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[NOTE: This post is part of a series on Entrepreneurship 101 to give a kick-start to those who are thinking about starting their own business. Our regular Job-Seeking and Career-Improvement programming will continue soon!]

Have you been following along in our Entrepreneurship 101 series?

If so, you’ve seen some of what’s necessary to start up your business and what kind of business to start for you. You’ve also seen what starting from scratch as a consultant looks like as well as setting up a franchise.

So today’s lesson is for those of you who like the “prefab business” part of the franchises, but don’t have an extra $250,000 to spare.

That leads us to Network Marketing / MLM work. Now before you get all bent out of shape and run away, let me say two things about Network Marketing:

1) Network Marketing can be a legitimate and profitable business for you.

2) The key to success in a Network Marketing business is to pick the right company.

And, much like yesterday with franchises, today I’ll give you some of the questions to ask and red flags to look for in network marketing businesses.

WHAT MAKES A NETWORK MARKETING BUSINESS DIFFERENT?

There a few features that make a Network Marketing business different from other businesses. First, you are provided with some training, some product, and sent on your way as an “independent agent”. There is enough structure to provide for some support and a successful business plan, but not much else to hold you back.

Second, you are encouraged to recruit new “independent agents”. Which, of course, there’s nothing wrong with. Businesses recruit new employees every day. The difference is that you get a piece of the profit on anything that IA sells. It’s the manner in which you go about this piece that can really bug people.

Thirdly, Network Marketing businesses are heavily floated on emotion and “friendship” at the independent agent level. As a result, you will be heavily encouraged to attend a minimum of 1 feel-good meeting a week. And drive all of your potential “independent agents” to a similar meeting, as well.

Lastly, you will be encouraged to set up “parties” where you can show off your wares (whatever they may be) to a group of friends that feel comfortable together and trust the person who did the inviting. It is at these parties that you’ll find most of your first-time customers.

Otherwise, the businesses operate just like any other business. Don’t think so? Take a look at the examples below.


NETWORK MARKETING COMPANIES THROUGH HISTORY

While they haven’t always been called MLMs or Network Marketing companies, this type of company has been around for a long, long time. Take a look at some well-known examples of NM companies that you may not have thought of that way before:

Insurance Agencies - Every single insurance agency is built on this same foundation. You’re given a little training, encouraged to sell your friends and family first, and sink or swim mostly on your own. When you get to be successful enough, you hire your own agents. And you get a cut of everything they sell.

Mary Kay Cosmetics - Most people know of Mary Kay, but her company came about before the big MLM push in the 80’s, so Mary Kay Cosmetics isn’t thought of that way. But it is a “friend-to-friend” sales model where they try to recruit others to sell the cosmetics as well.

The Fuller Brush Man - While there was much less emphasis on recruiting other salespeople, the Fuller Brush company was based on you buying a sample case, learning about the brushes, and going out on your own.

Encyclopedia Britannica - Of course, this was back in the day when an encyclopedia set weighed enough to knock down an elephant. But in those days, the door-to-door Encyclopedia Britannica salesman was given (very) little training, bought some samples, and told to find those mothers who didn’t want their children to be below average.

Stock Brokers - While stock brokers have a little more structure to them, a “broker in training” is taught about the different types of trading and must then go find customers who want to buy stock. A senior broker then gets the sale. Once you work your way up, you become a senior broker and build your own team of trainees.

Financial Services - In a similar manner, most financial services organizations are built around training (and getting licensed) trainee brokers and letting them go find their own business. As they build up their business, they eventually get their own agency, where they go find some trainee brokers.

Tupperware Parties - While Tupperware has gone more into retail distribution now, it used to be the only place you could get Tupperware was at a “Tupperware party”. And at these parties, an “independent Tupperware consultant” would sell the Tupperware and try to recruit new consultants.

As you can see from above, the basic model for Network Marketing has been out there for a long time. It’s only in the last 10 or so years that it has become a model for selling everything from vacations to jewelry to lingerie.

Something important to keep in mind is that your Network Marketing company is a business, just like the companies listed above. That means you’re going to have to invest time and money to be successful. If you’re not prepared to treat this as a business, you shouldn’t go into a Network Marketing opportunity.


