Direct Sales – John Hobbs

Comparing MLM Compensation Plans

network-marketing-compensation-300x300 In a previous article about home based business I talked about how I might evaluate a network marketing business opportunity. One of the factors that needs to be examined is the compensation plan. MLM compensation plans tend to be complex. But you need to understand how you can earn money.

Of particular importance to the new prospect is being able to make enough income early in their network marketing business to make it worth their time, before they have built a substantial team of distributors.

In looking at network marketing companies, Robert G. Allen, in his book Multiple Streams of Income, has a 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.” In my opinion, this rule of thumb has value.

Each sale takes effort. The average sales effort must account for sales attempts that fail.

If we assume that average sales effort is similar for different companies, the compensation plan that pays more for each successful sale is a better deal. For a distributor, they must feel that doing the business is worth the investment of their time. A higher average commission amount per sale tends to make it more worthwhile from a personal time investment perspective.

Furthermore, if a company’s compensation plan does not provide adequate incentive to make customer sales, what does that say about their overall philosophy? In my opinion, a distributor must have a reasonable expectation of being able to make a profit in a reasonable period of time without building a significant team of distributors. (Profit in this context means money in hand each month after all mandatory costs are paid. Mandatory costs include any administrative fees and any qualifying product/service purchases.)

If the new distributor can’t do that then there is a problem. The problem could be that the product or service is not deemed of sufficient value to the consumer and making sales is a challenge. The problem could be that the product/service is a commodity and there is not sufficient margin to cover an adequate commission rate. The problem could be that the company is more interested in building large teams at the expense of consumer sales. (This last one could become problematic from a legal/regulatory perspective.) Or it could be a combination of these and other issues.

The bottom line is that if the new distributor can’t make a reasonable amount of money from consumer sales in a reasonable amount of time, I would argue that, for them at least, the viability of this business opportunity has some issues.

To illustrate this analysis I have outlined two examples with which I am familiar. In keeping with the policies on this site, company names are not used.

Example 1

This is a well known network marketing company. Joining the company (acquiring a distributorship) is $499. The annual renewal fee is in excess of $100.

The compensation plan documentation uses a basic service price of $40 as the example. (The reality is closer to $30 but we will use their $40 for purposes of this discussion.)

The company pays between 1% and 10% commission on their main service. The exact rate depends on how many customer accounts you have, the more accounts the higher the percentage, with an absolute maximum of 10%.

If all were at the maximum rate, it would take 125 customers to earn $500 residual income per month. But with the sliding scale resulting in lower commission rates on the on the first 30 odd sales, the reality is that it would take in excess of 130 customers to earn our target $500 residual income per month.

Example 2

This is the company I represent. Joining the company (acquiring a distributorship) is $25. The annual renewal fee is $25.

The flagship product (and the one with the greatest overall sales) has its lowest autoship price (the most common price on actual orders) set to $65.

The company pays to distributors 25% of the autoship price (or $16.25).
If we use this commission amount, it would take marginally less than 31 customer orders to earn $500 residual income per month.

Recommendation

The Federal Trade Commission in the United States is looking at network marketing companies. Specifically they are looking at the degree to which companies are making sales to end customers as opposed to associates who are required to buy products/services. The push is for substantial sales to be to direct customers that actually use the product/service. It appears there may be a risk that those companies with compensation plans that pay scant attention to end customer sales may in future be classified as illegal pyramid schemes rather than legitimate MLM companies.

Look at the compensation plan in sufficient detail that you can understand how you can earn customer sales commission in the absence of recruiting new distributors. And understand how many such sales would be required to make a specific income target.

Team related commissions and bonuses are important. Certainly building a team is essential to make really significant income in network marketing. But the new distributor must be able to make a modest profit early in their network marketing business before and while they build a significant team. Compare compensation plans on the basis of the foundations applicable to new distributors. If those aren’t in place, the new distributor may never stay with the company long enough to become a leader of a large team. High attrition rates in many MLM companies are evidence of this issue.

Allen, Robert G. Multiple Streams of Income: How to Generate a Lifetime of Unlimited Wealth. Hoboken, NJ: John Wiley & Sons, Inc. 2004

#wealth #mlm #entrepreneur

Is Network Marketing a Viable Retirement Strategy?

when-i-retire In February of 2016 the Broadbent Institute published a report entitled An Analysis of the Economic Circumstances of Canadian Seniors. Its findings were not pleasant.

The value of retirement assets of those aged 55 to 64 without an employer pension who earned between $25,000 and $50,000 had a median value of only $250.
For the same age group, those with incomes in the $50,000 to $100,000 range the asset value was only $21,000.

In April of 2015 the Schwartz Center for Economic Policy Analysis published a report entitled Are U.S. Workers Ready for Retirement? Its findings were equally discouraging.

Of those at or near retirement age “54% of American have too little saved to produce an income stream in retirement. Annualizing $50,000 for a single male turning 65 in 2014 yields only $70 a week. A married couple in which both members turn 65 in 2014 would receive only $58 per week.”

Most people in our society do not have enough assets to live on comfortably in retirement.

In 2014, Robert Laura published an article in Forbes on the topic of network marketing and retirement. Reading between the lines one gets the impression that Laura was skeptical about network marketing until he conducted his research.

In the end, however, he concluded that “the entire industry is poised for explosive growth and can be one of the most significant solutions to America’s current retirement savings crisis.” Here are some of the points he raised.

AARP estimates that half of all baby boomers are interested in starting a business, which has the makings of a massive trend.
Boomers are shifting their focus from accumulating a giant nest egg to a desire to be part of something bigger and better – to have a positive effect on others – and working in retirement.
Retirees are beginning to realize they need activities that keep them busy, relevant, in good health, and connected to others. In this context, the time, energy and cost to participate in these kinds of companies make them very appealing to large segments of the population caught up in these dynamics.

What he concluded resonated with me as I approach “retirement” after nearly five decades in traditional business. (I put “retirement” in quotes because I have no intention of retiring in the traditional sense of the word, meaning lazing about on permanent vacation.) I have a network marketing business that I will continue working on long after I end my traditional consulting career.

I can relate to one of the people Laura talked with in the course of his research. Staci Cahill says “The products I now offer has changed my life and that of others… and I find a lot of value in waking up and going to bed knowing that.”

It’s more than the money, although given the state of retirement savings it is still an important factor. One of my motivations for getting into this business originally was a healthy ongoing retirement income. What I find is that I get a lot more out of it than that.

I spend time socializing with some great people.
I enjoy helping people be successful starting a business.
Running a business can be challenging and helps keep me mentally active.
Over the years teaching and coaching people to help them develop has always felt good. I am able to leverage those skills to help my business partners and my team members improve.
But a sense of significance is perhaps the overriding factor. In my traditional career I helped many large bureaucratic organizations become more efficient and effective. The work was mentally challenging; but I rarely had a strong sense that I was making a fundamental difference in the world. In my network marketing business I know that my products are making a difference in people’s lives. That is very rewarding.

From my personal perspective, the answer to the question posed by the title of this article is a definite “Yes!” Network marketing can be a very viable retirement strategy.

It involves effort. It is running a business – not taking a vacation. But if you choose a company well, the effort does not seem like work because you enjoy what your are doing. And if you do it well you can get paid handsomely for your efforts.

#entrepreneur #retirement #economy

Home Based Business? What You Need to Know

Networking Visual 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. Say yes now and learn it later

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

#wealth #mlm #entrepreneur