Multi level marketing (MLM) is a decades old business model that offers complete financial freedom to its users for a small investment. The very essence of MLM is to keep adding sponsors, who in turn add users below them. This creates a huge network of individuals who work towards growing their personal MLM network by selling the company’s products/ services and by signing on more individuals as sponsors of the MLM company. This is a large number of people, similar to a huge bureaucracy with a lot of transactions, commissions and other business details.
However, we hear a lot about MLM companies failing within a few years of incorporation, despite the seemingly simple growth model. Here are some of the most common reasons that their failure can be attributed to:
Weak sales team = more capital needed
All MLM businesses
have a few successful distributors/ sponsors who can easily sign people on very fast. The problem arises when the network below these distributors is not a solid one, i.e. they are not able to sell the products or sign on more people. Traditionally, an MLM company is financially sound if it can sign more sponsors or have sponsors who can sell products easily. An MLM company is said to be in a good shape if it has 4- 5 thousand sponsors. If not, it should have enough cash to slog it for the next 2 years at least.
Lack of market research
One major reason for a MLM companies failing is that little or no market research is done to understand the industry or the market realities of the industry they are entering. The company could be into selling FMCG products or financial products, but without any understanding of the consumer, it is next to impossible to address his/her pain points. Remember, MLM is not just about signing more people on to your network, but also about ensuring that the network is working effectively for you by driving more sales. Afterall, what good is a network if you don’t have good sales? This is usually a scenario where the core network marketing management team has been successful in another MLM business and can be successful in any other business, irrespective of the industry/ product they choose.
Estimated costs tend to be higher than the budgeted cost
Like any organization that has some budgeted costs, the estimated costs tend to be much higher than what was budgeted for. This is true for any organization with a huge sales network. If these costs have not been accounted for, or if people are able to claim refunds against fictitious bills due to a lack of oversight, any business would be in a soup as your sales network could actually be more inclined to claim expenses than to sell your products. While some of the costs may be genuine, not accounting for them will result in a shortage of capital for your business.
Lack of proper communication with external stakeholders
This is a huge problem faced by MLM companies in India. By not interacting regularly with the government authorities, media, distributors, etc., MLM companies risk isolating themselves. Amway, an American MNC that sells through the MLM business model has been at the receiving end of the government’s ire for a long time as it is believed that their business dealings are arbitrary and illegal. As a result, the company’s goodwill has suffered. This could deter even enthusiastic businessmen from joining it and hinder the company’s long term prospects.
Learning and development is an integral part of any organization. Although MLMs say that sales is the responsibility of a distributor and his network, not every person who signs up is good at sales. In an MLM business, it is very important to train the people about the various sales techniques that can help close a deal. Training them about your products is also a must. At the end of the day, when a sponsor is not successful, he will surely blame/ badmouth the company for not training him and expecting sales. Any good organization must have a good sales training program for its employees and distributors alike. Also, MLM sales are much more difficult as there are no advertisements or promotional schemes that can push a product in the market.
MLM companies have a lot of data that has to be handled. Details of sponsors, distributors, their networks details, details of transactions, sales, offers, tax details, compensation claims, invoices, incentives etc. are some of the most important details without which an MLM organization cannot work.
Banking and accountancy are often the first major casualties of an incompetent MLM software. Not having a good software often results in a lot of ambiguity, which may have several repercussions. For instance, it could impact your tax compliance and land you in trouble with the government authorities, or there could be delays in compensation and incentives, which can adversely impact the team’s morale and make them look for greener pastures elsewhere. The right MLM software will be able to mitigate most risks if it is able to account for any changes within the organization (such as new offers and discounts) and also in the external environment with ease and is customized keeping in mind the unique needs of the industry and business.
Also, having a good MLM software can also, reduce the cost of human capital, which is required for maintaining records and details. Thus, having a strong MLM software is important to keep your distributors and regulatory authorities happy.
These are just a few points that we believe can make or break an MLM company. By paying detailed attention to these, founders can move from being just another MLM company or a small MLM company to a stable and sustainable MLM MNC. A little bit of smart work is all you need to go from ‘good’ to ‘great’.
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