Beware Of Network Marketing Requirements
June 29th, 2006 by The Sales Freak
EVERYONE LOVES THE CONCEPT OF NETWORK MARKETING
I first joined a Network Marketing opportunity when I turned 18 back in 1985. I was getting ready to graduate High School when I discovered the amazing power of geometric progression and that I could earn money by referring other people to a company to buy their products. I thought it was too cool that a company would take a percentage of their profits, that they would normally spend on advertising, and pay people like me for spreading the word about their products.
Over the years, I have discovered that most people love the concept of Network Marketing. When Network Marketing is explained properly there are very few people who do not like the concept of getting paid for telling others about a product or service and getting paid again when those people tell other people. It’s a great concept that anyone can grab hold of and get excited about. Unfortunately, the reality is that this is not what happens when people actually try to market the products and services of a typical Network Marketing company.
THE AMAZING DISAPPEARING COMMISSIONS OF NETWORK MARKETING
I’m convinced that if Network Marketing were done the way it is actually explained to people, as a referral based marketing and advertising system, like Affiliate Marketing for example, there would be thousands or even millions of success stories. You would see many more professionals leaving the standard eight to ten hour work day, for a better life of financial freedom in Network Marketing. People would want to leverage the resources and opportunities that Network Marketing companies claim to offer and the industry would explode.
Why doesn’t Network Marketing work for most people the way that companies promoting it claim that it does? Let me tell you first off that I have personally invested in excess of $150,000 into Network Marketing ventures, so I’m not talking from a lack of experience in the industry. I’ve been involved on the “ground floor” of numerous ventures and I’ve sat in board meetings and listened to “gurus” and “consultants” explain how to create wealth for successful MLM companies.
The biggest challenge facing distributors involved in Network Marketing is that the company’s have “qualifiers” or what I call “dis-qualifiers”, that are put in place by the company executives, to prevent the distributors from getting paid the money that has been allocated to pay their salespeople.
These “dis-qualifiers” create a situation where the salesperson becomes like a donkey trying to get a carrot on the end of a stick as they continually have to achieve new levels to get paid the money that has been allocated for the salespeople by the cmpany. Every company I’ve ever seen has them and some have more than others. In my opinion, these “qualifiers” are the driving force behind why most people failing in Network Marketing.
THERE ARE ONLY 100 PENNIES IN ANY DOLLAR
It’s really simple to figure out how you’re getting paid by a company for selling a product or service, if you just remember that there are only 100 pennies in a dollar. When you get right down to it, a Network Marketing company is like any other company. A product is manufactured or purchased from a manufacturer. For simplicity let’s say that the product costs 25% of the retail cost, so 25 pennies of each dollar goes toward buying the product. The company then marks the product up to a retail price, which in Network Marketing can be 5, 7 or even 10 times the cost of the product. Depending on the product, this may still be feasible since many of the goods and services you purchase today have a high profit margin. The software running your computer for example may have a super high profit margin.
However, let’s say that a company has some common sense and doubles the price of the product to $5.00. Out of that $5.00 the company may spend about $1.00 - $1.50 on marketing and advertising, which leaves another $1.00 for operating costs, management and profit to the owners or investors. That may not seem like enough money, but if a company is doing $100 million in sales, paying $25 million in product cost (keep in mind that the product costs go down with volume, so it should be more like $20 million at that level), paying out $40 - $50 million in commissions they are still retaining $25 to $35 million for the company. Does that sound like a good business to you? You would think so, but Network Marketing Executives are like any other business owners and they get dollar signs in their eyes and start looking at how to get more of the $1.00 - $1.50 they are paying for their sales and marketing. Some of the best kept secrets of Wall Street are Network Marketing companies, like USANA for example that has traded for as much as $41 a share with a $750M Market Cap.
REQUIREMENTS ARE REALLY DESIGNED TO TAKE AWAY SALESPEOPLE’S COMMISSIONS
If you’ve ever been to a Network Marketing training seminar or big event you will hear motivational talks from “Big Hitters” telling how the company has put different tiers in place to motivate their distributors.
For example, if you sell $50 a month in products you will get paid on 2 levels, but if you spend $100 a month you will get paid on 3 levels. However, if you get 3 people into your business and you have $100,000 in sales volume, personally buy $100 in products, make sure that your 3 people have each recruited 3 people and purchased $100 in products and sold $20,000 in products you will “maximize” the pay plan.
Even writing that was difficult and like stepping up to throw the darts at the balloon at the Carnival the odds are tipped in the favor of the company. These are not “motivators” as they want you to believe, they are financial systems for the Network Marketing company to tap into the money that they have allocated to pay the distributors for promoting the company and make the company more profitable.
