Multilevel marketing offers a strategy that many start-up entrepreneurs find helpful. While this strategy works for some businesses, most fail. When I work with people who want to start some variation of a of a multilevel marketing (MLM) business, I make sure they consider several key factors.
1. The income results of the few successful MLM businesses are not representative of most.
Before starting an MLM business, ask what the average sales per representative are. Find out how many in the sales force earn $5,000 or $25,000 per year. You need to be able to deliver above average results to earn good money. There are two critical elements to make this happen. First, you must be good at selling product directly to customers. Then, you must be able to persuade new people to join the organization.
2. The key to turning profit is meeting customer needs.
This is where an MLM strategy confronts a problem. MLM companies focus on how much money the business can make, even before the first sale. This gets the process backwards. Successful business principles require meeting customer demand first. Then, profit confirms that the business is on the right path.
The other place where this diverted focus occurs in in the emphasis on recruiting people under you. Since your profit depends on the productivity of those under you plus your direct sales, it is important to keep recruiting more people. This limits your customer-based investment.
3. In order to be successful, 60% of your first time customers need to be repeat customers after a year.
Success in a MLM business depends on repeat business. However, many MLM businesses don’t generate repeat business. This problem shows up with Tupperware and other companies that sell product at “parties.” Regardless of how successful the event, it usually generates one-time sales instead of repeat business.
Before participating in a MLM business, check out repeat customer statistics. Find out the number of repeat customers the business has after a year. A successful company has 60%. Less than that means you will struggle to find enough new customers to replace the ones that don’t come back.
4. Build a MLM company with people who have sales expertise or potential.
A mistake many make is pushing everybody they know to join their MLM business. Many may not be motivated by the product or they can’t sell. These people will waste your time. Instead, go outside your group to connect with others. First look for people who can sell and share a passion for the product. Then, work to develop these people. Invest in them. Their success is your success. Paul wrote, “Now there are varieties of gifts, but the same Spirit.” (1 Corinthians 12:4, ESV) Understand that everyone is not gifted for MLM. Also understand that MLM strategy won’t replace important business tools. These tools include planning, time management, and the ability to explain the benefits of a product and why a customer should buy. These are the most basic skills important in any business or job.
5. MLM needs a unique product with a high profit margin.
A high profit margin is needed to generate commissions for the salespeople. Higher margins mean higher prices for customers. Customers who like the product but not the price may look for cheaper substitutes. Don’t be fooled; most products can be substituted. And your personal approach is worth only so much to most.
6. Follow up customers who fail to reorder.
When customers fail to reorder, contact them. However, don’t use a high pressure sales push. Instead, ask gentle questions to determine why they stopped buying. Did they tire of the novelty? Was the price too high? Did they simply make an arbitrary decision to switch?
For example, health products may hook a customer in the beginning. However, people can read labels and will look for other options. The Prophet Amos wrote, “Woe to those who are at ease in Zion, and to those who feel secure on the mountain of Samaria, the notable men of the first of the nations, to whom the house of Israel comes!” (Amos 6:1, ESV) We must reject complacency. Customers are never ours forever.
Amazon is another example. When I research prices of a product, they are often the lowest so I buy from Amazon. If you are selling something that Amazon doesn’t offer, their competitive pricing won’t be a problem.
One or two generations ago, anyone good at selling could make a comfortable living in sales. Today, with price competition accelerating, technology replaces the sales person. Best Buy is one of the latest victims. They are getting creamed in the marketplace by Smart Phone Apps that tell you where to go to get the lowest price. Since salespeople form the foundation for an MLM business, anyone entering the MLM arena should pay attention to this trend.
One of my first pieces of advice to people wanting to start a business is to find out what people want and sell it to them. This is a good rule for those starting an MLM business as well.