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Why Successful Companies Would Choose the MLM Sales Channel
Why would a Successful Small Business or even multinational business decide to sell their products through the MLM or Multi-Level Marketing sales channel?
We should start with an honest interpretation of what Multi-Level Marketing, Network Marketing or MLM actually is.
What is MLM?
The MLM Industry has been around for over 100 years. According to the DSA’s figures, in 2009, worldwide sales by the Direct Selling Industry were $117 Billion. This is not a small number!
MLM is simply a method of moving products or services from the manufacturer to the consumer, eliminating as many distribution steps as possible.
In its most current form of MLM companies doing things honestly and ethically, a Distributor joins the company for the right to purchase products at wholesale and SELL them to end users at Retail, and then makes the difference as his profit margin.
In addition to the Retail Profit earned, the Distributor can also earn additional bonuses based upon building a network of other distributors.
While the commission plans vary wildly as to how these additional bonuses are earned, this explains the simple vanilla Ethical method of an MLM Company setup.
The principal is simple, take all the money a typical Proctor and Gamble, or Coca Cola type company will put into marketing, advertising, distribution, and the normal sales channel, and re-direct it into the MLM commission plan.
This ultimately pays the members to set the MLM company up with direct to end user distribution in a best case scenario, or at least with direct to Member distribution who then go on to retail themselves to the end user.
Valid Products and Services for MLM
What products and services can be sold by an MLM can vary widely, but there are a few general traits of a good MLM product.
1. High Profit Margin
2. Highly Consumable
3. Hard to Explain
4. Must be Experienced
High Profit Margin
Let us start with the High Profit Margin criteria.
The necessity of high profit margins is mostly due to competition in the MLM Sales Channel. Sadly, outright illegal scams, in addition to less than ethical MLM companies are messing up the marketplace.
As a result of scammy MLM companies with Sham products being sold for ridiculously inflated prices in order to power ever more "generous" compensation plans, legitimate MLM companies can find it hard to compete if their profit margins are too low. Their commission plans will appear anemic when compared to the company selling the sham product with massive margins.
When a Scam masquerading as an MLM company can be your competitor you can be at a serious disadvantage. MLM Members are not always the best at deciphering the difference.
Lower profit margin products can still be sold by the MLM sales channel, it will likely just take a little longer to build a loyal distributor group, and cost a little more in initial procurement of Distributors.
The ideal profit margin to have the ability to pay out 50% of the Distributor price in total to the distributor base through your commission plan is a 1 to 8 ratio. So if your product costs ready to ship $10, you want to be able to sell it WITH VALUE, not just by pricing it high, for $80 wholesale to your Distributors, and an additional 30% ON TOP of that or $104 for retail.
Before you get all crazy about how ludicrous this profit margin is, let’s take a reality break from the “real” business world.
How much do you think it costs Coca-Cola to produce a glass or bottle of Coke that you buy for $3 at the Movie Theatre? Or Even $2.00 at the gas station or 7-11? Wait EXACT SAME PRODUCT yet such wildly different pricing? Sounds like a scam to me!
Ok, I know bad example, everybody knows we pay too much for Coca Cola. Let’s look at something simpler. Water? Now bottled water costs MORE than Coke but it is still ultimately sold to me by Coca-Cola!
Do we need another example? How about perfume? Do you think the cost to the perfume manufacturer is really out of line to our 1 to 8 ratio? Thedailymail.co.uk wrote that the liquid in the bottle*** costs 3% of the selling price. Throw in a really nice bottle at say $5 cost on a $55 bottle of perfume and Voila, another item that would qualify with MLM capable margins that exists in the "real" business world.
Vitamin Supplements, Skin Care, Cosmetics, Laundry Detergent and Automotive Additives are all "real world" high margin items often with more than sufficient margins to power an MLM commission plan ethically.
Why don’t we get back to the topic at hand of why this high profit margin is desirable?
If your competitor has a 1 to 20 ratio due to a fake or close to fake product being sold for an overinflated price on the basis of how much money the joining member will make, he will appear significantly easier to make money with regardless of compensation plan.
We have noticed an interesting point with regards to commissions earned by members with large teams across several of our Legitimate and mature MLM clients. Clients with legitimate products and profit margins tend to see Members overall average payouts of 10% of the total sales generated in their organization or downline. This is average over time, not including any large 1 time advancement bonuses. So if 1000 members sold/purchased $100 each in a month, after all the dust clears, on average their total compensation would be about $100 x 1000 = $100,000 x 10% = $10,000 for the month.
Keep in mind this is based on a product with an 8x ratio. $1 cost, selling wholesale for $8 and a commission plan tweaked to pay out about 50% of wholesale sales overall to the membership. So of $8 in sales, $4 overall goes to commissions, $1 goes to product cost, and $3 is left for operations and profit.
As these are normal ratios we can assume operational costs are $3.
Here is where the illegitimate MLM’s advantage comes in. Let us assume the bad MLM has a cost of 50 cents, and sells their product for $16. This means they have $16 in revenue and if we assume our other example is fixed costs for the comparison, they need $3.00 for operations and profit, and 50 cents for product cost, so they would have up to $12.50 to pay in commissions or just over 78%. That is a 50% increase in ability to pay.
