A 15 Minute Read that May Save Your Business
Seven Things You Can’t Ignore When Starting a Multi-Level Marketing Company
By: Preston Stewart
Although there are many things that go into and help sustain a direct sales company, here are seven things that are crucial. Ignore any one of these and your business may fail!
I have included real-life experiences from the over 20 years in the direct sales industry and no, I am not making these up.
From product formulation and production, to software and taxation, it’s critical that you find and work with experienced partners.
You’ll notice that I didn’t say “vendors”. That’s because the companies and people you work with in this industry are more important than any other industry I know of. The MLM world is as unique and fast paced as the companies in it. The companies you work with had better treat you like a partner (concerned for your success, available 24/7, and willing to help out in any way possible) as you experience growth, challenges and frustration! If they don’t, your business will suffer and you will lose ground. But don’t forget, in the same way you want to be given the time that you will need to succeed, your vendors also want and need to be treated with respect and even praised from time to time when they come through for you – like a real “partner” should be.
The Story: Company XYZ was ready to launch. Their software was running, conference calls going, numbers growing, and they were still waiting for their product to be delivered from the manufacturer. They knew that the six to eight weeks delivery date was tight, but hey, the vendor promised it would be on time, so why wouldn’t they believe them? After all, they manufacture products for all types of big, well-established companies and do millions of dollars in business each year, so what’s to worry about? The answer – a lot! The sometimes COO of XYZ didn’t stay on top of their initial order and two weeks before they were to officially launch was informed by the vendor that their product would be delayed by 45 days. Something to do with their raw materials not all being in stock, the label not having the correct INCI names and oh, did we forget to tell you we will need to hold the finished product for an extra week, to do ‘micros’! Now this may not sound like a big deal, but when your Distributors are signing up prospects, taking their money and promising them the world, and then find out their products are not even going to be shipped for another month or two?! Well, you have chaos.
Bottom Line: XYZ survived (barely) but lost a number of their key leaders, momentum and over $150, 000 in pre-order sales that first month. My projections are that if they would have had their product in place and on time and continued to grow at the same pace, they would have done over $500,000 their first 90 days. Instead, they barely did that in their first 12 months.
Contrary to what most people think, starting an MLM or Party Plan company is a difficult and complex job.
I can’t speak enough about experience. This industry is full of turns, rules, pitfalls and regulations that you never, in a thousand years, would think of. For example, did you know that in some states and even countries, the recipient of your product (because it’s Direct Sales) has the right to return your product for up to 12 months? And with a full refund! Did you know that in some states you don’t have to collect taxes on behalf of your Distributor, unless the Distributor elects not to pay? Then you, as a company, are liable for any taxes and penalties that may be imposed by the IRS. One of my favorites is in Taiwan. You have to pay the sales tax to the government before the product is even delivered and the list goes on and on. Having experienced people from within the industry, in your business, is critical to your success.
The Story: “My Favorite Company” (I call them that because, well, that’s what they were) was just two years old and growing at a rate of 200% a year and was on track to do over $5MM the year it all fell apart. The owners of My Favorite Company were awesome. Great partners, who were fun to work with, paid their bills, treated us with respect and worked closely with us as they asked for direction and advice. It was time, or so they thought, to get a new CEO and President to help run their fast growing company. One day I received a call from the new President who informed me that we, as their software vendor, didn’t know what we were doing, that we were over-priced and that we needed to fly to Florida immediately to renegotiate our “working relationship”, as he put it. Not a good start with a “partner” that had bent over backwards to help My Favorite Company succeed. Our visit was a disaster. The new President, who was constantly rude and demeaning, along with the new CEO, didn’t have any experience running a Multi-Level Marketing Company and immediately started implementing rules, regulations and making demands that, quite frankly, I could see were going to harm My Favorite Company. Sure, they had been Distributors in other companies, but that’s not even close to being the same as running the business. They demanded that we make changes to the compensation plan (which were illegal) and also to the Distributors back office (Team Office). A back office we had just spent the better part of a year, collaborating with their field leaders, to build. They also demanded we renegotiate our pricing and make a number of other operational changes that, quite frankly, were terrible decisions. We left frustrated and dejected. I tried to discuss these issues with the owners, but to no avail. Those new employees, after all, had been successful Distributors, and very persuasive ones at that.
