Starting a business

Monday, 20 August 2007

How To Evaluate A Network Marketing Opportunity

By Greg Kittinger

Network marketing is now recognized by some of the biggest names in personal finance and success industry as one of the best opportunities for the average person to reach their financial goals. Included in this group of proponents are folks like personal finance gurus Robert Kiyosaki and David Bach, and world-renowned economist and entrepreneur (and advisor to two presidents) Paul Zane Pilzer.

If you are like me, you are always interested in looking at ways to get ahead. For 24 of my 26 years I have worked for non-profit organizations – not known to be a high-paying career choice! I have 10 people living under my roof, and I need the best possible leverage with the least amount of risk.

I would hazard a guess that if we were to compare our personal experiences, or the experiences of our friends, we would conclude that there have been more disappointments in the industry of network marketing (or MLM) than positive outcomes. But this is not an invalidation of the industry. Rather, this is simply an invalidation of the evaluation process that most people undertake prior to involving themselves in an opportunity presented by the industry. What I will do in the next few minutes is spell out for you a process to successfully evaluate any opportunity within this industry, so that if you decide to investigate a business for yourself, you can go into the process with the confidence and knowledge to succeed.

Primary to running your evaluation, you must keep in mind that network marketing and MLM is a subset of the Direct Selling industry. Thus, network marketing is not about selling a product – it’s about offering a business structure supported by a product offering. It is therefore important to understand that you must evaluate both sides of the opportunity – the product offering and the business structure.

There are five key components necessary for success in any business within this industry.

PRODUCTS

The best products are:

  • Consumable - not durable, single-purchase items like water filters or car alarms. Products need to be normally re-purchasable every month. This creates a monthly revenue stream for the company and you.
  • Physical – it is very difficult to make intangibles & services work (like financial planning services) partly because there is very little emotional involvement. If you can’t feel it, experience it, and immediately enjoy it’s benefits, you are not going to be satisfied with the product yourself, and thus you won’t be a convincing advocate of the product (and opportunity) to others. If it makes a significant difference in the way you feel, or feel about yourself, you will become committed!
  • Supported by upward price pressure – you want to be involved in an industry that is growing (strong demand), or where “designer” products keep pricing trends on the rise (like Estee Lauder and Nutregena do for the skin care industry). Commodities like phone service or internet service will always see downward pricing structure as technology and competition continues to drive down costs.
  • Ahead of or part of an emerging or growing trend – did this company jump on a bandwagon that left the parade years ago (bad choice), or are they positioned to take advantage of growing demographic or consumer trends (good choice)?
  • BONUS: First-to-market innovation – it is better to avoid “me too” products. The front-runner in any category is going to almost always remain the leader, no matter how much a new comer may tout a “better” formula or product (think juice products). IF you find a company that is introducing a significantly new product, or an innovation on an existing product (think breath strips for mouth wash), consider this a bonus, as these innovations (& opportunities) are few and far between.

COMPANY

Thousands of companies have attempted to utilize network marketing to distribute their products. As of the date of this writing (fall 2006), only 27 companies have grown to be $100-million-per-year companies, 8 have become Billion$-per-year companies. Of those thousands, many do not last, and only a few grow to be large companies, indicating success. These companies typically fall into 3 main categories:

  • Mature Business – they’ve been around for 30-50 years (in my opinion, Amyway, Shaklee & Mary Kay fit this category)
  • Slow-growth companies - these are the party plan or direct-selling companies. It just typically takes too much effort to make significant income, so people burn out eventually. (here I would reference Pampered Chef, Usborne Books, etc.)
  • Emerging Powerhouse – they have a product that meets the criteria above, and are relatively new to the marketplace (see TIMING below).

Two key things you MUST evaluate when you identify companies to research are:

  1. Capitalization – do they have the resources to make it past the delicate first couple of years. As you probably know, many companies fail due to lack of resources to get them through the launch phase, or their first growth spurt.
  2. Management – it takes more than just an entrepreneur with an innovative product idea – to handle world-wide distribution and all that that entails requires a diverse and experienced management team.

