Direct Sales and MLM

USA Today Reports on MLM: point for point response

By
Kevin Thompson

[caption id="attachment_166" align="alignleft" width="640" caption="Photo by @w3inc via Flickr"]< src="https://dev-thompson-burton-wpms.pantheonsite.io/mlmattorney/files/2011/02/4292341508_4bae644ea0_z.jpg" alt="" width="640" height="425" class="size-full wp-image-166" />[/caption]Over the past year, USA Today has taken a special interest with the MLM model. They've published a number of articles skeptical of the MLM model and usually reference examples from Fortune Hi Tech Marketing. Recently, they published an article titled "Many in multilevel marketing sales find it hard to earn much." The article focuses on some legitimate concerns with the MLM model and I address them point for point below. However, it's not entirely fair to focus on the challenges facing the model without mentioning the positives. When done right, direct sales offers people with an unmatched opportunity to change their finances. There's a low-cost of entry, people can represent exciting brands and unique items, they can sell those products for profit and they can build large sales teams and earn override commissions on downline performance. If the product is marketable and the compensation plan fair, it gives the average person a chance to change their life. Is it tough to make it in the MLM space? Absolutely. It's damn hard to make it in sales and it's damn hard to achieve anything significant in life. Are there companies out there exploiting the model and harming people? Yep. It's why I sued a company last year. But the fact of a few bad apples should not impugn the entire MLM space. In reality, it's challenging to win in any endeavor, including business. In the MLM space, it takes strong sales skills (which can be developed) and a lot of work.

Comments about the article

The picture

In the image of the victims in the article, there's a VHS tape. Who in the world still sells VHS tapes!? This initially made me wonder how recent the couple was involved with Amway. And then I continued to read and discovered that they quit the business in 2000! Seriously!? If the author was trying to make a point about Amway by talking about "victims," it would have been a lot better to get some quotes from a more recent example.

Pokorny echo

The article reiterates some of the same points discussed in the past about the Pokorny class action lawsuit. Amway has already taken a beating on these very issues and most of the issues referenced in the article have already been addressed by Amway. The article references tool companies, which was the main point of contention in the Pokorny class action case. Gerald Nehra, another MLM attorney and one I hold in high esteem, was quoted in the article. The article states:

The sale of training materials has to be a "very small" part of distributors' businesses, or "people will focus more on that aspect of the business than on the aspect of selling products to customers," says Gerry Nehra, a Michigan attorney representing multilevel marketing companies and former director of the legal division of Amway from 1982-91. Nehra, who would not comment on Amway specifically, says that when selling training materials becomes the focus, the business becomes "overly dependent" on recruiting more representatives, which raises questions about whether a company is a pyramid scheme.

It was a good summary by Nehra. When the vast majority of funds are made via tool sales, the economic pressure forces people to focus almost exclusively on recruitment (who need more training), which lead to sustainability issues and cultural problems within the organization. It's a large issue being dealt with by multiple companies in the space right now. But this is old news.

Likelihood of Success

The article states:

Even proponents of multilevel marketing say the cases and probes underscore one of the growing problems in the industry: It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches.

"Ease of earning an income" is never a factor when determining if a company is a pyramid scheme or not. One of the greatest things about the industry: ease of entry. One of the worst things about the industry: ease of entry. Because it's so cheap and easy to join a MLM, the vast majority of participants do nothing and never earn an income. It's not because the model is unfair, it's largely because the vast majority of participants DO NOTHING, which skews the income averages down. The issue referenced in the article centers on one thing: managing the expectations of prospects before they join. This highlights the importance of using a good income disclosure to make sure the prospect is fully informed of the data before making a decision.

Price competitiveness

The article states:

With the growth of discounters including Walmart and retail websites, few people need to buy toiletries, detergent or vitamins from a friend or neighbor, especially with the higher prices charged so all the commissions can be paid. Making money by recruiting more people, selling them training materials and persuading them to buy products can become the only way to make much money at some of the companies.

