The benefits of network marketing are attractive: You call the shots, avoid rush-hour traffic by working from home and earn residual income that accumulates whether you're working, sleeping or playing. In contrast to traditional franchising opportunities, which can require $35,000 to $100,000 or more in start-up capital, you can often buy into a network marketing (also called multilevel marketing, or MLM) opportunity for less than $100. Also, the structure of MLM businesses makes it feasible for you to get started while you're working another job, allowing you to gradually grow it into a full-time operation.
But as with any investment opportunity, not all MLM offers are good picks. For every person who makes it big in network marketing, there are several who give up their businesses after only a few months. What are the pitfalls you should be aware of before you sign up, and how can you protect yourself?
With your financial future and business credibility at stake, it's important to make an informed decision. Here are the seven most common mistakes prospective MLM distributors make and how you can best avoid them:
1. Falling For MLM Imposters
The most insidious of the MLM look-alike scams are pyramid schemes. They mimic legitimate network operations in that they compensate distributors on a multilevel structure, providing an incentive to sell the business opportunity to prospects. The key dis-tinction, however, is that pyramids focus primarily on recruiting salespeople, not on selling products or services. In fact, in many cases, there's no real product or service to sell.
"In a pyramid scheme, the focus isn't on the movement of a product or service to the general public," explains Jeffrey Babener, a partner in the Portland, Oregon, law firm Babener & Associates who represents many network marketing com-panies in the United States and abroad. "It's a 'deal on wheels,' in which people are encouraged to spend a lot of money and find other people to do the same, who are then also encouraged to find others to do the same. The whole focus is on the movement of money-people making money from headhunting fees."
How can you pick out a scam? Do a background check on the company you're considering. Contact your local Better Business Bureau (or log on to the bureau's Web site at http://www.bbb.org) for a reliability report on the company. You can also consult the Multilevel Marketing Inter-national Association (MLMIA) at (949)854-0484 or http://www.mlmia.com , or the Direct Selling Association at (202)293-5760 or http://www.dsa.org , to see if the company is a member in good standing. The Federal Trade Commission (FTC) will have infor-mation on any complaints that have been lodged about the company; contact the FTC at (202)326-2222 or http://www.ftc.gov
2. Expecting Instant Wealth
You've heard the stories of network marketing opportunities that take people from the brink of bankruptcy to six-figure incomes within months. If you expect to do the same, cautions Babener, you could be setting yourself up for disappointment. "Probably less than 1 percent of the individuals who join an MLM company will make huge money," says Babener. "It's no different from any other endeavor."
What often happens with new distributors is this: You join a company expecting to make $20,000 a month after six months, with little effort, because that's what you hear the superstars say they've done when they give their testimonials at sales rallies. But after a few months in the business, reality sets in: You have yet to crack the $100-a-month barrier! Dis-couraged (and, if you gave up your day job, hungry), you decide to fold up your MLM tent and write the opportunity off as a bad investment.
The problem here, however, isn't necessarily the failings of the network marketing company-it may be that you're just giving up too soon. Success in MLM, as in any type of business, takes time. As Babener puts it: "Individuals should look at [network marketing] just as they would look at holding stocks in the stock market. The true rewards come after long-term involvement, not short-term."
3. Signing On In The Heat Of The Moment
This seems to be a no-brainer, but it's an easy trap for even the most disciplined person. When you're sitting in a sales meeting, dazzled by presentations given by ordinary people who've made it big in the business, you can hardly help but daydream about your own financial future. "Wouldn't it be nice to knock out my $10,000 worth of credit-card debt in one fell swoop," you imagine. "New cars, nice homes, the opportunity for me to cut loose from my day job and call all the shots. How can I pass this up?!" You feel an adrenaline rush and sense of urgency bubble up inside you as the person who brought you to the "party" explains the compensation plan in a one-on-one follow-up session right after the meeting. With the paperwork in front of you and pen in hand, you . . . STOP!
Just as with any investment decision, you must take time to evaluate network marketing opportunities. Seek objective feedback from your attorney, accountant, spouse or friends. The opportunity may very well be right for you, but confirm it with people you trust before you sign. If it's legit, the offer will still be there in a week or two.