Bottom Line: It took these two individuals just six months to destroy the morale of the Distributors and ultimately the company. I’ll never forget the heart-breaking call I received from one of the founders, while in tears, expressing her apologies for the way we were treated and sorry that she hadn’t listened to our advice. Working with and having experienced network marketing and Party Plan individuals in your business is critical. If you don’t, you won’t survive!
Sure, you can find cheap software, but if you want to grow to any kind of substantial size, (even up to as little as 1,000 Distributors), your software and software providers need to have experience and a mature platform.
I can’t emphasis this point enough. I can’t count how many companies I’ve seen fail due to software that does not work. It may sound easy, or maybe not as high a priority as other issues you will tackle, but you must have a software system that tracks downlines, manages inventory and pays commissions (to name a few) perfectly and without fail. There is nothing more destructive to your independent agent’s trust and hope in you or your business, than that of a back office that doesn’t work.
The Story: I’ll be short and to the point. A company, which was for the most part starting over, came to us two years ago. They told us horror stories of their last software system placing recruits in wrong positions in the downline, displaying incorrect personal and business information, and the more dramatic “life-ending” event of all – not calculating and paying commissions correctly.
Bottom Line: Don’t underestimate the critical role good software and software partners play in your success.
The Right Merchant Provider
Choosing the wrong merchant provider will first lose you cash, and then – your business.
The Story: This one never ceases to amaze me. In 2005, just when competition in cellular-phone plans was heating up, we launched a company that, as far as I know, was one of the first to offer Unlimited Calling for a flat fee. Over a sixty day period, we watched them sign up over 30,000 people, all of whom bought the $69.95 a month (or higher) rate plan, and processed more than two million dollars in sales. Everything looked great, except for one little problem – they didn’t take our advice and set up multiple merchant accounts. After all, the person who set them up was a friend of the family and they “guaranteed” that the processor would take care of them. Forty five days into the launch, the bank (not the processor), because of the sheer volume, froze the account and notified the owners that they were going to hold 90% of the funds (yes, 90%). Be aware, they have that right! You can imagine what happened next. No service, no commissions and tons of charge backs. They were out of business in 60 days.
Bottom Line: Always have more than one merchant provider and the means to move freely from one to the other as needed.
I can’t emphasis enough how building a strong culture will make a difference.
The Story: We’ll call this company “Vacillate” because that’s exactly what they did. About everything. Especially when it came to their story and brand. In a twelve month period, Vacillate changed their branding, their message, and their compensation plan at least six times. I remember meeting once with their Distributors to discuss what reports they wanted in their back office and having one of them say, “What does it matter, the plan is just going to change again next month anyway”. Even though it didn’t, the damage was done. Vacillate never did gain any traction in the industry and the leaders left before the products or pay plan could ever catch hold. They were out of business in 18 months.
Bottom Line: Build and be true to your story and brand. Don’t let Distributors drive the shop and never let one individual set the tone of your culture. Now, this doesn’t mean that you don’t listen to or implement good advice, but we aware, Distributors will pull you every which way, unless you stick to your guns.
Like it or not, Distributors do not work for you, are not your employees, and are constantly being bombarded with “new” and “exciting” opportunities. You had better treat them like gold!
The Story: This was actually something I heard second hand. A Distributor that had just left her previous company (bringing all of her downline as well) joined a company that we had just launched. In talking to her, the only reason she left the other company was because of the way the CEO treated her and her team. They liked the pay plan, felt connected to the founders and loved the products, but the CEO, who came from the traditional corporate environment, treated the Consultants as though they were employees – questioning and even demeaning their sales abilities, and asking why they weren’t doing more. Although the previous company is still in business today, it struggles along, churning through Consultants and never doing more than a few million dollars in business each year.
