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Network Marketing is a legal, ethical business model that offers participants a
leveraged opportunity with a huge potential upside- that's the
good news. The bad news is that not all companies that represent
themselves as MLMs (Multilevel Marketing companies) are in fact legal,
ethical, or MLMs- some are pyramid schemes or ponzi schemes, which are
illegal for good reason- they're predatory and based on fraud. This
article will briefly describe which is which, will help you recognize the
warning signs of bad opportunities, and will help you avoid the commonest
errors made by new network marketers.
The purpose of this article is not to convince you of anything or to
sell you anything- the purpose is merely to provide useful information to
the curious. MLM vs. Pyramid Schemes or
Ponzi Schemes Multilevel Marketing, also called Network Marketing,
is a pretty straightforward process- it begins when a supplier of a
product or service offers people outside the company the opportunity to
solve the problem they face of marketing and selling their products by
creating a business opportunity with built-in leverage- they offer you a
commission on sales volume you generate, or on sales volume generated by
people you've recruited to do the same, or both. Your business
incentive is to promote the company and generate sales, and when you
leverage the efforts of others effectively, everybody involved wins
because everybody has contributed value to the equation- you and your
network have connected the seller with a buyer, and the company pays you a
portion of its profits. A Pyramid scheme relies on revenue generated by
new investors, rather than revenue based on the sale of a product or
service with some intrinsic value of it's own. Put simply, in a
pyramid scheme not enough new value is created in the process to pay out
all the investors- the only wealth gained by any
participant is wealth 'invested' by other participants. You've seen
these chain letters where they ask you to send them $6 and forward the
letter to 100 people who will each send you $6 and so forth? The
problem here is that eventually you'll run out of people on the planet and
the last people to pay in are out their six bucks. Pyramid schemes
will always fail because their business plan is not based on creating
value in the way that a sustainable business is. When a company
makes a product worth more than it's parts and sells it, they've 'created'
value from which they can profit sustainably. When a marketer connects a buyer with a product, they've also
created value, and this, too, is a sustainable process- every time a
product is connected with a buyer, the value of the product (to the
seller) increases from 'potential' to 'actual' revenue. If, however,
someone is selling you the opportunity to sell
other people the opportunity to sell other people opportunities, all
that's happening is the shuffling of money, and it's based on a lie. The classic example of a pyramid was developed by Charles Ponzi, who in
1920 collected an estimated $15 million in a scheme where he promised,
based on his fictional speculation in international postal reply coupons,
to pay 50% interest over a 90 day loan period. After convincing the
first round of 'investors' and enough 'second-round' investors to pay back
the initial investors within 90 days, he was inundated with would-be
millionaires throwing their money at him. Of course, he was
promising a 50% return and 'borrowed' from the next investor to pay the
last- no wealth was created, it was merely fraud, and expensive fraud at
that- half a dozen banks and lending institutions crashed when Ponzi's
scheme collapsed for want of new investors to keep it liquid, and the
majority of 'investors', those caught in the last round, lost their money. How to spot a Pyramid
Scheme: The last thing in the world you want to do is become
involved in a pyramid scheme- not only are they unethical and illegal, they're doomed
to fail by their very nature. On top of that,
most pyramids are designed to prey on your optimism. The easiest way to avoid a potential
involvement with a pyramid scheme is to use some common sense- if it
sounds too good to be true, odds are that it is. If you can't see
where the value comes from in the supply chain of goods or services, odds
are good that the value is coming from investors (i.e., you), rather than
from customers or suppliers. Here are some signs (this is not an
authoritative list) to be on the lookout for:
- Situations where you're asked to invest in 'the opportunity', or where there
isn't a product with it's own value. If there is no legitimate
product or service being sold, but only the 'business opportunity' itself, chances
are the promotion is a pyramid scheme.
- Situations where your compensation is based upon anything other
than sales volume generated by you and your group. If your income is based on
recruiting, if your recruits must 'buy in' or 'load up' with inventory,
beware- a legitimate MLM doesn't operate based on any of these things.
- 'Opportunities' that require substantial buy-in. If the
business opportunity is being sold for a 'substantial amount', buyer
beware! Many states consider a required up-front investment of $500 or
more to be "substantial" and so should you. No legitimate MLM will
need your money up front in order to work.
- Programs that require purchase of other
products or services. Some pyramids seek to exploit their
distributors by requiring them to purchase expensive items such as training or demonstration
materials. If kits or demonstration materials are necessary for
conduct of your business, they should come at cost- no legitimate
business needs to make a profit on its' office supplies and this is no
different.
- Companies that don't 'buy back.'
