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I spent the last four months doing extensive investment research on the nutritional supplements industry in the U.S. I feel the industry has good growth prospects, due to the aging of the baby boomers, and a generally more health conscious public. In the course of my research, I discovered a company that I consider to be an attractive investment opportunity. Subsequently, I bought stock in the company. Another thing I noticed is a large number of the companies that I have researched use multi-level marketing (MLM) to distribute and sell their products. MLM is offered by these companies (including the company I bought stock in) to the public as an opportunity to start your own business and earn a sizable income. I became intrigued with the concept of MLM both from the standpoint of investment research and also from the point of view of an entrepreneur checking out a potential business opportunity. Prior to my research into the nutritional supplements industry, I had never been involved in the MLM business. My assistant, Monica, has been involved in MLM on a part-time basis for over two years and she has been trying to convince me, without success, to get into the business for some time. In order to gain a thorough understanding of MLM, I enrolled myself as a distributor with a number of different MLM companies, attended their meetings and presentations, and studied their compensation plans. When it comes to MLM, some people swear by it, saying it has helped them realize their financial dreams and freedom. Others claim it is nothing but a glorified pyramid scheme. If you are looking into earning extra income or starting your own business with little or no money, is MLM a good opportunity compared to other alternatives such as franchising or starting a business from scratch? Is MLM really a profitable opportunity as claimed, or is it mainly a vehicle rigged in favor of the MLM companies to allow them to sell their products advantageously? What is MLM? According to the Direct Selling Association (DSA), the MLM industry accounted for $17.9 billion in retail sales in the United States in 1995 - up from $13 billion in 1991. The DSA estimates that there were 7.2 million salespeople selling through network marketing in 1995 - an increase from 5.1 million in 1991. According to industry reports, the direct distribution of goods and services through these channels worldwide reached approximately $75 billion in 1995. The emergence of the Internet, and increased and improved methods of rapid communication, e.g., personal computers, fax machines, satellite conferencing, etc., have also aided the rapid growth of direct selling. Thus, MLM is definitely a growing industry. Traditionally most consumer products companies distribute their products via retail channels. These companies distribute their products to retailers and then advertise and promote them to consumers. Consumers then go into the stores to buy the products. MLM companies, however, bypass retailers and sell their products directly to consumers. Consumers become independent distributors of the MLM company. They use and buy the products from the company and, in turn, recruit new distributors by recommending the company's products and MLM compensation plan to them. Eventually a network of independent distributors is built up (thus the name network marketing). Products are sold to and consumed by this network. The concept of network marketing is based on the strength of the recommendation created when one who has a favorable experience with a product recommends that product to family and friends. The recommendation, being based on personal experience, is given more weight than a recommendation from a stranger. This happens for two reasons : the first is that the conviction and enthusiasm are genuine, they are based on personal experience; the second is that family and friends trust the integrity of the person giving the recommendation. By relying on distributors to get the word out on its products, MLM companies save the 40% or more of gross revenues that conventional firms continuously spend on marketing. This money is therefore available to pass onto distributors in the form of commissions and bonuses. In essence, the independent distributors become marketing partners of the company. A symbiotic relationship between the distributors and the MLM company is created whereby both parties are mutually dependent upon each other for their ongoing prosperity. Making Money From MLM There are mainly three ways participants in MLM schemes make money. First, they purchase products directly from the company at wholesale price and in turn re-sell the products to consumers at retail price. The markup from wholesale to retail price represents the profit to the distributor. In reality, income from retailing or re-selling products to consumers by distributors represents a very small portion of the total potential income from MLM. This is because each independent distributor can only service a limited number of retail customers given the time, inventory, and logistic constraints. The real money is made in the second method: that is, recruitment and building an organization of distributors underneath you (downline organization in MLM speak) and collecting commissions from this downline network's ongoing sales. The key to success in MLM is recruitment of interested and enthusiastic people to join as distributors. The recruiting distributor then provides support and training to the new recruits to help them become successful. The essence of MLM is duplication of successful distributors. Instead of working independently to build your own network, you can multiply your output and effort many times by duplicating motivated distributors who are all building the network like you. If a distributor recruits two new distributors, each of whom recruits another two, and so