Why Network Marketing Companies Fail

by Rod Cook B.S., M.A, M.H.A.
This material was presented as a workshop to NetWork industry leaders at the Annual NetWork Symposium in Las Vegas, November 1995. Add it to your files on doing your due diligence of NetWork Marketing companies before becoming involved with one.

     The Villain(s) – This person(s) has only one intent, no matter what the consequences are to distributors. They are going to make the most money possible in the shortest time and put it in their pocket. They have no intention of building a company. If they have a product, they use low quality goods, mis-pay commissions, deliberately close a company and disappear. These villains also include MONEY GAME players who run pure pyramids (no product) calling themselves MLM. They fly around the U.S. holding meetings for the “Airplane Game” (now the Space Shuttle Game). Another bunch runs Chain letters or Gifting clubs calling them the hottest MLM opportunity in America.
     The Dummies – This group are innocents- in the sense that they do not know that ethics includes a devotion to company and distributors. They think the life span of a company is until it fails. They are totally unaware of state and federal laws. They do not know how to cope with any sort of success. They may grab the money and run out of sheer fear and lack of knowledge. As they run out the door leaving distributors holding the bag they may have some remorse.
     The Cowboy -This person(s) may not have the slightest bit of criminal intent. What they may have is a total disregard of state and/or federal law. Not because they are intent on breaking the law—but there is a mind set they have that says, “Governments should not intrude in our lives. Therefore, in designing the program, I am ignoring the silly restrictions placed on my company. This is the wild; wild, west — let them varmint ‘Government’ regulators try to ride me down!”
   THE NETWORKING PROS – have had good success in NetWork Marketing. They spin off their parent company taking their downline (perpetual). Un¬fortunately they don’t have a business background or MANAGEMENT SKILL AND TRAINING. They may know how to recruit, but don’t know how to put together a company. Their problem is that they know people—not business operations. The worst is they think they know business. The scary part is they don’t.
   THE NOVICES have been low level distributors that have signed up a few persons and decide that they want to leapfrog to the top of an organization by starting their own. They take the compensation plan which they barely know – get together a few friends and decide to make a run for the big time. They know nothing about the MLM business and are so enthusiastic that they don’t take time to even expand their warm market.
   THE INNOCENTS – Good ordinary business¬men seduced by the lure of the MLM siren. Positive articles in Success Magazine and even the Wall Street Journal are to be applauded. The problem is they are encouraging totally inexperienced people into the jungle maze of MLM. They don’t know what a warm market is, what recruiting is, or what the needs of the market are. They jump off the cliff without market research. Some large direct marketing companies have made missteps in this direction such as AVON.

   DISTRIBUTOR FEES/PRODUCT SALES. This is such a hot idea that we don’t need financing! This group starts out with the premise that they can charge for a distributor kit and that money will bring the company to fruition. It doesn’t work that way, unless there is a strong new unique product involved. Many new companies gamble, having the ‘product’ of the decade. What they don’t have is the money to do the marketing needed for survival. If the company is power-recruiter heavy some costs may be lower. It has been done, but in the last 5-10 years the market has become more capital intensive. Most industry consultants and investors are firmly convinced that it takes at least $ 1.2 million to start up a National company and half of that to start a “regional company” today.
   UNREALISTIC EXPECTATIONS about cash flow. Spread sheet figures in Business Plans are realistic in the planners minds, but not in “Real Time” /”Real Space” of starting a MLM company. The money runs out before the company runs up. In general it takes a distributor base of 4,000-5,000 distributors for a company to survive. All costs end up higher than in the business plan (Cook’s 5th Law – “You always run out of bullets before you do enemies”). For example telephone bills are usually twice what is estimated.
   FINANCING FAILURE – The persons committed to financing the operation either back out after the initial launch, or find themselves in a cash flow crunch. The same applies to existing companies whose growth causes them to implode. They may be able to start growth but don’t have the needed capital to grow the infrastructure, such as computers, phones, warehousing etc Banks don’t loan to MLM companies. Alternate financing wasn’t planned for. Venture Capitalists want 51-80% of a company to finance it and usually want to oversee day to day operation.