Also, stay away from the Money Games disguised as businesses – things like friend gifting schemes, laundry balls – these are usually illegal and are quickly shut down. In EVERY industry there will always exist the charlatans!

TIMING

This separates simple income opportunities from true wealth-creating opportunities. Those who are satisfied with a few hundred to a few thousand dollars per month can simply review the established mature & slow-growth companies and pick one that appeals to you. Those that really desire a breakthrough financial transformation need to be a bit more deliberate and will need to look a little harder. You’re looking for one of those Emerging Powerhouses.

The growth chart of all business looks like some form of an S-Curve. When a company first starts out – as they are introducing their product to market and building a new network of distributors – their growth is fairly slow and relatively flat. Once they get past this early stage – their product begins to become branded in the market, their distributor force begins to gain traction – they reach critical mass and their growth begins a steep climb that can last from 5 to 25 years depending on the breadth and depth of the markets. Then as they mature, they reach that position with the older companies where their growth tapers off to a steady pace again.

What you are looking for – and sometimes you have to look for quite some time to find it – is a company that is in the first part of that S-Curve – before or just after it reaches critical mass. Yes – there is risk that a company in this stage may not make it to or past critical mass, but if you do your homework on the other components described here, and they all point in the direction of success, you can be confident that your risk (if any) is minimal!

COMPENSATION PLAN

There are basically four types of compensation plans in this industry, and they all have their strengths and weaknesses (I won’t go into detail in this presentation). What you really want to scrutinize are the weaknesses. The three critical components to look for are:

  1. Can a new person make money quickly – can the new affiliate reach profitability within 30-60 days. This early success will lead to enthusiasm about the business and provide an intrinsic motivation.
  2. Can the AVERAGE person (who only plans to work part-time, 5-7 hours per week) make significant money
  3. Can the professionals (those who desire to work full-time) become millionaires. This is important because any venture of this type needs to attract strong field leadership.

One additional component that I have found to watch for is the nature of any “cut-off” from the efforts of those in your downline. There are a couple of ways this happens in various plan designs:

  • The Breakaway – in this situation, if someone grows a larger business, or in some way outperforms you, they can break out from under your business, and when they do so they typically take all of the business volume (which translates into commissions) away from your business.
  • A Level Limit – in this situation, you are paid only through a set limit of levels of referrals in your business (typical level limits are 5 or 7). Thus, once business extends below this set level, any of the business volume no longer contributes to your business or commissions.

The preference is a plan design that pay through infinite depth. There is typically an additional benefit with these designs in that the purchases of customers-only and the efforts of those who are not working the business very vigorously do not penalize your business.

SYSTEM

Done correctly, in network marketing you NEVER sell – you simply provide information that will lead a person to a point of logical conclusion. They will either:

  • join you in the business
  • decline the business opportunity but become a customer of the product
  • say no to both

Because they reached their own conclusion after perusing the available information (and without any “sales” pressure from you) your relationship with that person remains unchanged. The significant component of this process done right is that YOU are not the information provider! You point to a system, and the system takes over. The elements of a proper system are:

  1. tools do all the work – you simply distribute the tools
  2. there is no guesswork – you plug into a pattern of activities
  3. you have access to leadership

One last word – once you have done your homework, the ball is in your hands! Businesses don’t grow by magic but by determined and consistent effort, and network marketing is no exception. The concept of network marketing is one of the most powerful concepts of leverage that exists today. When done correctly (and with the right company), you can leverage the efforts of thousands of people literally around the world.

As John D. Rockefeller remarked, “I’d rather have 1% of 100 people’s efforts than 100% of my own.” The power of leveraged, residual income is a force multiplier that levels the financial playing field for any person.

The deck is now stacked in your favor. You can evaluate any opportunity and reach your point of logical conclusion based on solid rationale rather than fear, misperception, or false claims! Whatever your story, whatever your passions, whatever your situation, whatever your needs, whatever your skills – if you desire a breakthrough financial transformation, do your homework and find the right opportunity for you!