On Network Marketing
On Network Marketing
What is it?
I am a network marketer. Like myself, my clients are intelligent, very well educated, and results oriented. They are interested in their health, but they don’t believe that they are going to have any success by having someone wave crystals at their chakras. They are serious and engaged. Each has his or her own distinct concerns, although there is much common ground. They have almost all had experiences with established medical professionals that they have no desire to repeat. I have personally discovered that surgery is no fun. So have most of them. Two on my knee, one on my back, one on my nose; and I’ve had enough of that.
I’ve earned a BSc in Physics, an MSc in Electrical Engineering, and an MBA in entrepreneurship. In the year I graduated in Physics, I ranked third on the CAP exam.
Funny story about the CAP
Considering this as a potential embarrassment for the school that might raise questions about the bias of the exam grading, the head of the department called me into his office to explain that although I had actually earned one of the prize places, they were going to demote me to fourth place to avoid any “scandal”. But he said that if I wanted to tell the truth to the world, that would be OK with him. That’s the Canadian way.
In the US, I could probably have sued them and won big. Not in Canada. So the truth is that I ranked third in the country.
Blah blah blah
I’ve racked up scholarships, been a licensed professional engineer in Canada and the US for around 30 years, and a Senior Member of the IEEE. I have over a dozen patents in the wireless industry to my name. I’ve been a C-level executive in two firms in wireless and GPS. And I am a network marketer now.
The point is not to blow my horn. The point is that if I consider network marketing to be a perfectly valid career model, maybe it’s worth you having a closer look. There’s no question that there are a lot of myths and objections out there. I’ll come to address some of the big ones later. For now, let’s take a look at what network marketing is and is not.
Ways to Make a Buck
Here are ways we all know about to make a buck …
You can be a blue collar employee, white collar employee, commissioned salesperson, or what ever. The main point here is that you’re trading your time, usually for a salary or wage, in return for reduced risk. That reduced risk comes in the form of a steady paycheck, health care & other benefits, paid vacation, and so on. The fundamental thing that you are selling is your time. Even if you’re a commissioned salesman, it still takes a certain amount of your time to close a deal. And you can’t make more of your time. You can make your time worth more on the market by getting an education, improving your skills, coming up through the ranks. But you’re stuck with how much time you have to sell. Unless you can clone yourself, in which case you don’t need my advice.
You’re a doctor, a lawyer, an engineer, or other professional. You’re a craftsman or a small business owner. You are selling your very valuable skills to your clients on the basis of time or project completion. Really, it still comes down to how much time you have to sell. Even a heart surgeon can perform only so many surgeries in a day before he or she falls over in exhaustion. In many ways, you don’t have one boss, you have as many bosses as you have clients. Depending on the nature of your skill set, if you want to have the job done right either you need to do it yourself or legally you have to do it yourself. The doctor, the lawyer, the engineer can have so many nurses, assistants, and technicians on staff, but at the end of the day, it’s their role to supervise all of the efforts responsibly. You can add partners and expand the business; but you can’t expand yourself.
Now you’re the CEO, CFO, CTO, C-whatever. Now there is some leverage to be had. You have 100s or 1,000s of employees in your hierarchy, and you are rewarded on the basis of their collective performance. Their performance is your performance. You have salary, benefits, bonuses, stock options and other perquisites. This is nice work, if you can get it. However, it’s a slippery slope and you’ll find a lot of people gunning for you once you’re in that corner office. Not everyone is cut from the cloth needed to get into these roles.
If you have a lot of money, then you can make money by investing it. Here again, there is a factor of leverage to boost your return if you chose your investments wisely. I’m not here to explain features of capital leverage, but if you’re familiar with these concepts then you’ll know what I mean when I say that you can improve your return by choosing investments that incorporate both an equity and debt component. This leverage increases financial risk, and so you construct a portfolio that balances your desired levels of risk and return. That is, that’s what you do if you have enough of the do-reh-mee, boys.