on, you can have exponential growth in your network over a period of years. In reality, not all the recruited distributors will be active and motivated, but in the MLM business it takes only two or three motivated distributors to spread the network like wildfire. Once a few key distributors start working and duplication momentum is achieved, the distributor network will essentially take on a life of its own, i.e. it will continue to grow over the years, even without further effort by the original sponsoring distributor. A sizable network of independent distributors can be built up via the initial seeds planted by the original distributor. The commission overrides that can be earned by this distributor from the downline network that he or she built can be very substantial. In fact, there is no ceiling to the commission income as the income level is determined by the size of the downline network that the distributor is able to build. Commission overrides represent the bulk of the income of MLM participants. The third method of earning money from MLM is bonus payments. Most MLM companies set aside a percentage of their global sales into a bonus pool. This bonus pool is then divided and paid out to qualifying distributors according to pre-determined formulae based on each distributor's group sales contribution. For those MLM companies that have attractive and fair compensation plans, the income from bonuses can equal the commission overrides. Thus commission overrides and bonus payments constitute most of the income of MLM participants. Misrepresenting Income So how much money can you earn from MLM? This is where all the trouble comes in. Frequently, inflated income claims made by overzealous recruiters to new distributors lead to disappointments and lawsuits of misrepresentations (not to mention negative publicity and image for the industry). These recruiters, in their effort to recruit a lot of distributors quickly, make unrealistic income claims and usually do not provide adequate subsequent support to their recruits to ensure their success. When the initial high expectations of the new recruits are not met, coupled with the money they have spent on product purchases, bad publicity and lawsuits ensue. In fact I just came across a company offering a MLM opportunity where they claim no selling, no sponsoring, no face to face meeting, no telephone calls, no presentations, and very little time are required to earn extra income of $600 to $5,000 per month (sounds like a pyramid scheme to me). In general, the laws of capitalism dictate that any business or profit opportunity that is easily duplicable with little or no effort required by participants either does not exist or at least is not durable. If the opportunity is so lucrative and easy to get into, then everyone will be getting into it fighting for the profits. The net result is all the profits quickly erode and disappear. There is no free lunch in this world. If something sounds too good to be true, it probably is. Stay away from such opportunities. I don't have the slightest doubt that MLM is a viable and legitimate business. Network marketing is being embraced by many Fortune 500 companies as the marketing wave of the future. Names include Colgate/Palmolive, Gillette, Avon, Coca Cola, MCI, and just recently AT & T. These giants would not be involved if network marketing is not legitimate. As for how much money one can make in MLM, this ranges from an insignificant amount (a few hundred dollars per year) to millions of dollars per year for the top successful distributors. As with all things in life, nothing is guaranteed and not everyone can get to the top. With MLM, the income level you can earn will depend on your own motivation and effort, the company's products, and the structure of its MLM compensation plan. It is important to select a MLM company carefully so that you are hitching yourself to the right wagon. Selecting A MLM Company In deciding which MLM company to join, first and foremost, evaluate the products or services offered by the company. The best MLM companies market a highly desirable, thoroughly genuine product or service with the utmost integrity and then let their products do the "talking." Ask yourself whether you would still buy the products if you were not a distributor of the company. Distributors must be full believers, converts, and users of the company's products. It is not healthy for distributors to be solely motivated by money. In fact, the hallmark of some of the most successful MLM companies is that the business aspect, at least initially, seems secondary to the participants' convictions about the good that they're doing. Products must be moved and repeat sales must be developed. The basis of MLM sales is many people moving small amounts of merchandise. Stay away if the MLM company offers "me too" or inferior products and places excessive emphasis on recruitment of new distributors. This becomes very similar to a pyramid scheme. The success of distributors will not be durable because as you run out of suckers to recruit, and without a significant recurring sales base from your existing distributors, your network of distributors and your commission income will eventually collapse. Legitimate MLM companies have a dual purpose: recruiting people and selling products. So always judge an MLM company by the quality of its products first. If the MLM company offers a genuine and superior product, then the next step is to evaluate its compensation plan. As a general principle a good compensation plan should make it easy for new distributors to join. Avoid companies that require new distributors to purchase a lot of products up front (so called front loading). The MLM compensation plan should also allow a distributor to earn commission overrides relatively easily if the distributor achieves reasonable success in building his or her network. It should not make it