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Evaluating a Network Marketing Business
Now before you say "ughhh" to network marketing, let me give you a few facts:
•There are a lot of people who have been made wealthy through network marketing
•There are some very high quality products sold through these companies
•It's much less expensive for a company to use commission-only reps (you!) to sell their products rather than mounting a major advertising campaign and buying shelf space in retail stores
•When franchising first started, many people called it a pyramid scheme, said it should be illegal, and generally thought badly of it. Franchising is now an established way of doing business, and I suspect network marketing soon will be as well.
•You don't have to hassle your family and friends to do network marketing. There are new approaches which use mass media such as classified ads and the internet to identify interested people. Your job is just to tell them about the opportunity and see if it's right for them. I'll give more detail on this below.
A couple terminology items before we get started:
•Upline: This refers to all people "above" you in the hierarchy of the company. The person who signs you up for a network marketing opportunity is your primary upline.
•Downline: This refers to all people who sign up "below" you in the company - either directly signing up with you, or signing up with those who you brought on board.
Here are some quick facts about the way network marketing works:
•You are responsible for selling the products and for bringing on others to help sell the products. In most programs, the emphasis is on bringing on others - since sales can be increased much more quickly by a group than by an individual.
•All orders are sent in to a central location, and the company sends the products ordered directly to the purchaser. (In the "old days" people often had to keep a stock of products on hand in their garage, but this isn't usually done anymore.)
•The company provides extensive marketing materials for you to use in selling and recruiting.
•You have a great deal of flexibility in how you run your business and in the hours you put in.
Evaluating a network marketing company:
If you think you might be interested in network marketing, your next step will be to start looking at the opportunities available and to find the right one for you. There are a lot of them, so I would suggest you first define what you want (read the info below and you'll be ready to put a list together) and then look for opportunities that match up with it. Here are things to look at:
The Product
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It is important that you can get excited about the product. If it's something you aren't interested in, you will never be successful at it.
In addition, look at the use of the product. If it's something which is used on an occasional basis, you will need a lot more customers / downline reps to sell a particular amount of the product. If it's something which is used on an ongoing basis - vitamins, cleaning products, meal replacement shakes - you will have a higher level of repeat sales and a more stable income stream, since people will order these items on a regular basis. I would strongly suggest you find a product which is consumed on an ongoing basis.
The Company
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As in any industry, the majority of network marketing businesses fail in the first five years. Therefore,
you need to be extremely careful in selecting a company that will stand the test of time. The easiest way to do this is to select only a company that has a track record of increasing sales and profits for at least five years. This narrow the field drastically.
On the plus side, if the company you're researching is public traded, so much the better. It will be easy to
scan financial statements and quarterly earnings reports. You're looking for a company that is well managed, solvent, with little or no debt, that has reached a critical mass of distributors to sustain
growth and that has been around enough to have worked out all the beginning bugs.
Compensation
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The most important consideration when choosing a pay plan is the number of people that you must enroll to begin earning income. The lower the number the better.
There are five or six different and competing systems that network marketing companies use to reward their distributors/associates/affiliates. They are the breakaway, the unilevel, the matrix, the two-up, the
binary, and various hybrid or combination plans. Each of these is described in more detail below.
BREAKAWAY
The stairstep/breakaway compensation plan is without question the most common of all compensation plans. It is also responsible for most of the really big money being made in the network marketing industry. However, this big money is being earned by a small percentage of those distributors involved in breakaway opportunities. What does set the breakaway apart from most other plans is that they are definitely geared to a full time effort. As a result, attrition is higher with breakaways as well as the expense involved in working and building a distributor base with them
The Breakaway plan generally has 3 or 4 increasing rank positions that can be achieved by meeting progressively higher sales volume requirements over a specified period of time. All the distributors under you are considered part of your personal group and their personal sales volume combines with yours to help you to move to these progressively higher rank positions at which point you will breakaway. You will generally earn higher commissions on the lower rank distributors under you (in your personal group) and this commission will decrease as they too move up the stairsteps to the breakaway side.
When you do breakaway, you become your own "organization" - in other words, you are no longer part of your upline's group. Your downline group comes with you as well as their sales volume which combined is called group volume. With most breakaways there is a set/defined personal group volume that has to be met each month in order to qualify for commissions on other breakaways. There is also a personal sales volume requirement that you as an individual have to do each month.
When someone you personally sponsored in your personal group qualifies as you did to breakaway, they officially breakaway from your personal group and take both the distributors and volume that are underneath them from you. They are now considered one of your first generation breakaway groups and you will earn on a monthly commission on this entire group by meeting the plan's monthly defined personal group sales volume requirement. With most breakaway plans, the more first generation breakaway groups you have the more generations deep of breakaways you will qualify to be paid on. Keep in mind that what makes a breakaway more of a full-time work program is that you have to constantly meet your monthly personal group sales volume in order to be paid commissions on your generational breakaways. However, if the goal is to have as many first generation breakaways as you can, you will continuously be losing distributors (as they breakaway) in your personal group whose volume will have to be made up in order for you to meet the monthly group volume requirement. This means lots and lots of recruiting for new distributors.
