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How to Build a Successful Direct Selling Company
By Jeffrey Babener
(Excerpted from the forthcoming book, Starting and
Running the Successful MLM Company)
Start with a Dream
Although it starts as a dream for many, history validates that the building of a successful direct selling, network marketing, mlm or party plan company can become a reality. Witness: Avon that started from a door to door bible sales business to Primerica, which evolved from the dreams of a football coach to applying direct selling principles to insurance sales, to Amway that started with two entrepreneurs mixing biodegradable soap in a bathtub to create a global giant.
Ten Rules to Keep in a Very Safe Place
The umbrella term for the business is "direct selling." Whether it is the variety practiced by Tupperware or Amway or Nikken or The Pampered Chef, it still is in the business "species" known as direct selling. Under that umbrella is found party plans, MLM or multilevel marketing, network marketing and direct sales. The objective is always the same, however...build a consumer products and/or services marketing company that distributes through a vast network of salespersons who sell both consumer products and services, as well as recruit and develop an even larger network of salespersons to sell, and for which remuneration is paid on the sales volume of those "downline" recruited networks.
Although a significant force with upwards of $30 billion in U.S. sales and $100 billion plus in worldwide sales, it is nevertheless an ultra niche industry with its own culture and formatting. Those who understand this focused culture and business model can prosper, and others will be "strangers in a strange land."
Although it may look straightforward, starting the successful MLM business is no simple matter. A methodology course could fill a library. A practical advice primer could fill books. The following is an essentials sampler from an industry tour guide, a professional MLM Consultant and MLM Law Professional who has spent two decades as a "consigliore" or trusted business and legal advisor to legions of leading direct selling companies. Those companies have started in back bedrooms and garages and have grown and ranged in size from mom and pop boutique businesses to multi-national, multi-billion dollar conglomerates.
If you are looking for detailed insight from this author, attend a conference sponsored by www.mlmlegal.com, Starting and Running the Successful MLM Company, or read one of two books by the author, Starting and Running the Successful MLM Company or Network Marketing: What You Should Know. (Legaline Publications, 1-800-231-2162 or visit www.mlmlegal.com) However, for purposes of a "to do" list, consider the following very brief but very practical tips on starting the successful MLM company. Each of these factors is so critical that each one might be placed on the "make it or break it" list. These ten tips are obviously not good enough to warrant being etched on tablets on top of a mountain in the Sinai desert, but they are worthy of being tucked into your MLM "bible" somewhere between "Solicitations" and "Celebrations."
Capitalization-Can you Recruit?
Do you have a great recruitment background, the ability to recruit, or a lineup of strong distributors? If so, your need for capital will be substantially diminished. In the end, your ability to recruit a talented and motivated sales network will be the number one key to your success. In fact, your need for capital is in direct inverse proportion to your ability to recruit. If you can recruit, you may have a cash cow on your hands. If recruitment will go slow, your business plan needs to allow for buffer capital to hold you through one, two or three years of break even or loss scenarios. That capital should be lined up ahead of time, either through personal and close relationship resources or through angel investors. The likelihood of public financing for the new MLM is very remote. Time after time, the best source of capital is literally "closest" to home. Your ability to manage expenses will be very determinative of your need for buffer capital and you will find that payroll infrastructure will "eat up" capital faster than anything else. Can you make it in this business by starting in a back room or garage? Absolutely! The fact is that most of today’s giants started precisely this way…with little capital, but much passion.
You need to be honest with yourself. Do you or those who are key owners in the business have MLM recruitment background? Without this talent, the best products will continue to languish on the shelf. Companies like Amway, Tupperware, Mary Kay and Home Interiors were not only founded on a very limited budget, but by individuals with strong backgrounds in direct selling. Develop a recruitment strategy for initial key leaders. It may seem odd, but your top distributors may not come to you for years. To those would-be leaders who come to you seeking special benefits or corporate positions, design remuneration that is "results oriented." Do not pay high salaries to individuals who claim to be able to recruit, but cannot demonstrate a strong track record of success. As a general matter, if individuals are strong recruiters, they would be distributors because the remuneration is much higher. Obviously, track your warmest market, then move on to lead generation systems and advertising. You shouldn’t expect initial advertising to bring you distributors, but consider it instead a foundational industry announcement that you have arrived on the scene. For instance, the best place to create the institutional announcement of your existence is the industry’s leading trade publication, Money Maker’s Monthly. Notwithstanding all of the hype, however, about internet, direct mail or mechanized recruiting campaigns, history demonstrates that this will always be a person- to-person relationship business and that there is no substitute for "pressing the flesh."