This means apples to apples a member in this company stands to make $15,000 on a $100,000 sales volume period vs. $10,000.
While the above example may not scare away members from a legitimate MLM, imagine if you only had a 4x ratio to work with. $1 Cost, $3 operations are not even possible, as you have nothing left to pay the members, therefore you will need to use BV or Sales Volume in order to even make your plan work in the first place.
What this means if that if a member sells $100 in product, and you are for ease of explanation a 5 x 7 Matrix commission plan paying 7% per level, rather than the member earning 7% of $100 or $7 in commissions in your plan, you would need to BV or Business Volume your product to about 50 points for the $100, so the member would now earn 7% of 50 points or $3.50!
With this 50% required BV, using the same logic as above, your member could expect to earn only a paltry $5000 on their $100,000 in sales volume.
As a result, the average person can deem an MLM with legitimate products to be not as lucrative as a scam. This brings up a whole new discussion on the state of the MLM Industry. We will get into that concept in another article!
Why is it better if your products are highly consumable?
This one is not a must, but rather you will have a much higher chance of success in the MLM sales channel with a product or product range that is very consumable. The ideal consumption rate would be the ability of a single person to consume $50 to $100 a month of your product or products and feel they have received fair value for their money. NOT value due to the fact they will make lots of commissions in the business, but actual VALUE based on the products alone.
The true measure of a good MLM product priced right is how many members and/or retail customers keep buying the product for more than 6 months AFTER they have given up on the dream of making money or building an MLM business. If you believe your product is that good and you have the margin, you are a huge step ahead as a candidate to distribute your company’s products by MLM.
There are some Vitamin Supplement companies out there in the MLM world that in my opinion get a little ridiculous with the expectation a family of 4 can afford to spend to take their supplements. That said, I am not sure the same company could afford going down to their local GNC and purchasing at retail the best Vitamins on offer for the entire family either.
In other words, it is fine to sell a premium product at a premium price, but at best you should be the top of the retail market in price with a similar product, or if you are going to be higher priced than the top of the market, you need a true value proposition as to why your product is so much better than what is available in the market.
High ticket items like water filtration or Esthetic Gizmos that sell for $1000 or up that are not consumable, can often do with less profit margins, but you have to be very careful as you can also contravene a lot of state laws trying to take such items to market legally and ethically by MLM. You also do not end up with the desired consumable trait with these type of items so it is harder to keep the network growing long term.
Hard To Explain
One type of product or service MLM excels selling is taking a hard to understand or complicated product or services to market cost effectively.
A perfect example is Vitamins. Before MLM the concept of a vitamin was children’s chewable or One A Day brand. Some people took them, but nobody ever questioned the quality or science behind them.
Once MLM got a hold of the vitamin industry everything changed. Suddenly the concept of Chelated vitamins, or just better science started to take hold.
The reason why complicated items do well in MLM is you end up with a very dedicated and Zealous sales force taking the time to explain the items with enthusiasm knowing that once someone starts to take the products, they will likely signup for autoship and keep taking them for a lifetime.
The dynamics of what goes on with MLM are quite exiting. In one transaction you get people to understand and trust in the concept of a vitamin that is better, coupled with the industry standard 30 day empty bottle guarantee to build trust, then the idea that it will be likely not just be a single sale, but a lifetime sale and POSSIBLY a member who builds a team leading to even more revenue for the referring distributor!
This is what allows Members to take the time to learn the complications of the product themselves, AND then take the time to explain it to a new potential customer or member. You can’t do that in a 30 second commercial.
Must Be Experienced or Demonstrated
As MLM is a person to person business, it does particularly well with products that are most easily sold after a trial or demonstration. By law in most places in North America an MLM Company must have at least a 14 day return period. Most MLM’s extend this to 30 days, and some even to 60 days AND say it is an empty bottle guarantee.
This means your MLM Member can sell the product to a potential customer with a full Money Back Guarantee, letting them actually use the entire product then decide if they want to buy more, become a member, or get their money back.
Once again the concept of the Member possibly picking up another Member or a LIFETIME customer motivates them to spend far more time with the potential customer answering questions and teaching or sharing information and testimonials about the products in order to close the sale.
So what do you do should your products or services not fit any of the above criteria? Should you still try to twist your products into an MLM Company based on how much money your members could make?
Much like you would not expect success selling a heart surgeon’s surgical instrument through your local grocery store or 7-11, sometimes the sales channel just doesn't fit your product!
Sadly, this is a major contributor to the mess in the MLM industry today. Products that do NOT fit the MLM model being forced in with the lure of a Fantastic commission plan.
If your products fit a few of these criteria, then possibly speaking to an MLM Consultant can help you decide if there is a way to make a successful, honest, ethical MLM utilizing your products.
If your products or services do not fit ANY of these criteria, it is likely best you do not pursue the MLM Sales Channel.
On the other hand, should your products fit 3 or more of these criteria, this could be just the Sales channel for you to inexpensively get the product recognition and sales volumes you deserve!
INS can certainly help ascertain if your product or service could be a viable Product for the MLM Sales Channel. We also have a generous Share in the risk plan on MLM commission plan design AND MLM software available to all our MLM Software clients.
Contact us today to learn more about INS MLM Software or our other MLM related services or request pricing by Clicking Here.
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