I have been running my businesses out of my home for about 30 years. I started by running a successful international information management conference for several years, I owned and managed two consulting companies, and I got involved with a network marketing company. That last one didn’t work out very well and I swore I would never get involved with another one again.
But the experience wasn’t wasted. I learned some things. And then a few years ago I was introduced to another network marketing business. I was very skeptical, because of my earlier unpleasant experience. But after considerable analysis and thought I realized that this one was different. I will likely continue to be involved with this venture for the rest of my life.
What this shows is that you can run many kinds of businesses from your home. But when we talk about home based business, we usually think of a network marketing or multi-level marketing (MLM) business. Network marketing or direct sales refers to the business model; and MLM refers to a type of compensation model.
In a network marketing business, you buy a distributorship which gives you the rights to sell the company’s products or services wherever the company is set up to do business. The way you do that is by approaching the people you know or meet in the course of living your life – your network of family, friends and acquaintances. This is word of mouth advertising (which is the most effective marketing method known) and it got its name because you are approaching your network of contacts. It is a very legitimate and effective business model.
Most (probably all) network marketing companies have a multi-level compensation plan. There are as many variations as there are companies. But the common theme is that you, as a distributor, in addition to selling your product or service also recruit other distributors. Because you were their sponsor, you are entitled to a small commission based on whatever sales they make. The exact rules are different for each company. Each of the distributors you recruit are independent businesses that can do just what you did, recruit more distributors. And they get a commission based on the sales of their team of distributors. This why it is called a multi-level compensation plan.
The MLM compensation plan is beneficial for the company in that they only pay for sales, not effort. It is much more efficient. It is beneficial for the distributor in that you can realize the advantages of exponential leverage. The more distributors in the various levels of your distributor team, the more total sales will be made and the more commission you can earn. As I said, the specific rules vary from company to company.
As long as compensation is based on actual sales of products or services this is a very legitimate compensation plan. (As a point of clarification, in a “pyramid scheme” the focus is on a distributor being paid for recruiting more distributors. In companies that do that, the product or service generally is secondary. In most jurisdictions in the world this is illegal. But some people still try to set up companies that do that; so exercise caution.)
There are literally thousands of network marketing companies out there. The vast majority of them I wouldn’t touch with a barge pole. As noted above, there are a few that are probably illegal – but only a few. The vast majority are legitimate companies with great products or services. But there are characteristics of many of them that, at least from my perspective, represent risk. The risk comes in two forms: risk of the long term viability of the company and risk that the income you earn may not be worth the effort you had to put in.
So what would I look for in a network marketing company?
Who are the owners? Who is in control?
Look at the founders of the company and those who have a significant stake in it. Did they have solid business experience with a sound track record of success in selling products or services before this network marketing company? Or did they just get into MLM to sell the product or service they came up with? Do they exhibit high levels of ethical behaviour or is it all about the money regardless of what might be right? Do they show, by their actions not just their words, that they respect and care about their customers and their distributors and their staff? Are they people you would be proud to be associated with?
If you are not able to answer positively to all of these questions, there is a risk that the company will not survive in the long run. Or if they survive, you may not be treated well. And those friends and relatives that you introduce to the company may not be treated well either.
I would walk away from such an opportunity because, for me, the risk to either my income or my sense of self worth would be too high. You are betting a large chunk of your future on these people. You must be able to trust them.
What about the product or service?
Is the product or service consumable? Network marketing and the MLM compensation model have residual income as a foundation. In order to ensure a steady stream of commission income month after month following a sale, the customer must be consuming the product each month. Something that is purchased once or only occasionally means you cannot rely on your residual income and you must expend more effort to make sales repeatedly or to repeatedly acquire new customers to maintain a steady income stream.