If the MLM you're looking at
requires you to carry an inventory, they should guarantee in writing
that if you want out they'll buy back at least a substantial amount of
your investment. Without this safeguard, what the inventory
'loading' often amounts to is a buy-in reward for your upline, rather
than a sustainable business transaction. If the company won't 'buy
back' what it requires you to buy, beware- this is a system that can be
abused.
- Recruiters who misrepresent potential earnings. If the
opportunity is sold as a "get-rich-quick" scheme, beware. The only
people who do well are those who can sucker others into buying in.
Ten common mistakes made by beginners into Multi-Level
Marketing:
- (Don't) Join based on Inflated Earnings Expectations - While
many people do in fact make money in MLM programs, and most will point
out that the theoretical earnings potentials are enormous, the reality
is that not everyone will make it big, for the same reasons that only a
few make big money in pro sports- the market will only bear a certain
volume and it takes an exceptional performer to get there. If you
join with unrealistic expectations of making millions in your first 6
months, you may end up dropping out, discouraged. Most MLM
participants use their MLM to supplement their income, rather than
making their entire living from it. When you become a star, THEN
you can retire and live off your MLM income. Until then, expect it
to grow only as fast as you can make it.
- (Don't) think Short Term- Most MLM participants describe
their entry into network marketing as a slow process- it takes time to
establish a network and create a cash flow from it if you're a beginner.
Like anything, networking is a skilled activity- you can throw an
experienced network marketer into any MLM and expect them to take off
phenomenally, it really is a skill. That said, although many
report slow beginnings, they also suggest that it gets easier and faster
over the long term. When evaluating your MLM, pay attention to
their track record and regard it as a long-term partnership, rather than
a get-rich scheme.
- (Don't) expect easy money- Marketing is work! It
requires you to talk to a lot of people, to communicate effectively, to
represent your program, your products, or your services in a positive
light- and even then, 9 out of ten won't be interested. Once
you've found that one, odds are good that they'll need your help to
become effective themselves. Odds are good that in order to be
successful in MLM, you'll have to create a successful you before it
becomes easy- and that's honestly money you'll have earned.
Remember, this is still business- if the money was easy, someone would
have picked it up already. What you're doing is adding value to
the product or service, and in order to succeed, you've got to become
good at it.
- (Don't) buy into a 'Front-End Loading' program- If your
prospective MLM expects you to put up your own money, beware- why do
they need your money? The truth is that no legitimate business
needs your investment unless something of value is trading hands, and
even then, there should be a written inventory buy-back policy.
Programs with front-end loads or buy-ins tend to create abuse- if you're
financially motivated to recruit people who put their own money in...
well, some folks will find that too tempting to resist.
- (Don't) buy in without Profit Margins- If your program
requires you to sell product from your own inventory, expect your
distributor price to be below a competitive retail price for that
product or service. If it isn't, your ability to sell will be
limited by what the market will bear. You may ask, 'how can you
succeed?'- The answer is that their business is likely not based
on you selling the product... it's based on you buying it. One
exception to this rule: If you don't sell the product directly (that is,
if the service you provide for the producer is a referral, rather than a
sale) don't expect a wholesale discount, they may regard you as a
customer when you purchase product. Put more simply, if you have
to buy it from the producer in order to sell it to a customer, expect a
discount. If you don't get the discount, it's more likely that the
system will be abused (that is, the business model is more likely to be
based on you buying in than on your sustained business) and it will be
more difficult for you to maintain your own profits.
- (Don't) work with recruiters who pressure you to recruit your
family and friends. This may not be an indicator of an illegal
scheme, but if there's pressure from your upline to get your family and
friends involved, odds are that you don't want to be involved- .
Of course, if you choose to invite your family or friends into the
program, that's another thing entirely- but it needs to be on your
terms, not those of your upline.
Okay, enough about the bad stuff. There's a few bad ones out
there, but there are also many very good companies to choose from- often
your most difficult process will not be in choosing which bad ones to
avoid, but rather, in choosing which good one is a better match for you in
the long term. So, this raises the question- what are some things to
look for in a network marketing opportunity?
- Consumable goods and services- The object here is to
grow a customer base, which means repeat customers who are happy to come
back for more.
- Products and services that make sense to you- If they
make sense to you, they'll make sense to the kinds of people you're most
likely to connect well with.
- Horizontal markets- The more interests your supplier
caters to, the easier it will be to attract business.
- Good Leadership- Is the person introducing you to the
company a good leader/teacher/mentor, or are they just trying to sell
you some product?
- Good Documentation and transparent processes- All
businesses that want you as a partner should be able to document their
policies and explain them clearly.
- Positioning in an expanding market
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