Let’s think about these four approaches
If you’re someone else’s employee or self-employed, you have this fundamental limitation: there’s only so much of you to go around. If you are really really successful as a self-employed small business owner, then perhaps you can make a transition to senior management by growing and growing your business. The question is “how likely is that?” You can make other transitions too. You can move up the corporate ladder and get into the executive suite. In point of fact, I’ve been all four of these at one time or another, although frankly I was a lousy investor because my nest egg was never quite up into the $1,000,000s that one really needs to do well. I’ve also tried to take small businesses and get them big. Never quite pulled that one off. My small businesses have stayed small. The statistics say that small going big happens maybe 10% of the time. The other 90% small stays small or goes bust.
Most people are trained to be employees and don’t want the risks of the other approaches to making a living. But that puts them in a box that is very hard to get out of. You hear mythic tales of the kid that starts in the mail room and becomes president. Try that. Let me know how it works out for you.
I lucked out getting into the executive suite by having exactly the right and unique skill set that my company needed at the right time. That was because I was an implant at a point in time when the business landscape changed dramatically. It was also because the guy who was there before me had a personal life implosion. No one else who had labored long and hard inside the business was right for that promotion. I can’t call that a strategy; it’s more of a coin toss. You’re more likely to get into senior management by being groomed for it from birth, frankly. And that’s another path that’s hard to choose on your own.
On the left hand side of this arrangement, you see I’ve indicated that the degree of leverage that you have as an employee (E) or self-employed (S) is relatively low. You get much more leverage for your time or money (resources at hand) if you’re in senior management (M). What I haven’t indicated on this 2x2 matrix is the factor that I’ve alluded to in what I’ve just mentioned; namely, barriers to entry. Almost anyone can get to be someone’s employee. Not much in the way of barriers there. At the opposite end, barriers to becoming a big investor are pretty large: money and skill. The same for getting into senior management at some large organization. Perhaps you can be the next Steve Jobs or Bill Gates, but being born those folks is a barrier in its own right.
So that raises a question: “Is there a low risk, low barrier to entry, high leverage model that isn’t showing up here?”
The simple answer to that question is “Yes!”
What network marketing is
Network marketing is a low risk, low barrier to entry, high leverage method of earning income. Let’s take each of these in turn.
You are not going to lose your shirt in network marketing. You do not have to spend tens of thousands of dollars to buy inventory, to license a franchise, to take out a second mortgage on your home to come up with the up-front investment. It’s true that you might not hit the jackpot as an associate of some businesses doing network marketing. It pays to consider carefully the pros and cons of joining any given company that uses network marketing as part of its business model. You would like your personal investment of time and effort to be rewarded.
What would you look for? The first thing would be a broad product line that would have some component that could appeal to many different people. There should be a common, stick to the knitting theme as a core component. Still, you would not want to have to sell just one or two items. There should be some very basic unique selling proposition (USP) for the product line, something that distinguishes it from competitive offerings, no matter what. For example, if Mercedes Benz sold automobiles through network marketing, it would still be a great vehicle. The product offering should be unique like that so that it would be the “prettiest girl at the party” even if it wasn’t offered through network marketing. You would like a product that is used by all consumers at an absolutely identical rate. If you’re selling soap, for example, some folks will use a bar a week and others will use a bar a month. This variability in consumption makes getting orders right very difficult. After a while, people will just cancel out when their cupboards fill up with unused soap. That’s OK as an additional product to offer, but not as the core component of the product line.
Why do I include this concept under risk? Because you want your return to be commensurate with your efforts. It’s a kind of risk for you to put in effort to market and lose it all because the product you’re selling will not support your efforts. It is as if you were an investor: you put in money but the return does not come out. The investor would say that was a bad investment. Some people try network marketing and fail, and then they say network marketing is a bad idea or they were bad at it. If you bought an automobile and it fell apart quickly you wouldn’t say automobiles are bad or that you were a bad owner. You’d say it was a bad car. Same deal here. Some companies use network marketing for bad product concepts.
While the product line itself is critical, there is something even more important, as you’ll see later. As important as the product is, the compensation plan for associates, and their training opportunities, are even more important. The essence of network marketing is not just selling the product, it is building a network. Heck, that’s why it’s called network marketing. The marketing part is that aspect of the core business offering that has to work. That’s just sound business analysis. But the networking part has to work too. You have to be able to bring on associates and train them effectively. They have to be successful on their own.
