Q: I am interested in information about using a multilevel
marketing (MLM) structure for the distribution of common products
or services. What advice can you give me?
Erwin C. Mettler
America Online query
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A: Jeffrey A. Babener, a partner in the law firm Babener &
Associates, represents leading U.S. and foreign companies in the
direct selling industry:
Direct selling can be a very viable marketing channel. Most
companies in the direct selling industry use an MLM format in which
distributors profit from their own direct sales as well as from the
receipt of override commissions on sales by distributors in their
sales organization (their "downline").
According to the Direct Selling Association, the direct selling
industry accounts for nearly $17 billion in U.S. sales and involves
some 6 million distributors. Leaders in the industry include Amway,
Shaklee, Tupperware, Avon and Mary Kay.
Since this method of distribution tends to draw distributors
from its base of satisfied customers, it is best suited for the
sale of consumer-oriented goods and services. Also, because sales
are usually made person-to-person or through word-of-mouth, MLM is
well-suited for products that need demonstration or testimonials.
With the right product or service, a company can gain very rapid
market penetration without spending a lot of money on
advertising.
Keep in mind that the direct selling industry is usually
comprised of people seeking supplemental income; approximately 92
percent of sellers work part time only. As compared to professional
manufacturers' representatives, MLM tends to be an industry
where many people sell a little as opposed to a few people selling
a lot. In addition, most people sell within their spheres of
influence, such as to family and friends, at the workplace, and at
church. Therefore, this industry is typically not suited to
business-oriented and commercial products.
If a company adopts the direct sales method of distribution, it
should be ready to go national immediately. Distributors are eager
to sponsor their friends or family members as salespeople, and
those contacts are national. In addition, you should prepare a
business plan that allows for adequate capital for data processing,
sales materials, consulting and legal assistance.
Unfortunately, illegal pyramid schemes sometimes masquerade as
MLM programs, so legal assistance is imperative to make sure your
company's marketing program is set up correctly. There are
several important criteria your program must meet to qualify as a
legitimate MLM opportunity:
- Product or service. The company should offer a
high-quality product or service for which there is a real demand in
the marketplace. Customer satisfaction should be guaranteed. If the
product is used by distributors, it must be something they would
want to buy on its own merits even if they weren't
participating in the program.
- Price. The price of your product or service must be fair
as well as competitive with similar products on the market.
Distributors should be able to purchase your product at wholesale
or at a substantial discount compared to retail prices.
- Total investment requirement. You should not require
distributors to make any investment other than purchasing a sales
kit or demonstration materials at cost.
- Purchase and inventory requirements. A legitimate
marketing program should have no minimum purchase or inventory
requirement for their distributors or sales representatives. Once
distributors are in business, however, most network marketing
companies have some type of requirement for ongoing activity or
minimum sales.
- Sales commissions. Commissions should be paid based on
sales, not for the mere act of sponsoring other distributors.
- Buyback policy. A legitimate MLM company will agree to
buy back inventory and sales kit materials from distributors who
leave the program, as long as they leave within a reasonable time
period and the materials are in resaleable condition.
- Retail sales. The focus of your marketing program should
be to promote retail sales to nonparticipants. However, many states
recognize that purchases for personal or family use in reasonable
amounts by distributors are also retail sales.
- Distributor activity. Many laws regarding MLM companies
require distributors to perform a supervisory, distributive selling
or soliciting function in moving the product to the consumer. In
other words, they must have meaningful contact and communication
with their downline sales organization.
- Earnings representations. The basic rule is that a
legitimate marketing program should not make any earnings
representations that are not based on a track record. Testimonials
by individuals as to their own experiences are not uncommon,
however.
- Training. A good network marketing program should offer
solid training in sales and recruitment to its distributors.
Before you start, it would be wise to call one of the industry
trade associations for further information. You can contact the
Direct Selling Association in Washington, DC, at (202) 293-5760, or
the Multi-Level Marketing International Association in Newport
Beach, California, at (714) 622-0300. These organizations have all
kinds of information on MLM programs and have adopted ethics
standards for their members.
If you have a question for our experts, include your name,
address and phone number, and write to "Business
Hotline," Entrepreneur, 2392 Morse Ave., Irvine, CA
92714.
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