MLM Legal—Don’t Leave Home Without It!
At first blush, one might question the role of the MLM Law expert in a marketing driven business. However, your MLM Lawyer may well be the single most valuable resource that you ever utilize. This individual, and there are very few in this gene pool, has intimate practical knowledge as well as legal knowledge of the business, often understanding the business better than most of his/her clients. It is a unique melding of marketing practical knowledge and experience together with practical legal experience that may cause this individual to answer questions off the top of his or her head in five minutes that would take typical business lawyers five years to research…and, in which case, they would still probably not understand the "issues," let alone the solutions.
For better or worse, the practices of the MLM industry have induced scores of pieces of legislation and regulatory control, such as pyramid statutes, MLM statutes, business opportunity, securities, FTC and postal regulation. Notwithstanding the success of the industry, there is always tension between the regulatory community and the MLM industry. Overzealous regulators and rogue operators guarantee that this state of affairs will always exist. Layer these issues with distributor relations and discipline, FDA, trademark, tax and international issues, and it is easy to see why this individual is probably the first person with whom you should establish a relationship and with whom you should grow, with that person as a trusted business advisor and member of your business team.
At a minimum, you would be totally premature to jump into the marketplace without a legal review by MLM legal counsel of the most basic of sales kit contents, whether they be in hard copy, CD-ROM or on the internet. Those basics include: representative agreement; policies and procedures; product brochures; marketing plan presentation; and various forms ranging from retail receipts to autoship to multiple owner applications, etc. Responding after the fact to regulatory agencies over deficient materials or answering distributor complaints for slipshod documentation is too little, too late…and too bad for the startup MLM business.
Your Trademark-Your Life!
Picture living your life without a name. To some extent, you define yourself and your existence by your name. Obviously, you had no choice in choosing your name, but nevertheless, in the trademark sense, it is your branding for life. When others think of you, they think of your name, and vice-versa. Your choice of name for your MLM is equally important. Not only will you brand your business and product forever, but what may be worthless today will be your most valuable asset in years to come. Just ask Coca-Cola, Marlboro, Microsoft, Avon or Mary Kay. And so, this choice deserves special emphasis in the beginning. A trademark search by your MLM Lawyer is a must. To be told three years down the way that you must give up your name because you did not bother to conduct a trademark search would be a devastating blow to your business. Also, it is essential that the name that you choose will suit the expanding product or service offerings that will be coming down the pike. So, what’s in a name?…everything!
MLM Business Experience—Possess it or Buy it!
As mentioned, MLM is not just any business. It is not retailing, franchising, e-commerce internet or dot com selling, telemarketing, catalog, direct marketing or infomercial. MLM, under all its names, Direct Selling, Network Marketing, Direct Sales, Party Plan and Multilevel Marketing, is a unique beast. To launch this business, you must have a substantial background and be well grounded in its written and unwritten principles. If you know your product and you have a passion to bring it to the public, but you lack industry experience, then you must buy that experience. You may hire key employees in such positions as CEO, COO, Sales and Marketing, Customer Service and Distributor Relations, Information Technologies, etc. The payroll will add up fast, and unless your capitalization can sustain this ongoing cost, you should seriously consider outsourcing the solutions for these types of expertise. A first suggestion is to consult with your MLM Attorney, who is likely familiar with the best resources in the business. Although limited, your search will disclose extraordinary resources in the area of MLM Management Consulting. Such industry established experts in areas of MLM startup implementation, compensation plan design and software selection are often tremendous team players and invaluable assets to your team. Above all, don’t launch without in-house or outsourced MLM business experience.
MLM Technology and Software—The Engine of the Machine!