To keep your risks low, select a network marketing company that has been in business for a long time, that has a proven track record of growth, that has a broad product line, that has a unique selling proposition, that has a core product that’s consumed at an absolutely uniform rate, that still has upside potential, and that has exceptional support for its associates. In this way, your personal efforts can be maximized.
Low barriers to entry
There are three kinds of resources that you’ll need to enter a network marketing business as an associate: money, time, and background. If you can get into the business with modest levels of each, then we are talking low barriers to entry.
Some network marketing businesses can be entered for as little as $30. Some demand a several hundred dollars. Some offer a range of entry points with different rewards or options. Still, buying into your own business for a few hundred dollars is not something that would stand in the way of any truly interested person. That’s a modest credit card purchase for groceries, say, and in some product lines, it actually might be food. Or maybe you pre-sell the products, buy them on your credit card, and have the money in hand before the card bill comes due. That’s no barrier at all.
What about time? Work five hours a week making contacts and building your business while you work at your regular job. Like any business, it might take you several years to get rolling; but at some point, your network marketing efforts will be your job. In short, you do not have to take your current employment and turn it into a high leverage business. Instead, you start a high leverage business with part time efforts and grow it and grow it until its leverage becomes self-sustaining. But maybe you’ve got a different life-style. Maybe you’re out of the work force for one reason or another. Maybe you’re finding it difficult to get back in. You want an honest way to make a decent living. Here it is.
What about background? In network marketing, ignorance on fire is worth more than brilliance on ice. If the product line is right and the training and compensation plan are right, then the primary skill is personal drive to succeed. If the product line is right, it “sells itself”. If the compensation plan and training are right, then you’ll attract new associates.
Networking marketing gets its leverage from, well, networking. Let me show you how this works as simply as possible.
So here is the simplest network to begin with, a binary network:
I’ve made it as obvious as possible, I hope, that this is all about a repeating pattern: one node on top with two nodes below it. That just keeps on going. Of course, I only drew out three tiers below the top node; but you can imagine that network branching on as deeply as you wish. If you go to the left, you get to a “Joe”. If you go to the right, you get a “Sam”. This kind of network shows up in all sorts of situations, but for here I want to think about it in a financial context. Suppose for the sake of argument that every person on this binary tree buys the same amount of product each month, say, $100. It’s pretty easy to see that there are 2 people in the first level, 4 people in the second, 8 people in the third, and so on. In fact, the number of people in the nth level is 2n. Like the name suggests, it’s a binary progression: 1, 2, 4, 8, 16, 32, … and so on. Suppose we go down to the fifth level where we have 32 people. If we add all this up, we have 2+4+8+16+32 = 62. [There’s a simple mathematical rule here if you know about number systems: 62 = 26-2. Bonus points if you can see why that’s right.] Each of these 62 people below “You” has purchased $100 worth of product, for a net of $6,200. Let’s say you get a 10% commission on all of this; that’s a check for $620.
Let’s build You’s network up a bit. Imagine that instead of replicating a repeating pattern with one node on top and two below, we now go with one node on top and three below. The picture would be pretty much like the one above, but now we’d get a “Joe”, a “Sam” and a “Fred” repeating at each tier. At the first level, there are now 3 people, at the second there’s 9, at the third there’s 27. The rule is now 3n people in the nth level. The progression of people is 1, 3, 9, 27, 81, 243, …. Let’s add up how many folks there are going down to the fifth tier (not counting “You”). That’s 3+9+27+81+243 = 363. If everyone is doing $100 of revenue a month, that comes to $36,300; and You’s commission is now $3,630.
What happens if “You” has a four-node network. Same idea. The progression is now going up as 4n people in the nth level. That is, it’s 1, 4, 16, 64, 256, 1024, …. That’s a total of 1,364 people. That’s a total of $136,400 a month of sales and a commission for happy “You” of $13,640.
Let’s do just one more. We’ll go to a five-node network for 5n people in the nth level. That’s 1, 5, 25, 125, 625, 3125, … for a total of 3,905 people with total revenue of $390,500 and a commission check for $39,050.
Review: the broader the network, the greater the leverage, the bigger the commission. That went from $620, to $3,630, to $13,640, to $39,050.
