales request was only a small percentage of the favors that were already "owed." Any sales resistance would have been out of character and out of the question. Sales seem to make themselves.
Thus, the new networked sales person thrives by including the products and sales into everyday interactions. They drop hints and occasionally nudge a bit -- and rake in the sales. It's easy because it's just a small slice of the give-and-take that goes on naturally. After having spent two days helping repair a neighbor's garage, it's nothing to say: "Pam is putting together a detergent supply business. You might want to check out the price list to see if there's anything you need." It's a rare person who wouldn't jump at the chance to return the favor.
The old style structured sales pitch just doesn't work with low end commodity sales. When someone tries to give a polished presentation, it comes across as out of place and abrasive.
Recruiting these new stars into your business can be a challenge. They're not as easy to identify as the old style fast talking sales types. You are looking for someone who is reasonably outgoing and has an extensive web of contacts throughout the community.
Sample star profile:
Identifying the best candidates may take research time, but it is time well spent. Star sales reps will make you wealthy.
It's best if you keep your recruitment pitch low key. That's the way business is done in the give-and-take arena. You need to hint around your offering, using others as examples in your discussions. Even though you are not asking them to join pointedly, you can be sure they are thinking about it. By not pushing them, you are letting them consider the opportunity without having to resist your sales pitch.
These comments get the opportunity on the table without putting the other person on the spot. You might need to fish several times. If there is any interest, these hints should surface it.
Homework and obstacles.
After you've "picked the low hanging fruit" and recruited those who you already knew would be inclined towards this type of venture, it's time to roll up your sleeves and do your homework. Since your future stars are members of local organizations, you need to get the membership listings of all the local groups. Your future stars are on these lists.
To narrow down the candidates, identify active members. Skimming old newspapers for community events and the participants will surface targets. Give those on your lists a check when their name comes up. As checks pile up, the potential stars will stand out.
Contact is next. If you live in a small town, create a "visit list." As you conduct your usual chores, take an extra moment to chat with those on the list. Your may be doing some of this already -- this is the next level of organization. If you live in an isolated area and mostly interact with others over the Internet, use your visit list as a guide to newsgroups and discussion contacts.
Once regular contact is underway, it becomes a matter of dropping hints and letting others know that opportunities exist in your business. There is no hurry, don't push. Most people would like a chance at a high profit venture. They just don't wanted to be pushed into it.
Some find it fun adding technology to the venture. The effort feels more like building a model ship than a business project.
Many times potential star sales people are very interested, but they are shy about asking for help from others. They don't want to be the pushy sales types. To recruit these people, you need to show them how to sell without a traditional sales pitch. For starters, three techniques give the opportunity for others to respond. It's sales without the pitch.
Four low-key sales approaches:
These are not direct sales pitches. They're part of everyday give-and-take. Have fun with it.
These approaches let the others know you have a product for sale. You are giving them a chance to respond on their own -- you've helped them out plenty of times; this gives them the same opportunity. It may take a few hints. That's okay. At no time do you need to ask them for anything.
Real MLM stars, because of their connections, often need only to throw out a few hints about their product. Their friends want the opportunity to reciprocate for all the times they were helped. Orders tumble in from every angle.
Star vs broad recruitment.
The star system is so strong that it's worth comparing against the broadcast method of enlisting reps. You may recall that an individual selling 20/month netted 240 units at the end of a year; recruiting 1 person and selling 3/month netted 24,500 units.
Let's say that instead of recruiting just anyone each month, you find 4 stars a year who could sell 150 units a month. Each star, in turn, would also recruit 4 new stars a year.
This comes out to 11,700 units in the year.
Although this is about half of the broad recruitment system's total of 24,500, the star focus has several advantages. First, it doesn't have the inherent strain of continually needing to bring in new people. Having to bring in a new person in each month can become a burden quickly. The four stars per year goal allows you to target and cultivate these individuals at a more sensible pace.
As you might expect, morale is higher with a star studded group. They move more product and that shared success is self-reinforcing. It's fun to make money. In contrast, the sales volume for the broadcast, enlist everyone, recruits is much lower. As a result, the broadcast recruits develop a sense that they're not doing well. In turn, the sales results validate their suspicion they can't sell, and many drop out of the program.
Furthermore, as a sales manager you are much more efficient with a carefully selected group. It takes time and energy to persuade someone to become a representative. Recruiting four times as many reps is a lot. Focusing that same energy on those with a greater chance to be stars is more rewarding.
With a high number of recruits training and support become a drain. Even the best sales staff needs training. It's up to you to identify their weaknesses and shore them up with better techniques. If a high percent are dropping out, it's only natural for you to withhold some of your enthusiasm and guidance -- until it becomes clear who will be sticking around. You stand an excellent chance of being lulled into a very bad habit: waiting to see how representatives do before giving them attention. At precisely the time they need help, you are holding back.
Lastly, by signing up every person possible, you acquire the negative baggage of introducing your friends to a venture that doesn't work for them. Your stirred their expectations, and they are not met. You have diminished your credibility and tarnished your individual relationship. That baggage can be of little good.
Targeting well connected individuals as your top sales representatives both focuses your recruitment effort and ensures strong sales morale.
Even the best sales people can't succeed alone. They need training, guidance, and your ear.
Sales people need solid product knowledge. Deals slip through because they weren't aware of the obscure feature that would have closed the sale. They must know the product backwards and forwards. You never know when that extra detail is exactly what the customer is looking for. Training the sales staff is your responsibility -- make sure they are familiar with the product.
Each sales person has a unique insight into the marketplace. Try to use that knowledge. Listen to their feedback and requests. Some may not feel comfortable approaching a customer in the same way you would. Recognize you can't clone them all into your image. At best, you can help them shape an approach that optimizes their selling style. A sales program that fits your reps' style unleashes their energy and enthusiasm. (One such approach is covered in the booklet Don't Like to Sell?)