Is the product or service unique? If it is a commodity item then competition in the marketplace will drive the price down to the point that it is very difficult for the company to pay adequate commission to make it worth your while. For example, if you are in the nutritional supplement business and you are selling vitamin C, you won’t likely get much commission. There are two reasons. First, you won’t have customer loyalty because the local grocery store may have a special on this month that beats your price and they cancel their order. And second, the margins are so thin that there isn’t enough to pay commissions that make selling the product worth your time. If the company’s main selling proposition is saving a little on the price of a product or service, that is a dead giveaway that it is in the commodity space and I would stay away.
Are the product/service claims verifiable? For example, if you are considering a company that sells nutritional supplements, are their claims backed up not just by scientific studies paid for by the company, but by studies where the results are peer reviewed and published in respected professional journals.
If the product or service satisfies these criteria, then ask is the product or service strategic? Is there a large and growing market segment that has a need for what they are selling?
For example, the population is aging and they want to stay healthy and young as long as possible. Health and wellness products and services, if they address real needs, could do well. But a company selling training DVDs when the world is moving to solid state media and internet streaming might not be such a good bet.
Does the compensation plan make it worth your time?
Eric Worre, in his documentary video Rise of the Entrepreneur, says you need to ask three questions: Can you generate some income quickly? Can you develop moderate part-time income in a reasonable time? Is there a possibility of serious full time income?
Robert G. Allen, in his book Multiple Streams of Income, has an additional specific question: In the absence of growing your team, how many customers would it take to earn $500/month in commission? The lower the number the better. (You may want to refer to Comparing MLM Compensation Plans .)
Some company compensation plans are complex. Take the time to figure out the details. Walk through scenarios so that you understand enough to be able to answer these questions.
Also, network marketing is work. If the person trying to recruit you says you can get rich quick or make a lot of money without much effort, don’t walk away – run as fast as you can!
What about the people and supports?
Specifically, are there people and mechanisms in place for you to learn, be coached and be supported so that you can be successful?
Can your sponsor and others provide mentoring and coaching? Is there skills training as well as training on the company’s system? Does the company provide your own company web site? Is there a useful back office site for you to manage your business? Is there a capability (an app) for you to conduct your business from your mobile phone?
And what about the culture of the company? Is it friendly and supportive with distributors helping each other regardless of where they are in the organization? Or are the distributor teams competitive, where they help only those in their own downline?
Another characteristic to consider is, are the people trustworthy? To illustrate my point I’ll tell you a brief story. Recently I attended an opportunity meeting. The presenter had been a customer of the company for a few years but became an associate less than a year ago. He spent the first third of the presentation knocking the competition’s products. It doesn’t say much about your products if their best selling feature is how bad the other guys are.
But what really got to me, and to me it is an ethical issue, is that he lied. Several times during the early part of the presentation he made a point of saying that this was not a network marketing business. Yet when he described how you could earn some money, it involved telling your network of contacts about the opportunity (network marketing by definition) and he outlined a layered compensation plan (MLM). If he was twisting the truth about something this fundamental, how could I have confidence in anything else he said?
Bottom line: Do you like the people and the culture? Would you be comfortable working with the people and the company?
It’s a Business – Not a Job
And finally, remember this is a business. It is based on a residual income stream. It is not a job. In a traditional job you are trading time for money – it is linear. You put in some hours and you get paid for them – end of story. In a non-linear residual income business model, you put in effort without getting paid until you make a sale. Then you get paid commission every month that the customer continues to order the product. And this happens without you having to put more effort into making that sale again. (Refer to Non-linear Income is Key to Wealth.) You need a different mind set when you are running your own business.
If you need to trade time for money in a job in order to survive, focus on that first. But then get serious about starting a home-based business on a part-time basis.
It can be worth it.
If you would like some help evaluating an opportunity, please contact me directly. I will help in any way I can, bringing to bear my understanding and experience with both the good and not so good.
Worre, Eric. Rise of the Entrepreneur – In Search of a Better way: A Documentary. Wichita: Go Pro Productions, LLC. 2014
Allen, Robert G. Multiple Streams of Income: How to Generate a Lifetime of Unlimited Wealth. Hoboken, NJ: John Wiley & Sons, Inc. 2004
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