Of course, there are practical limitations. You might be the best leader and trainer in the world, but your personal impact on people more than 6 levels below you is going to get a little thin. Most compensation plans will build in some natural limit that restricts your scope that way. In the company I represent, the plan is designed to first build in depth and then build in breadth. I think that makes sense.
Associates and customers
Let’s examine one of these nodes just a touch more closely. I’ve said that each “Sam” or “Joe” or whomever is providing $100 a month. In practice, that’s not likely. They might average out to something, but some folks will be bringing in more revenue than others. Each one of these nodes is an associate and they buy some of the product themselves and they may sell some to other customers. That’s their contribution, what they buy themselves and what they sell to others. Think about that a moment. What made more of a contribution to You’s commission: the revenue at all those nodes or the breadth of the network? Of course, it was the breadth of the network that was being replicated.
What does that tell you about how big of a salesman each person in the network has to be? They don’t have to sell product at all, really. They have to believe in the product and buy the product themselves; but they don’t necessarily have to go out pitching product to friends and family. There is much more of a contribution from associates than customers.
Don’t get me wrong. It’s not that customers are bad. Customers are good. The whole idea of the business is to increase sales. But you can see that it is in the entire business’s interest to expand in breadth rather than in the absolute revenue at any node in the network. Increasing the sales per node drives the total revenue up linearly. Increasing the breadth of the tree drives up revenue exponentially.
That makes leverage good for the business and good for all of the associates. As they say “Win Win”.
What It Isn't
It’s a Pyramid Scheme
I’m not at all sure that people who come up with this understand what a pyramid scheme is. So, you can click on the link to see what Wikipedia has to say about pyramid schemes. First and foremost, they are illegal. Network marketing is no more illegal than any franchise business. The key aspect of a pyramid scheme is that it does not involve any product sales at all; rather, the primary revenue generated is simply a payment for the right to join the pyramid. In order to keep the whole scheme going, new members must be added. If new members are not added, the entire business collapses for lack of revenue. In contrast, a network marketing business is sustainable on the basis of the sales revenue being generated by associates.
While it is true that network marketing models have a hierarchy, exactly the same is true of any significant business as you move up the management chain toward the executive suite. That, say, the VP of Sales, Western Region makes more than the Director of Sales, Oregon and they make more than the Manager of Sales, Portland and they make more than Joe the sales rep is no surprise at all. That hierarchy is just a natural way of handling and simplifying the scale of a large organization.
Still, there are some folks around who aim to profit by making allegations like that against organizations that employ network marketing in their business models. But let’s take a look at some simple business truths. Imagine a network marketing company that earns revenue from, say, 260,000 associates and 80,000 customers: about 340,000 consumers all tolled. Say that the annual revenue is based on each of these consumers purchasing $100 of product per month on average. That comes to 340,000 consumers x $100 per consumer per month x 12 months per year = $408MM/year.
Now suppose that of this total revenue, the cost of goods sold is about 20%. That leaves around $326MM after paying for product. Suppose that there is another 20% used for advertising, R&D and other general and administrative costs. Now we are down to around $245MM. Suppose out of this, the organization returns 40% of the total revenue to associate compensation: that’s around $163MM going to 260,000 associates. That averages to around $630 per year per associate. Of course, this is less than the average of $1,200 per year that all of the consumers, including associates, are spending. In fact, it’s about 52% of that average; it is larger than the 40% of total revenue because almost ¼ of the consumers are customers who are not part of the associates’ compensation plan.
Why is that? It has to be. No business can return over 100% as commissions on sales and stay in operation. In the model I just went through, there’s about 20% of total revenue left over after COGS, G&A, and sales associate compensation. Some of that will go to pay taxes and what’s left is net earnings for shareholders. Say that’s 8% taxes and 12% earnings. Maybe the company pays some of that as dividends and reinvests the rest for next year’s operations. Whatever.
Now, someone might say, wait a minute… doesn’t that mean that the guys on the bottom are getting clipped by the guys on the top. Those up-line dudes are getting all the fat! Not quite. If you take a snapshot at any time at all, then the associates at the lowest tiers have not had the time yet to build their businesses. They have just entered the operation. Suppose that the growth of the number of associates is 7% per year and the growth in revenue is 13% per year. That’s pretty typical for organizations like this. So the associates who were near the bottom in the past year have added around 20,000 new associates and they are moving up in the hierarchy, on average. And sales are expanding at a multiple to the rate of new associates.
