We have all been exposed to a Multi-Level Marketing (MLM) scheme sometime in our past. Although not a new concept, it seems that there was a prevalence of them twenty or thirty years ago. They didn’t go away, and it appears that there is some new traction in MLM today; probably because the previous “entrepreneurs” have moved on and a fresh set of minds are now in the pool.
Loved by a few, scorned by some, excited by many, and disappointed by the masses, MLM tends to polarise many people. The negatives tend to outweigh the positives, but then that depends where you are on the structure.
Most MLM schemes operate the same way. There may be some subtle differences in the detail, but the promises and goals are generally very similar. I will not be discussing the products in a MLM scheme. As a general rule, they tend to be good and they tend to be expensive. The product price point is a two-edged sword.
1. It builds in product value – the more it costs the better it is, right?
2. The nature of MLM distribution and residual income means that there needs (by necessity) to be additional margins built into the product to make it viable.
MLM is essentially a distribution system. It is a means of moving the product from the manufacturer (or principle wholesaler) to the consumers. Unlike a traditional sales channel where there may be only a small number of product touch point, the MLM system can only succeed if there are many of these points, in fact, the more the better.
A MLM generally does not operate out of a bricks and mortar premises. The distribution is micro in nature and typically it is the operator that assumes sales and distribution control and direct involvement.
Unlike a traditional sales channel, the main objective of a MLM is to convert a portion of its customers into distributors. Let’s call these “Partners” or “Business Owners” (heard this language before?). The choice of label is important because it introduces an element of ownership into the product, and this will in turn increase excitement and involvement levels.
Usually, the sale price includes a cost-of-goods price (which is the actual unit price plus any handling/finance/delivery costs) and a profit margin. The profit is what you pocket as a result of selling the product. That’s where the transaction ends. In a MLM system, the sales channel consists of a large number of on-sellers. The manufacturer supplies product down the chain, these links pass it on down until it arrives to the eventual consumer. Every link adds a little margin to the transaction.
There is an obvious issue with this model because the larger the chain, the more expensive the eventual cost of the product. It may quickly no longer become cost effective and sales, at that level, will cease – obviously not a good position.
To counteract this, the product price is set by the manufacturer. The manufacturer then discounts the product depending on the number of links in the chain, each getting a pre-determined rebate, The shorter the chain length, the less rebates paid by the wholesaler and the greater their margins.
This model is also limiting, because although short chain lengths generate greater margins, the manufacturer actually needs long chains so that there is exposure to a greater number of consumers and so that there is greater market penetration.
A sustainable MLM system sits somewhere in the middle of the two models above. By its very nature, there is a normal rate of attrition where some business partners cease to operate. The level above assumes their responsibilities, enabling the chain to widen and the product consumers to receive their product. But natural attrition is difficult to plan, so many MLM systems will force a chain break at certain levels. These new chains are able to maintain product margins whilst limiting the rebate levels that need to be paid. The system becomes sustainable and should continue to operate whilst product consumers exist.
There tends to be no limits on how many business chains that a business partner can head. The generated residual income can vary. This variance becomes the area of concentration for improvement.
Regardless if you love or hate the MLM model, or if you are a MLM product user or reseller, MLM has been around for a long time. Some people have made significant sums from it, but most have essentially lost their initial investment