THE MAIN BUSINESS PROBLEM WITH NETWORK MARKETING

The main problems with Network Marketing are that you want to be working with a good company that will be around for years to come and support your business that you’re growing. The trick there is that not a lot of these companies are forthcoming about the details you’ll need to know.

The biggest problem with Network Marketing companies failing (as the vast majority of them do) is that they are inherently an unbalanced business. That is, they are too reliant on the “get more distributors” side and not enough on “sell the product” side.

Eventually, as anyone who has seen the “recruiting pyramid” and can do math can figure out pretty quickly, the business runs out of new people to hit up to be distributors. And, if the company is reliant on that “new distributor” revenue to stay profitable, the company will fail quickly once that revenue slows down.

Some veteran network marketers know this and fully expect it. They just make as much money as possible early in the game so that, when the company finally tanks, they can walk away profitably and join a new network marketing company and call all their old friends.


RED FLAGS TO WATCH OUT FOR

There are certain “red flags” to watch out for as Network Marketing companies are recruiting you. That’s not to say that any company that does any one of these is necessarily a bad company. In fact, it would be hard to find any network marketing company that isn’t doing at least one of these somewhere in the country.

However, if you find that the network marketing company recruiting you is doing many or all of these, you should run for the hills!

(By the way - most of these were taken from actual ads for Network Marketing companies that will remain nameless)

• “No Selling, Ever!” - Let’s look at this logically. What use does the company have for you if you’re not selling their product or service? I’m pretty sure that they’re not in the business of handing out free money.

  While they might bring in a big gun to do the closing, you’ve got to do the selling up to that point (tell them about the opportunity, convince them to come to a meeting, etc.)

• “Make $100,000 in 10 hours a week in your pajamas!” or “Paying out $4,000 Weekly!” - It it probably true that you can make $100,000 in 10 hours a week. Over the next 25 years. However, NM opportunities are still businesses. You’re still going to have to put in serious effort if you want to make serious money.

  And unless you’re actually selling pajamas, you’ve got to interact with people. And, hopefully, if you’re interacting with people and trying to convince them of buying, you’re going to be wearing some real work-style clothes.

• “Your Website Will Do All Of The Selling!” or “Automated Selling System!” - Again, let’s look at things logically. Your website is going to be exactly the same as the 150,000 other distributors. What is it, exactly, that’s magically going to get people to your website (and not theirs)?
• “Make $1,500 Per Sale!” - There’s nothing wrong with this in itself. However, just doing a little math here, if you’re making $1,500 per sale, that means that a buyer must spend more than $1,500, right? In fact, since the company is going to make at least as much as you, it means that the buyer will most likely be spending more than $3,000.

  The question that you need to ask yourself is how many of your friends and family (as they will always be the people you’re asked to approach first) have more than $3,000 to spend on whatever it is you’re selling.

  As an aside, this also means that you, as a potential distributor, will probably also have to spend more than $3,000 to get started.

• “Sharing / Gifting Program” - These are also known as non-sustainable pyramid schemes. It means that you pay some large sum of money ($5,000, for instance) to the “head of the pyramid” and you get to move up a level. Eventually, you’re the head of the pyramid and are paid $5,000 for everyone else in your pyramid (usually 10-20 people).

  While paying $5,000 to get $50,000 sounds like a good deal, eventually you will run out of gifters to get into the pyramids. What’s worse about these programs is that when they stop paying (as they eventually have to) you have a lot of unhappy people out $5,000.

  Unhappy people who were dreaming of $50,000, but end up $5,000 down tend to do some drastic, stupid, and often violent things. Perhaps it would be best just to pass.

• “Not MLM!” - Almost every single opportunity that says, “Not MLM!” is lying. Oh, they may say, “It’s Network Marketing, not MLM!”, but it’s still MLM. I think there’s a little Clintonian, “that depends on what your definition of ‘is’ is” going on here.

  In any case, unless they’re in serious denial, they know that they’re MLM and just trying to get you in to a meeting, anyway. As I have said before, there’s nothing wrong with MLM inherently. It’s just some of the people that do MLM that there’s a problem with.

  Besides, do you really want to get involved with a company that starts it’s relationships by lying?

