Why MLM?

Recently I conversed on the internet with a gentelman from Belarus who was trying to decide whether an MLM company would be an adequate supplier for his foreign sales operation. He quite emphatically did not want to recruit a downline based on the economic turbulence of the country. My honest response was that he should seek a true wholesale source because he should

A) Realize that MLM distributors do not actually buy at "wholesale" (in reality they buy at distributor cost which is significantly higher, but still below "retail") and that

B) In reality, some companies' distributor costs were actually chosen to mirror the costs for similar products in a retail environment because the companies realize that little if any of its product is actually "retailed" has been taken by some as a blanket indictment of MLM as an industry by some responding to my posting by email.

In reality, these statements in no way indict the MLM industry for the following reasons:

This gentelman was seeking to distribute good consumer products directly and quite likely take the risk of a) importing them b) warehousing them c) advertising them and d) distributing them and e) managing the accounting and book keeping for this retail operation.

Considering these risks, I suggested that he seek a truly wholesale source allowing him product mark ups of 400 to 1000% not the normal mlm mark up of up to 100% for strong retailers.

For people understanding the economics of business in general, the reasons are obvious without necessarily casting any aspersion on network marketing at the same time.

Why? This gentleman's business and MLM are two completely different operations.

This man must assume all the risks of the business himself, including the risk that no one will purchase his goods. In exchange for purchasing items in truly wholesale quantities, he earns the right to make appropriate mark ups to cover his costs and profits.

In MLM, the MLM company assumes many of the risks detailed above and the distributor either only purchases for their own use or in small amounts to retail. In the meantime, the company carries the overhead and associated expenses.

In most cases the MLM distributor WILL NEVER buy in quantities justifying a truly "wholesale" price.

The difference between "wholesale cost" and the "distributor cost" goes of course to pay commissions for moving the product to the end user, but it also "pays" (whether the distributor taps into this resource or not) for the resources of the upline to be put at the distributor's disposal. It also covers the cost of having a field force who can order in even limited quantities and receive a discount.

Retail markups are fair to generous in MLM, given the minimal advertising that goes into retailing and recruiting compared with the advertising budgets of other product lines.

Now to this other reality... MLM prices are often considered "too high" for a number of reasons some, legitimate and others less so. One reality in MLM though is that distributor pricing is often set to mirror retail pricing in comparable outlets because of the simple fact that even though MLM began as a system of "micro distributors" it has evolved into more of a system of "end users" some of whom are business builders too.

That's why often distributor pricing is often what's most comparable to retail pricing.

Is this a "sin"? another gross fraud perpertrated on the public by mlm? Or is this simply the only sane response companies can make because 95% of the population is not geared towards "selling". From the very earliest experiences of MLM companies, they learned people would gladly sign up to buy at a discounted price (who wouldn't?). But then they realized no product was being moved.

The solution? Institute a higher distributor cost and a system of "breakaways" to reward those causing the most product to be moved.

The only difference today is that simple transfer buying is much more acceptable and compensation plans seek to reward the one gathering the largest number of transfer buyers, recognizing few will still be selling products one by one. Hence the proliferation of matrix, unilevel and other compensation plans designed to be more friendly to transfer buyers.

MLM distributors join the program and get fair compensation for their work. They accept lower gross compensation than one who can truly purchase at wholesale because they are accepting fewer business risks and lower fixed overhead costs and shifting them to the support company. They are marketing their products to a relatively few and gaining the ability to leverage their time and income in a way other entrepreneur's cannot.

Is MLM bad? No... it's one of the last ways ordinary people can start an extraordinary business!

In this case, it would have been in less than the best interests of the man from Belarus to advise him to take less compensation given the risks he faced since he had no desire to leverage his time and efforts through an MLM program.

Chuck Huckaby is a network marketer with a background in the insurance and investment fields. Currently he is creating his own online newsletter that will deal ways to help people succeed in their own home based businesses, marketing in general, and their personal financial planning. Subscriptions are free by emailing HuckabyCPH@aol.com