Bottom Line: Remember, whether you call them Consultants, Distributors, Agents or Partners, they are still a volunteer sales force, who loves being cherished, respected and rewarded for their precious time they give to build your company. Treat them like gold.
Run a tight ship and you could launch your business with as little as a quarter of a million dollars.
No story here, just a word of advice. Don’t assume you know how much money it will take to launch your business. No matter what you have, it’s never enough. Funny how that seems to always be the case. I’ve worked with individuals with as little as $150,000 to as much as $6MM and it’s always the same … they never have enough. The thing is, you’ll spend (or should I say, everyone around you will spend) whatever you tell them you have – every time! I’m always amazed at how quickly people can spend money. Especially if it’s not theirs. The bigger the purse the bigger the bang has to be, or at least that’s what every MLMer thinks. There is nothing wrong with starting out small, using sweat equity and then letting it grow. Sure it’s nice to have the funds available for growth, but that doesn’t mean you need to buy billboards, sponsor the local sports team or even lease and wrap the latest $100,000 vehicle. But hey, if that’s your thing, then history proves, you’ll be one of the 90% who fail. Those are just the odds! If you’ve never started or operated a Direct Sales company, here are some financial heads-ups to be aware of.
- Don’t over-hire: Having employees is the single largest drain on working capital for start-ups. If the people you are looking to hire aren’t willing to take on multiple tasks and work long hours, then move on.
- Product Expense: From formulation and production to the time you take your first delivery, be prepared to pay more than what you are told. I’ll guarantee you that formulation of your products will take twice as long as you think or were told. Raws won’t be available or will cost more than you were originally told, time to production always takes longer than what you are promised and all of these “nuances to the process” will cost you more. Not necessarily in the product directly, but in ancillary things that most people don’t stop to think about, such as rent, employees, insurance and other reoccurring expenses.
- Software Creep: It never fails, very seldom does a company like or want the software “as-is” or “out-of-the box.” Even though it may serve their needs, owners and Distributors typically want more and won’t leave well enough alone. They have to have this feature or that gadget or need to “tweak” the compensation plan just one more time, before it’s just right. Word of advice – get up and running fast as inexpensively as you can, see how things go, and then add the bells and whistles as needed – later, when you can afford it. Now for my shameless plug. Xennsoft offers affordable software packages and services that do most of the basics. For as little as $200 a month, you could be up and running in no time – kick the tires, prove your concept, make some sales and start recruiting. If you’re interested, please give us a call. We promise we won’t bite.
- Legal Council: Sure you could by-pass this for now, but at some point (and the sooner the better) you will want and need to have your Policies and Procedures, ULA Agreements, Web Agreements, Return Policies and Terms and Conditions, to name just a few, reviewed by a competent Direct Sales attorney. We highly recommend Spenser Reece at Reece Poyfair Richards, PLLC. Sure, it will cost a bit more than you want, but it’s money well spent as it’s only a matter of time before you will have to deal with the IRS, FDA, FTC or any other of those wonderful three-letter governmental agencies. Oh, and don’t forget your own Distributors. Sure, they love you now, but wait till they feel like they have been wronged. I’ve seen the lack of proper record keeping and shoddy operational rules slowly (and quickly) destroy up-and-coming companies and have even seen where the lack of properly managing the legal aspects of a business costing the company hundreds of thousands of dollars in legal battles. Having accurate and up-to-date operational documents won’t guarantee you’ll never get sued, but they will definitely help when you end up in court. Always put money aside for proper legal counsel. You will need it!
Bottom line, I love this industry. There are a lot of amazing and wonderful people in the Network Marketing and Party Plan world and we at Xennsoft take pride in what we do to help these companies succeed. Hopefully, this article has generated a desire for you to be better prepared and has opened your mind to questions you may not have known to ask before. Believe me, the more you understand and ask of your Partners, the better your chances are for success. With proper understanding, preparation and expectation, you will now move closer to that coveted 10% that actually make it past the first twelve months in the Direct Sales industry.