4. Choosing The Wrong Product
As with any kind of sales position, your success as an MLM distributor hinges on your belief in the com-pany's product or service. Michael Sheffield, co-founder and chairman of the MLMIA and president of Shef-field Resource Network, an MLM consulting firm in Tempe, Arizona, puts it this way: "Why would I join a company that sells weight-loss products if I don't need to lose weight? Quite frankly, it ends up just being a money deal. But when people who need to lose weight do so as a result of taking the product, they have their own testimony to share with others. Their chances of being successful are a lot better because they're right for the product."
5. Joining A Start-Up Company
Not all start-up MLM opportunities are bad investments. Some entre-preneurs make it big by getting in on the ground floor of a young, promising company. But if you're new to the network marketing industry, don't take the risk. Many MLM companies go out of business just months after start-up.
"The prudent person should look for a track record of about a year or so," Babener advises. "That's not to say that some people won't do very well [with a start-up company], but it's kind of like the advice 'Don't play the commodities market unless you know what you're doing.' "
6. Selecting The Wrong Sponsor
Sheffield likens choosing a sponsor (the person who officially signs you to the business) to hiring an employee. "In reality, it's the reverse role here," he explains. "You don't work for the sponsor, [he or she] works for you-to assist you in being successful in the business model."
What's the danger of committing to an unqualified sponsor? You miss out on the consistent one-on-one coaching and the training sessions you need to be successful in multilevel marketing. "If [the sponsor] doesn't know how to be successful in the business, then you've got to look above that person in your upline if you want to find people to help you grow your business, and they may not have time to help you," Sheffield warns. "If you're not an experienced multilevel distributor, choosing your sponsor can mean the difference between tremendous success or predictable failure."
7. Neglecting To Assess If MLM Is Right For You
Many people sign on with a multilevel marketing company because they're attracted to the high income potential or the prospect of earning money from home. What they don't realize until after starting the business is that they weren't really cut out for MLM in the first place. As a result, they feel frustrated and embarrassed.
Before you invest, here are four questions that will help determine whether MLM is right for you:
1. Are you a self-starter? With an MLM company, you won't have a boss to tell you how many calls you need to make or what time you need to wake up. To succeed, you've got to be the tough boss who ensures the work gets done. Are you up for the challenge?
2. Are you a people person? "Network marketing is a people business," says Babener. "It's the only way you'll make sales and get recruits. If you're not a people person, [MLM] isn't for you."
3. Are you a positive thinker? As with any type of sales endeavor, you'll face plenty of rejection in a network marketing business. Successful MLM distributors know how to put a positive spin on even the most negative circumstances to keep themselves motivated and achieve their goals.
4. Are you comfortable with the MLM business model? This is the most critical question because, even if you're a go-getter and have a positive attitude, if you're not comfortable conducting business through the network marketing distribution method, you'll flounder in MLM. The high-income distributors are completely sold on network marketing and convinced that it's the best way for them to do business.
The Bottom Line
While the upfront costs of MLM opportunities pale in comparison to the capital requirements for buying into a franchise or starting your own business from scratch, take your decision as seriously as if you were about to invest your life savings because there's more at stake here than money. "The smart multilevel person who looks at an MLM opportunity," says Sheffield, "is going to make sure the company is as solid as it can be and will do their due diligence because they know that their reputation and credibility is on the line."
Inside The Pyramids
How do you distinguish legitimate MLM operations from illegal pyramid schemes? Here are five things pyramids do that differentiate them from legitimate companies:
1. Promote the business opportunity as the "product." Always determine exactly what the product is before giving the opportunity a second look.
2. Require front-end inventory loading. For legitimate MLM companies, you pay a small fee to get into the business, and inventory is optional.
3. Require substantial cash investments. The red flag is when you're required to spend $500 or more to get into the business opportunity. Most MLM offers initially cost less than $100.
4. Pay fees for recruiting. "A legitimate MLM opportunity will have compensation based on product sales and not recruiting," says Jeffrey Babener, a partner in the Portland, Oregon, law firm Babener & Associates who represents many network marketing companies.
5. Don't buy back. Says Babener, "Any plan that doesn't agree in writing to repurchase a reasonable percentage of unused inventory or sales materials for a stated time after purchase should be avoided."
Sheffield Resource Network, (602) 968-6199, http://www.sheffieldnet.com
Sean M. Lyden is the principal and senior writer of The Professional Writing Firm Inc., a Kennesaw, Georgia, company that writes articles for consulting and advisory firms. He specializes in management, marketing and motivation issues. E-mail him at email@example.com