I've written about this in the past. The above paragraph is absolutely true. And it's why most MLMs avoid selling cheap, commodity products. I think it's safe to say that the vitamins at Wal Mart are not the best in the market. They're targeting a different demographic and offering a different value proposition. The MLM space is designed to introduce unique products and services into the marketplace. The keyword is VALUE. If there's legitimate demand for the product being sold at the price requested, and the margin is sufficient for the company to support a MLM compensation plan, the above quote about big box stores is irrelevant. However, if the product is UNmarketable and UNcompetitive with alternative products in the marketplace, then the company is relying on "opportunity driven demand" (i.e. the compensation plan) and the distributors are forced to focus almost exclusively on recruitment and internal consumption. It happens. But just because it happens does not mean it's representative of the entire space. The above quote paints the entire MLM space with a broad brush. Smart companies are NOT trying to compete with Wal Mart. When it comes to cheap goods, Wal Mart has that space covered. But when it comes to premium products with incredible health benefits, great MLMs shine. I've written about this concept a year ago about the importance for MLM companies to constantly innovate. In order to avoid the market catching up and offering comparable items at cheaper prices, the MLM executive team needs to stay one step ahead of the curve to keep their distributors armed with marketable items.

Distribution system / Amway's revenue increase

The article states:

Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing, says it's little surprise Amway's big growth is now outside of the U.S. He says the "direct selling" in multilevel marketing is needed in countries with "primitive distribution systems and limited choices in retail stores," but its potential is "seriously limited" here.

Lieberman notes the company is "extremely successful in formerly communist countries and in developing countries." Sales were also up last year in the U.S. by about 5%, he says.

Regarding Rolan Whitsell's quote, he's certainly entitled to his opinion. However, network marketing is not just about the physical distribution of product. Are there more efficient means of delivering goods in the market? Sure. It's easy to place an order on Amazon.com and have it on your doorstep within a day. However, Rolan Whitsell is willfully ignoring one of the most valuable functions of a good MLM: engaged sales force telling the product story! Some products are so new, so far ahead of the curve, there needs to be a person-to-person interaction before a consumer will make a decision. I have a client that recently sold its product through Kohl's, a popular retail outlet. They soon discovered that the product only sold well when it was demonstrated and sampled; hence, their entry into the direct sales space. Did they have a shipping problem before they started their MLM? No. They had a marketing problem, which is one of the benefits of leveraging the MLM model when selling unique products and services. Rolan's quote completely ignores this important function. Wal Mart is not in the business of selling premium cookware, yet Pampered Chef is worth over $1,000,000,000. Selling is more important than shipping.As for Amway's report about a 5% increase in revenue, if they actually grew in 2010, they'll be dramatically ahead of the curve. This is the first report I've seen about a company's performance in 2010. I'll report findings from the other companies as they're published.

Cost of doing business

The article states:

Wittlich says he worked day and night on his Amway business and never made a profit. "Active" Amway distributors earn an average of just $115 a month, according to Amway's latest disclosure statement. Just a quarter of 1% (0.26%) make more than $40,000 a year, which Amway attributes to the fact many work part time.

See my original comments about Wittlich. He quit the business 10 years ago! What insight could he possibly provide about Amway's business model today? Also, see my comments about the greatest thing and the worst thing about direct selling companies: the ease of entry. The majority of people do nothing, which skews the numbers down.

More about tools

The article quotes Lou Abbott, author of MLM: the whole truth. The article states:

Abbott says nearly all multilevel marketing companies prohibit distributors from selling "tools." When they are allowed, the products are supposed to be sold at cost. He notes $8 DVDs are a "profit center" when they cost "25 cents" to produce.

This is not entirely accurate, although I can see how Lou would reach this conclusion. It's perfectly fine for tool companies to profit handsomely from the sale of tools. If there's a market for the material, the creator can sell the items at whatever price the market will bear. The rub comes into play when there's a financial opportunity associated with the selling of tools, which turns into a MLM on top of another MLM. And with the competing interests, the model with the stronger pay plan gets the most focus, which is usually tools.Indicators for the futureThe article states:

Stuart Singer, a partner at Boies Schiller & Flexner, one of the law firms that represent the class-action plaintiffs, hopes the Amway settlement, if approved by a judge, will have a beneficial effect on the industry.

"If Amway recognizes the need to transform their business, then I think the other companies that are involved in multilevel marketing will have to follow suit," he says. "It's just a matter of time."

We can hope. The space will never "go mainstream" until the space gets serious about quality control. As an industry advocate once said, people are burying their faces in piles of money and they're doing nothing to address the obvious problems. Until the bad companies are routinely weeded out, they'll continue to burn through people at an alarming rate and create another generation of skeptical MLM participants. The solution lies in incentivizing on customer sales.

Conclusion

In order to genuinely improve the space, it's important to honestly acknowledge some of the challenges. The negative truth always stings more than the negative lies. While the USA Today article was clearly biased, she raises some valid concerns that can be easily addressed. What do you think about USA Today's article? Do you disagree with any of my points above?

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