BINARY
Each person can sign up only 2 others which directly report to them. If you bring on additional people, you sign them up below others in your organization. So, you have two "downline" groups. You are paid on the sales of the lower-selling group for the month. The difference between your higher-selling and lower-selling group may roll over to the following month. Obviously there is a big advantage to you if it does, so this is something to ask about.
This is probably the most popular plan for part-time network marketers, since you only initially need to locate two others interested in your opportunity and since those above you in the hierarchy have an incentive to place people in your organization for you, to help you get started and to increase their sales volume.
UNILEVEL
In this plan, you can have as many others as you want sign up directly under you. Then, there is a set number of levels in your downline, usually ranging from three to nine, and varying bonus percentages on each level. To explain a bit more, if you have "John" sign up directly under you, and he gets "Suzie" to sign up under him, "Suzie" is level 2 to you. You will receive a percentage of all sales up to the number of levels allowed, though the percentage will decrease as the person is more layers removed from you.
MATRIX
A matrix plan limits the number of distributors you can sponsor on your first level, usually to less than five. The most common form of matrix is called the 2x12, meaning two wide and twelve levels deep. Another way of looking at this is that or you can have on your first level, a maximum of two distributors, second level - 4; third - 8; fourth -16; fifth - 32; sixth - 64; seventh - 128. Aside from the 2 x 12, other common matrices are 4 x 7, 5 x 7, and 3 x 9. Matrix plans generally tend to pay down more levels than other types of plans, at least on paper. Since the width is limited, and organizations tend to go deeper in matrix plans, so do the levels bonuses are paid on. It is also much easier to predict how much you will earn on each level, since you will know exactly how many people will fill each one. Generally, matrix plans are simple and easy to explain and understand.
TWO-UP:
Well, I heard of this compensation method in many of the things I read but couldn't find any detail on it. The articles I read referred to it as a "scam" - so beware if this compensation method is used by a company you're evaluating.
HYBRID OR COMBINATION:
The options here are almost unlimited. Companies can combine the basis compensation plans in any way they want!
Residual Income:
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Income can only be considered truly residual if you can go on vacation for an extended period of time and still get paid. If you are looking for residual income, watch out for "personal sales volume" requirements. This means that you personally must sell a minimum amount of the product each month in order to be paid. Obviously, that doesn't meet the vacation test.
Upfront Costs:
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All network marketing opportunities will have some sort of upfront starter kit that you need to purchase. They start around $200 - $300, and can go quite a bit higher than that. For your money you will get some initial sales materials and products.
Ongoing Costs:
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You will generally be expected to purchase the company's products on an ongoing basis for yourself - you can't sell something you don't believe in!
In addition, if you will be marketing person-to-person, you will need to purchase marketing materials, and if you will be marketing via the internet you will likely have ongoing costs for a company web site, an 800# for prospects to call, and for advertising your opportunity.
This is definitely a "your own business" situation, so you will have some ongoing business costs as described. Also keep in mind that these costs may be tax deductible, so keep good track of your expenditures.
Marketing
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The "traditional" model of network marketing involves making a list of 100 people, sending them all letters, following up with calls and cornering them into face to face appointments where you sell them on the business opportunity. This is fine for "natural" sales people - but there aren't many of those out there.
However there are many successful people doing network marketing in a true marketing sense - meaning giving a little information to a lot of people and waiting for interested parties to contact them - using mass media like classified ads and the internet. If you're interested in this approach - I would suggest you find a company who is already doing it, since they will have a lot of tools (ad examples, web sites, etc) that you can use right away, rather than having to develop your own.
Also, if you plan to market using the internet, make sure it is allowed! Some companies restrict the use of the internet to promote their products.
Training and Mentoring
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Many companies don't offer much training or mentoring, so many people joining these organizations are not successful. I would suggest you look for a program with a strong mentoring component and a strong training program.
Also, keep in mind that many organizations have weekly training meetings. This sounds good - but can be a problem if you have children to take care of in the evenings. You may want to look for an organization which offers their training via conference call instead.
(c) Carol Woods
About the Author
Carol Woods is a small business consultant and the editor of Work at Home Income, a weekly publication of Income Building Blocks. IBB offers free ideas, information and inspiration for moms who work at home - or want to! For lots of free ideas to help you find a work at home job or start a home based business, visit us at http://www.income-building-blocks.com and sign up for Work at Home Income!