"Having" great software won’t recruit one single distributor for you. Having said that, lousy software and inferior support will no doubt ruin what might have been a tremendous business opportunity. This business is a numbers business. It is built on recruiting, payouts on thousands of generations, genealogy reports to thousands of distributors, timely calculation and payout of commission checks to vast networks of sales people. The moment you fail in the technology area, you will lose confidence amongst your distributors. Prepare to watch sales, recruitment, retention and momentum plunge to ocean depths. Recovery may never occur.
And so, remember cheap is not good in the technology business. Good value is good, but not cheap. "You get what you pay for" is true in this acquisition. The fact is that cheap software usually means "cheap software" that is flawed and for which there is no backend support service of worth. Your software must work, it must be scalable such that your data tracking solutions, your web and e-commerce solutions and your reporting and communications solutions can grow with your business. These are important questions for those bidding for your software. Statements like "up and running in 24 hours for $100" are as invalid as "join our MLM and earn $10,000 in your first week." Of course, expensive does not necessarily mean good either. At least one software firm became infamous in the industry for promoting seminars that were little more than high pressure sales presentations in which unwary MLM startups were induced into astronomical priced offerings. Beware the high pressure sales tactic that does not afford you the opportunity to compare in the marketplace and check references and opinions. Your best sounding board is your MLM Business Consultant or MLM Lawyer.
Look for established providers with track records with established companies, but that is not to say that you should not "hold" their feet to the competitive fire. Established MLM software companies all bring different but important strengths to the table. Most major providers also offer design solutions for the MLM startup that involves web-based software support that can grow to licensed onsite technology as the company grows.
Get the Product Right the First Time!
If your software runs the "machine," and the business is the "machine," then your product or service is, as the French would say, your "raison d’être," your reason for existence. In looking back on history of the direct selling industry, a chicken and egg analysis makes it difficult to determine whether the business opportunity or product was the essential reason for commencement of the business. There are instances of both. The founders of Avon, Mary Kay, and Home Interiors came from successful experiences in marketing other products. They found a product suitable for their marketing talents. On the other hand, the founders of Nikken, Amazon Herbs and Shaklee had a passion for bringing uniquely new products to the world and direct selling became the best vehicle. You will fit in one of these two categories. Whether it is one or the other, however, choose a product or service for which you can promote with passion. Be sure that the product is unique or that its formulation is unique to your company. If it is a commodity or generic product such as telephone service, then you will need to create another unique marketing edge, such as great service and value, to market the product. The better of the MLM products are those with high margins resulting from the "perception" of uniqueness in the marketplace. In the end, a company will only succeed when selling a product of high quality at a reasonable price to a market that purchases the product on its own merits. Overpriced products of dubious worth have no real long-term future. The death knell occurs when distributors are caught informing business opportunity meetings that the product is really irrelevant and is merely an excuse for the marketing plan. Another vocabulary term for this phenomenon is "pyramid."
Equally important to choosing the right product is the assurance that your marketing will not be impaired by poor planning. Your initial vendor agreements should be drafted or reviewed by MLM Legal Counsel so that you do not find yourself stranded without product, or worse, find your manufacturer in competition with you. Regulatory compliance is essential for such issues as FDA for labeling and claims, consumer standards for water and air products or compliance with discount buying legislation. If you are importing products, you should be assured in the beginning that your product will not be subject to embargo or detention. And, obviously, you should be assured that your distributors and customers would have an uninterrupted supply of product because you have established adequate capacity to produce the product or service.
Compensation Plan—It Better Be Good!
Does a compensation plan make or break a startup MLM company? History suggests that a good one is helpful and a must. Does it drive success? Probably not. Will a bad plan contribute to failure? Probably, together with other unlucky breaks. As industry expert Michael Sheffield notes with respect to a "good" compensation plan, "its absence will be noticed more than its presence."
Is there anything new under the sun as far as compensation plans? Probably not. Whether the plan is a unilevel, breakaway, binary, party plan, Australian two up or utilizes enroller, infinity or coding bonuses, the goal is the same….motivate varying behaviors of distributors ranging from direct sales to building wide to building deep to supporting downline to maximizing sales volume production and retention. Of key importance is that the plan is easy to explain to recruits and that it is perceived as fair and balanced.