Sure, some people decide that the business isn’t for them or the products aren’t for them; and they move on. Certainly, someone who has been in this company’s network marketing sales team for 5 or 10 years is quite likely to be earning more than the person who started 6 months ago. That first person has had the time to build their business up, to grow the number of associates in their down-line, and to earn more of a commission check as a consequence. Is that unfair? No. Why would that be any more unfair than someone who built a chain of sandwich or coffee shops over a 10 year period earning more than a part-time wage-earner employed in one of those shops?
Those truths don’t make the network marketing model a pyramid scheme any more than a sandwich or coffee shop franchise is.
A “legitimate” business …
What would be different about a run-of-the-mill, bricks-and-mortar, “legitimate” business that was doing about the same revenue as the network marketing model that I just gave you? First, you would never find a line item for 40% of total revenue going to remunerate sales staff that’s for sure. The next difference would not show up on the earnings statement (P&L) but rather on the balance sheet. This would have to do with working capital.
What’s working capital? Mainly it’s inventory. If you’re a bricks and mortar retailer, you have to stock your stores and to do that you have to have trucks moving around between warehouses and stores and more trucks from your manufacturing plants to your warehouses, and so on. Suppose you sold $100MM a year and you had $25MM in inventory in all these stores and trucks and warehouses. That would imply that, on average, Your inventory was sold out and replace 100/25=4 times a year. That’s called inventory turns. More turns are better than fewer turns because it means that less capital is tied up in inventory in order to achieve a certain amount of sales.
The run of the mill business has more inventory and fewer staff per revenue dollar than a network marketing business. That means that more investment is tied up in working capital, relatively speaking. For a network marketing business, a large percentage of product is sold through recurring orders; so the manufacturing plant can build to known orders and deliver “Just in Time” (JIT). That keeps inventory to a minimum relative to total annual sales. A network marketing business could have nearly twice as many inventory turns as a brick-and-mortar business of a similar size and the same industry sector. That keeps investors and associates happy.
But, and here is the important point, it is not a key indicator of a “pyramid scheme”. As far as I know, pyramid schemes don’t have regular capital, working capital, or listings on any reputable stock exchange.
I don’t have the time
I’ve already said that network marketing is a low barrier to entry way to earn money. That means that you could begin chipping away at your business with as little as an hour a day, five days a week. Drop a tv show and make some phone calls instead.
Imagine that you get four or five people involved in your business efforts. Each of them are doing 5 hours a week, like you. Already, here is leverage. You’ve got a multiplier and there are 30 hours of effort going into your business; only 5 hours of it is your time. Yet your business is growing at 6x your personal efforts already. What are you waiting for?
I don’t have the money
It doesn’t take much to get into network marketing. There’s likely to be some minimum entry level requirement and maybe something to keep involved as an associate. You can splurge if you have the cash and buy a big package of every item on offer, or you can buy only what you would use yourself in the near term. That’s about it. Say it’s a few hundred dollars. First, some of that may well be tax deductible, and I’ll come back to that point in a moment. For now, think of it as an investment in your future.
Suppose that you started in network marketing today. You keep at it and in 7 years, you’re earning 6 figures like many of the others who’ve done exactly that. Who are you today? Maybe you’re an 18-year-old just out of high school. You didn’t graduate at the top of your class. You are not headed for Harvard or Yale. You’ve been making money delivering pizza. Maybe you could scrounge enough money together to get into the local junior college and become some kind of technician. Start now and when you’re 25 you could have your own 6 figure income and then you could go to school. Maybe even get that Harvard MBA. Maybe you have a few hundred saved up, maybe your parents or grandparents would help out. What are you waiting for?
