If direct sales and network marketing is such a great way to make money, why do so many of those companies fail?
There are many reasons, but these are the top 7.
1. Successful distributors start many of them without enough business experience.
Building a successful sales organization within a direct sales company is a huge achievement, but it’s not the same as founding and running an entire business. Yet many successful distributors, making six figures a month, look above them at the company owner who is making even more money, and decide to take the next step up.
However, they discover that choosing and creating products the marketplace wants, manufacturing them, storing and shipping them requires a lot of expertise that just selling them and recruiting others doesn’t require. Founding such a company also demands they learn or hire the expertise to have employees, financial experts and accountants.
2. The founder doesn’t have enough capital.
This is one of the main reasons all new businesses fail. The founders start it with a dream and a shoe lace, and that’s not enough to pay the bills. According to MLM Attorney, a new company needs to have enough capital to see it through at least its first two years.
This overlaps with the first reason. The 6-figure per month distributor is wealthy based on that as a personal income, but doesn’t realize how much additional capital running the entire company costs.
3. The company can’t recruit well enough or fast enough.
Recruiting brings in the distributors to buy and sell the products, and to recruit more distributors. That’s what gets cash flowing through the door. Cash is the life blood of every business. And direct sales companies require distributors to make direct sales.
This also overlaps with the first reason. Successful distributors assume they can build an entire company as they did with their own organizations.
4. The company doesn’t safeguard itself legally.
There are many ways for direct sales companies to run afoul of state and federal regulatory agencies. With the latest actions by the Federal Trade Commission against HerbaLife and Vemma, it might set the bar separating legal direct sales companies and so-called pyramid schemes higher than ever in the near future.
Companies in the health, beauty and nutrition space must take great care about the product claims they make or risk adverse actions from the Food and Drug Administration.
It’s more important than ever before for direct sales companies to have attorneys experienced in the industry review their product claims and marketing materials, their compensation plans and their recruiting marketing materials. They must also adopt policies about what they allow distributors to say and do.
5. It doesn’t have the necessary technological support.
They need to put up a web site and host networking hardware and the software to track inventory, distributors, their genealogies and sales. Representatives expect accurate and timely payment for every penny they and their organizations have earned. Although such software exists, you must customize it for your unique payment plan and retail products.
6. Their products do not have a strong Unique Sales Proposition.
One of the strengths of the direct sales industry is that it’s pioneered some great new innovations in personal health. However, many times it copies new nutritional and beauty products from the larger health food and supplement industry. The products must have an edge, or a “moat” in the language of Warren Buffett, that makes them superior and invulnerable to imitation. If consumers can find the same product for half the retail price at GNC or on Amazon, why should they buy from you?
7. They don’t have an effective compensation plan.
Basically, every compensation plan is just a way of dividing up the net sales money that flows into the company, though the industry has come up with countless variations. The most important thing is to make sure everybody perceives the plan as fair to them. The company must receive enough money to keep operating at a profit. It must pay upline members enough to motivate them to stay with the company and recruit lots of distributors, or they’ll switch. It must give the individual distributor enough money, fast enough, to help them see how they can make a profit at the business.
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