Think about it for just a minute. If the company has really allocated 50% to pay on each product sold and if you recruited one salesperson that you knew who went on to create a million dollars in sales for the company, why wouldn’t the company want to pay you a percentage of all that sales volume? They will tell you that it’s not fair for you to get paid on all that sales volume because you didn’t do anything other than recruit someone for the company who built the business, but is that true? What if you introduced a famous celebrity to the company who went on to make the company millions? Would they have had that relationship without your taking the time to sell your friend on the benefits of the company? What if the company goes of out of business and your friend loses their income or their reputation for promoting the company? Are the Executives of the company going to take the heat from your friend for getting him or her involved or are you? You’re not an employee with a Network Marketing company, but an Independent Contractor. They don’t pay your mortgage. The company isn’t doing anything to earn the business you bring to them and they will get paid on all those profits, along with the Executives, and yet they want you to believe that you need to do more than make the initial sale.
Do other businesses operate this way too? For example, suppose a real estate agent came to you and said that they knew of a property listed with another agent that you could purchase for $5,000 down and flip to a buyer that they could put you in touch with for a $100,000 profit, but that they wanted a 7% commission on the transaction. Would you try to go around paying the real estate agent his or her commissions to save another 7% or would you be thankful that they brought you the opportunity to earn a substantial profit based on their skills, knowledge and relationships? Wouldn’t you want to do business with that agent again and again?
However, most Network Marketing companies won’t pay an independent distributor who brings one person in who goes on to create a $100,000 or $1,000,000 in revenues for the company through their relationships and sales skills, unless the distributor has jumped through a series of additional requirements the company has put in place in order to get paid. I know because I’ve brought people into companies that went on to create tens of thousands of dollars in revenues for companies and never saw a commission check. The real estate agent in the scenario above has the better deal because they are in control of their paycheck without having to meet some ridiculous requirement to get paid. The company gets paid for doing its job, but the distributor gets the shaft for doing his or her job. If you’ve ever done Network Marketing you know what I’m talking about. The only reason why the company’s get away with this is because their Distributor network allows them to. MLM or Network Marketing is one industry where the tail can wag the dog because without the Distributors promoting and selling the product, the company is out of business.
COMING OUT OF THE ETHER AND GETTING BACK TO REALITY
Hey, I’m just being honest about it. I’ve had professional Network Marketers try to convince me that requiring salespeople to meet the company requirements is not a bad thing because it motivates salespeople to sell more. I just laughed at the guy who told me that the last time. You know what motivates a salesperson? Getting paid! If it were true that creating more requirements for salespeople motivated them than in the story about the real estate agent above, it would make perfect sense to only pay them 3% until they brought another deal worth $100,000 and then pay them 5% and then after they have made you $300,000 give them their 7% commission.
Of course, you know what that agent would do don’t you? She would write you out of her book of business so fast your head would spin and she would bring her “opportunities” to someone who would deal fairly with her. You want to see your sales drop, just start messing with your salespeople’s commissions and putting in additional requirements to get paid. Can you imagine if the company executives had to live by the “requirements” they put on their salespeople? How many CEO’s would stick around if they didn’t get a paycheck unless each salesperson did $10,000 in monthly sales? How about if the CEO didn’t get a check if the company stock price didn’t stay at a certain level for their investors? Wall Street could call it a motivational stock price “requirement”. You know the answer. What’s good for the goose is not good for the gander.
As I mentioned at the start of this page, most people love the “concept” of Network Marketing when it’s presented properly, but once they get involved they discover that the table has been turned in favor of the company. It makes perfect sense that you can pay one person 50% of the profit for making a sale or you can pay five people 10% when a sale is made, just like a manager gets paid an over-ride on a salesperson in a traditional business. Unfortunately, in reality typically that money that has been earmarked for commissions doesn’t get paid out except to a few people who have overcome all the hurdles and that’s what frustrates so many people with Network Marketing. At any local carnival you will see one or two people walk away with the big teddy bear, but most people who try the game soon find out that they are playing something that is far too difficult for most to win.
THE CONCLUSION OF THE MATTER
I need to point out that I really like the Network Marketing “Business Model” because it’s a fantastic promotional system to use word of mouth advertising to market and promote products. It would be great if MLM companies would come into the next century and create their pay plans where they are more like Affiliate Marketing, Google AdSense and other forms of online advertising where marketer’s can get paid for their efforts without all of the ongoing requirements.
If you are evaluating a Network Marketing company here are a couple of links at About.com that may be worth reading before you make your final decision….
Cool Selling!
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Auto Consultant - John Boyd:The Cool Car Guy
John is an auto consultant with JFR & Associates in Denver, Colorado. He can help you save time and money on any make or model, new or used, lease or purchase - nationwide! Call or email John about your next vehicle! jboyd@coolcarguy.com
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