difficult for distributors to maintain their rank and organization after they get there. Unscrupulous MLM companies put in all sorts of obstacles in their compensation plans designed to keep their distributors forever running on a treadmill. Once they stop, they will lose the income and organization they have built up. The really great MLM companies have compensation plans that allow their distributors to enjoy the fruits of their labor even when they decide to slow down or retire. Another factor in evaluating an MLM company is to find out what type of support the company provides to its distributors. To help stem departures and to build their reps into successful distributors, good MLM companies produce a wide stream of information on the company's new products and services, sales techniques, and other topics, and also provide ongoing support services to their distributors. The companies also offer regular and continual training sessions that are held at local, regional, or national gatherings. The most critical factor to MLM is how committed the MLM company is to the success of their distributors. Myths of MLM MLM is a get rich quick scheme. A minimum one year commitment is required to build the business before you will start to see results. In fact, if you build your MLM business by the inch it will be easy, but if you want to do it by the yard it will be disappointing. Like everything else in life, success in MLM requires hard work, dedication, time, and patience. There is no free ride. Only those people at the top of the pyramid will make a substantial amount of money with the rest just toiling away for small sums. If you choose the right MLM company with good products and a fair compensation plan, everyone has the same chance and opportunity to make money. How much money you will eventually make will depend on your own effort and commitment. Again, not everyone will make it to the top and only a minority will become top distributors, just like only a small number of people will ever reach the top in sports, business, the arts, and other spheres of life. With MLM, at least you don't need to be born with superior intelligence or other innate talents to be successful. Everyone has the same opportunity for success irrespective of race, age, education, pedigree, experience, etc. You make your own success with MLM. You have to be a fast-talking salesman in order to succeed in MLM. People who are successful in MLM come from all walks of life. In fact, the most successful people in MLM usually don't think of it as selling. Instead they think of network marketing as sharing with other people their own experience with the products and as a money-making opportunity. Comparisons With Alternatives If you have limited financial resources, and want to start your own business, or earn extra income, or achieve financial security, I personally think MLM is a great opportunity. Unlike investing in a franchise where you have to put up anywhere from tens to hundreds of thousands of dollars, getting started in MLM requires very little capital. According to the Direct Selling Association, the average initial investment required of MLM distributors is only about $100, and its members pledge to buy back at 90 cents on the dollar any resaleable goods held by reps who want to exit the business. So if you pick the right MLM company, the worst that can happen is you waste your time in trying to develop the business. If the company has genuine products that you can use yourself, then your money would not be totally wasted. The financial downside is very limited compared to investing in a franchise or starting you own business from scratch. On the other hand, there is no ceiling to your income potential. You determine how much money you want to make by virtue of the amount of effort you are willing to put into developing your network. In addition, once you have built up a distributor network and are earning commissions, you will have a lasting stream of residual income. Residual income is where the income will continue to come in, long after you have expended your effort. For example, royalties earned by successful songwriters are residual income since the royalties continue to come in long after the song is written. In contrast, when you work for someone else you are earning linear income. Once you stop working your income also stops flowing in. If you build your MLM network properly, then you will always receive commission income from the ongoing sales of your network, even when you decide to scale back on your effort. Compared to running your own business, MLM is much more simple and, in a lot of cases, more profitable. You don't have to be tied up every day dealing with all the headaches of running a business, e.g. personnel, cash flow, financing, etc. With MLM you realize every cent you earn in cash. With a business, the profits you show on the Profit and Loss Statement frequently cannot be taken out entirely in cash, due to ongoing working capital and capital expenditure requirements. In the course of my investment research into the nutritional supplements industry, I became so convinced in the idea of MLM as a source of extra earnings that not only did I buy stock in a particular MLM company, I also joined them as a distributor. My goal is to use MLM to earn extra income, which I can add to my portfolio for further investments. Donald Trump Some savvy businessmen understand the power of network marketing. A few months ago on his show, David Letterman asked Donald Trump, "Donald, if you ever lost everything, and I mean everything, what would you do to get it all back?" Trump replied without hesitation, "Network marketing." Immediately there was snickering and laughter from the audience, who thought he was joking. Trump turned to the audience and, as politely as possible, smiled, and said, "Well, that's why you're sitting over there, and I'm sitting here." |
