Home Biz – 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

Those Jobs Are Not Coming Back

image of job loss newspaper headlines I have been in the information systems business for well over four decades. In the 1970s and 80s there was this niggling question I kept returning to. We were justifying expensive systems projects on the basis of improved efficiency. Each project promised to deliver reduced cost because the system would make the business more efficient. Efficiency usually meant the computer would be doing work that had been done by people. The niggling question: what is the logical consequence of that? Would people lose their jobs?

To reassure the workers we said that nobody would be laid off because there was more work to be done than we had people for. So the staff would simply be doing different things. And as the company grew we might not need to hire quite so many as we would have without the system; but the current staff were assured. That was perhaps a bit disingenuous but it was accepted.

Well time passed. Economic downturns occurred. Some people lost their jobs. And when the economy started to pick up, not so many were rehired. Overall unemployment rates started to climb; to the point that governments started to change who got counted as “unemployed.” Why? Because if you counted everybody that fit the original definition it would make those in power look bad, especially if they had campaigned on promises of reducing unemployment.

About 150 years ago, society faced a similar upheaval. Few people recognized it at the time. It was called the Industrial Revolution – the shift from the Agricultural Age to the Industrial Age. At the start of this upheaval about 90% of the population worked in agriculture. Today, because of the dramatic efficiencies of mechanization, it’s less than 1% and farming jobs are gone – for good.

We are well into the Information Age. You can see the same pattern repeating itself. Three decades ago when I wanted to travel I would talk with my travel agent who would book my flights and hotel rooms. Now I can do that online and most of the travel agents are gone. Remember customer service call centers where you would talk with people? Now you talk to a machine or go to a support web site and most of the customer service jobs are gone.

A few years ago my niece graduated from college. She still has not been able to find a job in her field – and apparently the same is true for many members of her graduating class. These are smart and capable people. What are they doing? The fortunate ones get the opportunity to say, hundreds of times a day, “Would you like fries with that?” But guess what? Fast food outlets are starting to install robotic systems to replace workers. Very soon it will be the computer asking “Would you like fries with that?”

These jobs are not coming back. A post secondary education is no longer a guaranty of a job.

If you don’t want to get caught in this trap, at some point you need to start thinking about something different from the old established patterns. Working for someone and trading time for money (so much per hour, week or year) puts your employer in control of your life.

My recommendation is that you start to think about running your own business. As long as you are able to deliver a product or service that people deem to be of value you will always have income. And you are in control.

Traditional businesses can take quite a bit of up-front investment. So that might not be the best approach for everyone. Possibly a more appropriate option to consider is one of the many home-based businesses. You don’t have the expense of acquiring office space. And in most cases you can start on a part time basis, at least until you are earning enough from your business that you are no longer dependent on employment income. I would be happy to chat with anyone who would like to explore that option. I have been running my businesses out of my home for about three decades.

“The way to get started is to quit talking and begin doing.” – Walt Disney, co-founder of the Walt Disney Company.

#economy #jobs #homebusiness