   THE ELECTION YEAR ATTACK – A dangerous period of time for NetWork Marketing Companies is when State Attorneys General are up for re-election. They like to attack MLM companies to get attention as “The Protector of the Public”. This has happened to some the biggest companies in the business (if you include the Federal attacks). The biggest danger: “rogue” distributors overselling the program and putting out unauthorized printed material. The company hasn’t done anything wrong. 99% of the distributors haven’t done anything wrong. Can your company limit the Election Year Attack?
   THE UNINFORMED- In this area we touched on management skills. The major focus here is that the people who start the company hire a local lawyer that doesn’t know about MLM. They feel secure in the fact they have legal advice. They re-invent the wheel of past, failed programs that were shut down because of legal problems in various states. Some operations are well financed without excuses. Obviously, the leaders attending the seminar can’t do it all. Money Makers Monthly, The Insider, Profits Now, NetWord Hotline, NetWork Trainer, Cutting Edge, Emerald Coast News and the other 30 or so MLM publications can’t do it. You have to question your company as to what MLM lawyer they are using.
   DISTRIBUTOR VS COMPANY (and vice versa) – Some companies terminate distributors for participating in other programs. Some distributors recruit their downlines, some don’t. Distributors are independent contractors. In years past the accusation was companies terminated top earners to bring in new blood and keep the old blood’s money. Law suits fly on a regular basis. One group is pushing for federal regulation to protect distributors. This also means they could be construed as employees and lose tax benefits! What is a good solution?

   GOOD PUBLIC RELATIONS – One of the most amazing things in the MLM industry is the lack of attention to public relations by companies. Public Relations in the MLM industry is one of the hardest selling jobs there is, due to past bad press. It can provide high returns for relatively low cost. Most importantly, it can provide protection during attacks by AG’s and competitors.
   INDUSTRY INTELLIGENCE ANALYSIS – NWM is an industry of rumors, but little confirmed fact. It’s amazing how little attention is paid by MLM companies to what is going on in the industry outside of a rumor. There are only few companies in the industry that actually keep tabs on what the rest of the industry is doing— good or bad. Sometimes it is only when they start losing distributors to a new company or product that they wake up. History repeats itself. Companies in momentum are going the “get hit”. Do they know who their enemies are? If there are any?
   RESEARCH – Before, during, and after startup. Companies are vulnerable to changes in market trend. Established companies are complacent because 1000 new product vendors a year are beating on their door. The reason for the beating is that they can’t sell the stuff elsewhere! Finding competitive new products for the “edge” in MLM markets is difficult. Can distributors be used for market research? Should companies have staff researchers or consultants?
   DISTRIBUTOR TRAINING – In startup companies this can be a dilemma. They haven’t programmed the funding for training, and the lure company isn’t strong enough to charge for training. In this technological age it is difficult to get distributors to sit down for programmed learning—even on video tapes.

   COMPUTERS– Cheaper is better is the “battle cry” of startups. They get their sister’s brother-in law who works as a programmer for a bank to put together a system. The novice non-mlm programmer doesn’t understand how complex a full MLM system can be with order entry, tax, warehouse release, inventory locations, distributor entry, commission calculation, commission pay, commission corrections, payroll schedule, accounting, reorder points, inventory management, customer relations, management analysis, security levels, overviews and how long it takes to get all of this to work. The system doesn’t work well, distributors become disenchanted and disappear. There are other scenarios such as a company starting with a small packaged MLM program that won’t “grow” fast enough – chaos ensues!
   CUSTOMER SERVICE & DISTRIBUTOR RELATIONS – Companies start up with these combined and fail to separate them. Or is the solution to em¬power one element to do all? One is basically for order entry and shipping the other is for complaints and problems. Database marketing (having personal information on file about the distributor) hasn’t moved into the MLM mainstream yet. Hi-tech has to be high touch. One company (non MLM) study indicated that a new auto¬mated phone system cost them 23% of their customers in 6 months. The retail market estimates that it costs six times as much to get a new customer as it does to keep an old one.
This article is from the MLM Insider Magazine, Feb/March 1996 Issue:
3 years ago

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