• “No Hype! No Gimmicks!” - First of all, I’ve always thought it ironic to say “no hype” and follow it by an exclamation point. But that’s just me.

  Anyway, “no hype” is usually found in the same ad that says, “WOW! $4,000 a Week From Home!” Just in case you were hype-blind, that statement is hype. Wildly promoting the best, possible scenario that has happened once in the company’s history qualifies as “hype”.

• “Send / Enter / Leave Your Phone Number For Details!” - Now, I know we’re all busy. But if you’ve got to capture my phone number up front and, conversely, I don’t get yours, here’s what that says to me:

  “We’re going to call you endlessly until you give us a credit card number and buy something. We will then disappear without sending you anything, but after charging your credit card. Since you have no phone number or address for us, you will have nothing to tell the police. So, hurry up and GIVE US YOUR STINKING PHONE NUMBER!”

  But I’m sure I’m alone in that.

Okay - did the Network Marketing company recruiting you pass all (or, at least, most) of the red flag test? Great!

Now, when you go to the meeting, you’ll need some questions to ask to really dig into the company. Luckily, I just happen to have some handy for you.


QUESTIONS TO ASK NETWORK MARKETING COMPANIES

So, now that you know how most network marketing companies fail, let’s get down to the brass tacks of what to ask to make sure you’re working for a good company.

Here’s what you need to find out for sure (not - “gee - I’m pretty sure…”) before you join your next Network Marketing company:

• What percentage of revenue is from “distributor packs”? By this, I mean the initial monies that come in when a new distributor joins up. If 70% of the revenue of the company is from these packs, run!
• What percentage of revenue is from non-distributor-related sales of the product. Many companies require distributors to buy a certain amount of the product every month in one way or another. Of the total revenue of the company, what percentage does all these distributor-required purchases make up?
• What is the initial cost? - Everyone in the seminar room knows that there will be a cost to become a distributor. Sometimes, however, they don’t know what the total cost is going to be until it is too late. Or, at least, late enough that it’d be a huge pain to get their money back. Find out exactly what you must spend to become a distributor.
• What is the ongoing cost? - Are you required to pay a certain amount monthly or yearly to stay a distributor? Find out!
• What is your required activity? - Some companies don’t require specific amounts of product to be purchased by the distributor. Instead, the distributor is required to get so many new distributors a month or sell a certain amount of product a month. How much is required? And, more importantly, what happens if you miss that amount?
• Is there any way that you could lose your customers / downline? This has been the after-the-fact-shocker for most folks burned by MLM. Often, there are conditions that, if you don’t meet them, your entire network of folks that you recruited and/or all of your customers will be taken away from you. And given to someone else. You definitely want to know what those conditions are!
• How many meetings are you “encouraged” to attend? They can’t really require you to attend meetings (since you are “independent”), but they will heavily encourage you (by not helping those that don’t, by slowing down your orders / checks, etc.) to attend night time meetings. Find out how many of these there are that they’d like you to go to and figure that into your time invested.
• Can you be successful without signing up additional “distributors”? This is rather important. A sound business strategy would be to focus mainly on getting repeat customers of whatever it is you’re selling before becoming a “manager” an recruiting a ton of people underneath you. If you can’t make any money doing this, or if they’ll kick you out, you’ve got a bad company.

And, saving the best for last:

• How Much Have You Made So Far? - That majority of folks that are doing MLM haven’t made much “yet”, but they’re “on track to make $7 bajillion this month!” And I’d bet they want to, “introduce you to Jim, who made $200,000 this month!”

  Hint: There’s one Jim in every city. And you ain’t him.

THE BOTTOM LINE

Like many sales-oriented organizations, Network Marketing companies are going to work hard to separate you from your money. And, in reality, I don’t have a problem with that.

However, you’ve got to do your in-depth research to make sure that they’re for real. If they are, you’ve found a great way to channel your entrepreneurial energies, build a business, and make some good money.

Just make sure that you’ve got the right kind of company to get hooked up with.


Next In The Entrepreneurship 101 Series: What Is Your Biggest Business Weakness?


Enjoy the Search!

-Dan


Photo by: The Wu’s Photo Land

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This entry was posted on Friday, February 2nd, 2007 at 9:20 am and is filed under Entrepreneurship 101. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.