Perhaps you’re a sales director in your mid-40s. Since the economy went south in 2007, your company lost its nerve. It’s been rationalizing, down-sizing, and re-engineering itself since then. It’s less about growth than cost-cutting. More from less. It seems you spend two months around every quarterly earnings statement preparing PowerPoint presentations to prove that your team is not the worst in the company. Rumors abound about who’s getting cut next. Sometimes it’s you. You spend half your time encouraging your team and half your time trying to figure out where the competing teams stand. You’re gaining weight, have little time for the family, and have been passed over for promotions more times than you care to count. In seven years, you’ll be early 50s and you could start today in network marketing, put that drive that got you where you are in the company into your own business and maybe be earning more than you are today. What are you waiting for?
Maybe you’re a 40-something wife and mother. Your husband hasn’t been able to hold down a steady job since the economy went south in 2007 (welcome to the club). You want to, you need to, make a contribution. You haven’t been in the work force in decades while you’ve focussed on your family. You can start at a low paying job, work your way up, and barely make enough to cover the additional day care costs and new clothes (even from the thrift shop). You don’t have a lot of ready cash and what you have goes to food. Fine. Put a few hundred dollars into food that your family can eat and get started. By the time you’re in your late 40s, you might, just might have your own 6 figure business that could cover expenses and get your children into college. What are you waiting for?
Or you’re a doctor. Your life-long practice is spinning out of control as the new insurance programs come into place. More patients, more time, less money. Your nerves are shot. You’re starting to get sick yourself. You’re already well-trained. You want to help people. You can keep banging your head against the brick wall that your practice has become. As they say, “Physician, heal thyself.” What are you waiting for?
You see. I don’t know your exact “Why”. I don’t know why you want to go out and be an employee, be self-employed, get to senior management or become the world’s next big investor starting with penny stocks. Something is moving you. Taking care of the kids. Getting a fancy car. Affording a vacation with your wife. I don’t know. But you do. You know your “Why”. What are you waiting for?
By the way, if you have a home-based business, you can likely save yourself $3,000 to $9,000 in taxes every year. Even if you don’t sell a thing in your first year. A few hundred dollars up front and at a minimum you’ve got some legitimate business deductions suddenly.
I’m not a salesman
I understand this objection. I’m the world’s lousiest salesman. When I was a kid, around 10 years old, I got a door-to-door route selling magazines for 10¢ a piece. I’d ring some stranger’s doorbell and they got to tell me to buzz off. I’d come back home so demoralized because I took their rejection of the magazine as a personal rejection.Looking back at it, I probably succeeded 10% of the time and for a cold-call that’s not so bad. But I was 10 and a I learned to hate selling.
But ideas, some of those I can get behind. I can get passionate about ideas. Like a true IP-ready link layer for wireless networking. I tried to get one of those going in around 1990 or so. Still hasn’t happened.
I can get passionate about my kids, my friends. I want them to do well. I don’t think of that as selling. I’m not trying to sell an idea or sell you that my kids are great. I just think that some idea is right and I’ll tell you why, because I’m convinced. I think of selling as trying to move something like those magazines: I was 10. I didn’t read them. They could have been the best magazines on the market back then; and I wouldn’t have known. Selling is trying to move something I don’t believe in, to me anyway.
So, no, I’m not a salesman. But I don’t have to be. I just have to believe that network marketing is a great business model and that the product line I’m representing is the best of breed. That’s all easy, because it is and it is.
Fear and Pride
Let’s be real for a second. You’re afraid to try this: you might fail. Or you’re too proud to try this: you might fail. You can introduce these objections that I’ve listed off. Pyramid scheme. No time. No money. No sales skills. Whatever.
It’s not a pyramid scheme. You have 5 spare hours a week or more. You can get the money. Try the product and you’ll believe in it: so selling skills are beside the point. Fear or pride or both.
You’re that sales director or that doctor. A well-paid professional. Why would you even remotely consider stepping down a notch to go into direct selling? You’ve got degrees and experience. So do I, and a bunch of patents. And I built this web site from scratch too, on my own CentOS Linux VPS system. Blah blah blah. So what? Here’s the deal: what works is what works. Get over your pride.
Maybe you’re that 40s something woman who’s been out of the work force. You’ve never tried anything like this before. Sure. Read this book.
Sure. You might fail; maybe if you let your concern that you’re either not good enough or too good to try network marketing. But then, that 18-year-old high school graduate is sure going to make you look twice at your choice when he gets to Harvard on a 6 figure income at age 25.
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