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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
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.
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Babener & Associates, 121 S.W. Morrison St., #1020, Portland, OR 97204, (503) 226-6600