Typical plans may pay out upwards of 30% to 50% of sales volume in commissions to distributors. Various plans merely divide the pie differently. As long as the perception is that the plan is competitive within the industry, it appears that other factors, including bonding with the product, management, field leaders, company philosophy and corporate communication will be a more significant driving force for recruits and distributors. In fact, companies whose pitch leads with the compensation plan are often merely hiding the weaknesses of other key components such as quality of product or stability of management. In designing plans, leading MLM management consultants serve a vital role in balancing all of these factors.
There are obviously significant legal issues in evaluating and implementing the compensation plans. Review and input by a competent MLM Lawyer is essential.
Clear Agreements Between Owners
It is one thing for an MLM business to fail because of regulatory challenges, legal challenges or even financial challenges. Periodically, the industry is aghast when MLM companies fail as a result of disputes among owners. Unfortunately, such events have occurred. The causes for such failure can be many. Often, the failure occurs because the owners of the business did not, at the time of inception, take sufficient care to outline their respective rights and responsibilities. It may be a legal matter, but then again, it is often a case of differing expectations about the future of the business. These expectations should be out in the open at the commencement of the business and mechanisms for dynamic change should be anticipated, including exit strategies for owners. The worse case scenario, which has occurred, is paralysis of the business while owners argue over management objectives. Obviously, this problem cannot occur when there is one principal owner to the business. It tends not to occur when there are two owners. Three owners tend to produce a revolving alliance of two against one. More than three owners may well be a prescription for future disputes. In any event, managing expectations starts "at home" and at the beginning of the business.
Attitude—The Three P’s-Passion, Patience and Persistence
Success coaches and motivational speakers will often note: "If you think you can, you’re right! If you think you can’t, you’re right!" This is not a mere placebo. There is something to such advice. Attitude makes all the difference in survival and success of the startup MLM. Every successful MLM company was driven by a leader who had passion for the product, the opportunity or both. The charisma of the leader could not be shared successfully without passion. You must be in a sense what the philosopher Eric Hoffer referred to as a "true believer." A "true believer" is a founder of cultural, religious or business movement….and that’s who you must be. There is little room for the skeptic or cynic. As Eminen would say, you can’t just sing the song, to succeed, you must "lose yourself in the music."
Only with passion will persistence and patience occur. And, only with those two additional attributes will an individual be successful in the start of an MLM company. It is a rare day that an MLM company is an overnight success. Some companies become overnight success stories because of the migration of thousands of seasoned distributors as the result of the collapse or implosion of other large MLM networks or companies. This occurrence is the exception to the rule. In the end, it is often the case that a company will not experience its more rapid trajectory until it has been in existence for two or three years. It is usually at that point in time that the combination of its stability, and some other fortuitous event in the marketplace, causes its discovery by legions of potential distributors and customers. So, in the end, attitude, the culmination of passion, patience and persistence, is a defining factor in the success of the startup MLM company.
This Advice from Experience
You won’t find these ten rules in a textbook. You will not find them in a college course. You will not find them at Staples or Office Depot. You most definitely will not find them by consulting with corporate business lawyers or general business advisors. These very important factors are forged in the furnace of experience. These are practical rules that arise from two decades of practical hands on involvement. These rules come from the school of "been there, done that." If you pay attention, is success guaranteed? Well, go to rule eleven, which is "success is never a sure thing, but opportunity is always guaranteed."
About the author. Jeffrey Babener is widely recognized as a leading legal counsel in the MLM and direct selling industry. His law firm, Babener and Associates, has, for two decades, represented leading direct selling companies headquartered throughout the U.S. and abroad. He lectures extensively at such universities as the University of Illinois, University of Texas and University of Houston, publishes extensively in books and articles and has served on many committees of the Direct Selling Association as well as general counsel for the Multilevel Marketing International Association. He can be reached at his Portland, Oregon office at 503-226-6600 or visit his website at www.mlmlegal.com for an expansive selection of information on direct selling, MLM and network marketing.
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