In MLM, a successful sales force will make you wealthy. Helping them be successful should be your top priority.
A sales force needs leads. Leads give them the chance to apply their persuasion and connection skills. Top sales people love to sell. Don't drag them down with contact research. Every sales person should receive a list of contacts. They're an extension of you. Make them successful -- give them leads that your pet mule could sell.
Multi-level does not mean isolated levels. These reps are your business. If necessary, lead them to water and show them how to drink. Conduct postmortems of successful and unsuccessful sales attempts. If it doesn't become clear how they might have made that sale, your analysis isn't good enough.
Losing a sale should never be blamed on the sales person. It's just too easy for that rationale to cover up other deficiencies. When problems arise, keep an open mind for product enhancements. Look at improving the training, the product knowledge, the scripts, and the relationships. Typically, these are the elements that need to be shored up.
Surprisingly, many stars say they had a difficult time getting started. Even though they had plenty of contacts and were quick to improve their organizational skills, it took them a while to get rolling full speed. In light of these comments, potential stars may be dropping out early just because things seem to drag on so long. If you wish to run a star-studded operation, it's critical you don't let any stars leave early.
New recruits say that sales really take off once they have a cash flow to brag about to their friends. With a little success their enthusiasm takes over. Their friends, who are predisposed to buy from them anyway, get caught up in the excitement. The excitement of an operation working is vastly greater than liking the sound of a product. Business often explodes at this point.
If you need sales to stir sales, isn't this self-defeating? It is. Many overcome it, but this dilemma may eliminate up to 60% of the stars before they get going. It's a waste.
It's a waste you can't afford to let happen. These are your stars, you can't let them get away.
The trick is to make your stars successful soon after signing up. If they don't start ringing up solid sales within one week, arrange for them to cover some of your business. Those three new reps you were about to sign into the organization, make some excuse and hand them over to the new star. Let them get the credit. You may lose a few percentage points of up-front money, but you will jump-start the star operation. The star can now begin the brag process and the results will snowball.
Giving your business to every new rep wouldn't make sense if you use the broad based, enlist everyone approach. However, if you have acquired a potential star, that is, a rep with an extended number of contacts, it is in your interest to make that sales person successful. Don't leave it to chance -- make it happen.
Many MLM operations require new members to pay a fee when they join. These fees accomplish two things: they generate cash, and they eliminate members.
A fee is not the place to generate cash. Get an investment partner, increase sales, take out a loan. Don't hinder recruitment with your need for cash.
These fees will keep some people from joining the organization. In the case where you are enlisting everyone, that's probably a good thing. Hundreds of unproductive representatives would overwhelm you anyway. When recruiting potential stars, however, you must use every trick in the book to entice them -- not push them away.
Some say, "If someone can't afford $400 to join my organization, I'm not sure if I want them." That's silly. A star will make you wealthy. Don't throw away a chance for your own success because someone is a bit tight with their money. And there have been enough great sounding scams that their reluctance is really sensible caution.
Any requirement that prevents a star from joining your organization should be removed. It's that simple.
The best way to understand multi-level operations is to build the business from scratch. You'll directly feel its power, as well as its pitfalls. Pulling together all the pieces will accelerate your efforts if you join a larger organization -- you'll know exactly what to avoid and what to push aggressively.
The following guidelines break operations into logical stages. The idea is not to get ahead of yourself. For example, recruitment is important, but if you haven't settled on a product, you're focusing on the wrong activity.
Let's assume you have an ideal product that fits the profile described earlier.
With the product in hand, you need to verify whether it will sell as well as you think it will. Launch your sales plan: promotion, lead generation, cold calls, closings, support. Get all the functions going. The sales motion will surface product flaws and gaps in the marketing plan. Until demand and ease of sales are demonstrated, it's too early to expand the sales force.
Now the surprises begin. All the little things you have tucked away in the back of your mind will surface when you bring on additional staff. They are not you; they don't know what you do. All the access codes, all the background on product features, all the special cables you built last year -- the new person doesn't have that knowledge.
Increasing your staff slowly allows you to understand how much knowledge and procedural support they need.
Listen to your new sales people. Don't force them to do everything exactly the way you would have. Let their energy and enthusiasm surface. Make it easy for the sales team.
Starting your first representative is a big step. Try to work out even the smallest problems. If you don't get them early, they'll only be more inconvenient when you expand.
Stage 3. Losing control.
At some point in an MLM system, you no longer have absolute control. The individual reps no longer report or are tied to you. In most ways they are out of your control.
Losing control is a good thing. It means you've expanded. Others now have the chance to drive the business. Your focus should shift to support and management at a higher level.
If you feel the urge to tighten controls, try to let it pass. Although it is possible to maintain a rigid system as you grow, the drain on your energy and others' enthusiasm can be substantial. This means giving people enough room to make mistakes and fail occasionally. Try to treat failures as opportunities for training and learning.
Your urge to install rules will surge when you enlist that one sales character who is dishonest and takes advantage of the freedom. Don't structure your entire process to prevent a repeat. Focus on growing the business. Be too loose. Make some mistakes yourself. Comments like, "That's against our policy," are warning flags that rules are becoming the end. Policy should facilitate, not restrict.
The key challenge of Stage 3 is to ensure the highest standards of training, support, and encouragement are working at every level of the organization. With that in place, you will thrive.
Your First Year in Network Marketing
by Mark and Rene Yarnell. Prima Publishing, 1998.
Wave 3: The New Era in Network Marketing by Richard Poe, Prima Publishing, 1994.
The Wave 3 Way to Building Your Downline
by Richard Poe. Prima Publishing, 1996.