Rules to Keep in a Very Safe Place
The umbrella term for the business is "direct
selling." Whether it is the variety practiced by Tupperware
or Amway or Nikken or The Pampered Chef, it still is in the business
"species" known as direct selling. Under that umbrella
is found party plans, MLM or multilevel marketing, network marketing
and direct sales. The objective is always the same, however...build
a consumer products and/or services marketing company that distributes
through a vast network of salespersons who sell both consumer products
and services, as well as recruit and develop an even larger network
of salespersons to sell, and for which remuneration is paid on the
sales volume of those "downline" recruited networks.
MLM Business Experience: Possess it
or buy it.
MLM Technology and Software: The engine
of the machine.
Get the product right the first time.
Although a significant force with upwards of $30 billion
in U.S. sales and $90 billion in worldwide sales, it is nevertheless
an ultra niche industry with its own culture and formatting. Those
who understand this focused culture and business model can prosper,
and others will be "strangers in a strange land."
Although it may look straightforward, starting the
successful MLM business is no simple matter. A methodology course
could fill a library. A practical advice primer could fill books.
The following is an essentials sampler from an industry tour guide,
a professional MLM Consultant and MLM Law Professional who has spent
two decades as a "consigliore" or trusted business and
legal advisor to legions of leading direct selling companies. Those
companies have started in back bedrooms and garages and have grown
and ranged in size from mom and pop boutique businesses to multi-national,
multi-billion dollar conglomerates.
If you are looking for detailed insight from this
author, attend a conference sponsored by www.mlmlegal.com,
Starting and Running the Successful MLM Company, or read one of
two books by the author, Starting and Running the Successful MLM
Company or Network Marketing: What You Should Know. (Legaline Publications,
1-800-231-2162 or visit www.mlmlegal.com)
However, for purposes of a "to do" list, consider the
following very brief but very practical tips on starting the successful
MLM company. Each of these factors is so critical that each one
might be placed on the "make it or break it" list. In
the first of three presentations, this article addresses issues
of capital, recruitment, legal and trademark. In a second article,
Part II will focus on equally key issues including MLM business
experience, technology and software, product and international markets.
Part III will focus on compensation plan, outsourcing, owner relationships
and attitude and commitment. These tips are obviously not good enough
to warrant being etched on tablets on top of a mountain in the Sinai
desert, but they are worthy of being tucked into your MLM "bible"
somewhere between "Solicitations" and "Celebrations."
MLM Business Experience--Possess it or Buy it!
As mentioned, MLM is not just any business. It
is not retailing, franchising, e-commerce internet or dot com selling,
telemarketing, catalog, direct marketing or infomercial. MLM, under
all its names, Direct Selling, Network Marketing, Direct Sales,
Party Plan and Multilevel Marketing, is a unique beast. To launch
this business, you must have a substantial background and be well-grounded
in its written and unwritten principles. If you know your product
and you have a passion to bring it to the public, but you lack industry
experience, then you must buy that experience. You may hire key
employees in such positions as CEO, COO, Sales and Marketing, Customer
Service and Distributor Relations, Information Technologies, etc.
The payroll will add up fast and, unless your capitalization can
sustain this ongoing cost, you should seriously consider outsourcing
the solutions for these types of expertise. A first suggestion is
to consult with your MLM attorney, who is likely familiar with the
best resources in the business. Although limited, your search will
disclose extraordinary resources in the area of MLM management consulting.
Such industry established experts in areas of MLM startup implementation,
compensation plan design and software selection are often tremendous
team players and invaluable assets to your team. Above all, don't
launch without in-house or outsourced MLM business experience.
MLM Technology and Software--The
Engine of the Machine!
"Having" great software won't recruit one single distributor
for you. Having said that, lousy software and inferior support will
no doubt ruin what might have been a tremendous business opportunity.
This business is a numbers business. It is built on recruiting,
payouts on thousands of generations, genealogy reports to thousands
of distributors, timely calculation and payout of commission checks
to vast networks of sales people. The moment you fail in the technology
area, you will lose confidence amongst your distributors. Prepare
to watch sales, recruitment, retention and momentum plunge to ocean
depths. Recovery may never occur.
And so, remember cheap is not good in the technology
business. Good value is good, but not cheap. "You get what
you pay for" is true in this acquisition. The fact is that
cheap software usually means "cheap software" that is
flawed and for which there is no backend support service of worth.
Your software must work, it must be scalable such that your data
tracking solutions, your web and e-commerce solutions and your reporting
and communications solutions can grow with your business. These
are important questions for those bidding for your software. Statements
like "up and running in 24 hours for $100" are as invalid
as "join our MLM and earn $10,000 in your first week."
Of course, expensive does not necessarily mean good either. At least
one software firm became infamous in the industry for promoting
seminars that were little more than high pressure sales presentations
in which unwary MLM startups were induced into astronomical priced
offerings. Beware the high pressure sales tactic that does not afford
you the opportunity to compare in the marketplace and check references
and opinions. Your best sounding board is your MLM Business Consultant
or MLM Lawyer.
Look for established providers with track records
with established companies, but that is not to say that you should
not "hold" their feet to the competitive fire. Established
MLM software companies all bring different but important strengths
to the table. Most major providers also offer design solutions for
the MLM startup that involves web-based software support that can
grow to licensed onsite technology as the company grows.
Get the Product Right the First
If your software runs the "machine," and the business
is the "machine," then your product or service is, as
the French would say, your "raison d'Ítre," your reason
for existence. In looking back on history of the direct selling
industry, a chicken and egg analysis makes it difficult to determine
whether the business opportunity or product was the essential reason
for commencement of the business. There are instances of both. The
founders of Avon, Mary Kay and Home Interiors came from successful
experiences in marketing other products. They found a product suitable
for their marketing talents. On the other hand, the founders of
Nikken, Amazon Herbs and Shaklee had a passion for bringing uniquely
new products to the world and direct selling became the best vehicle.
You will fit in one of these two categories. Whether it is one or
the other, however, choose a product or service for which you can
promote with passion. Be sure that the product is unique or that
its formulation is unique to your company. If it is a commodity
or generic product such as telephone service, then you will need
to create another unique marketing edge, such as great service and
value, to market the product. The better of the MLM products are
those with high margins resulting from the "perception"
of uniqueness in the marketplace. In the end, a company will only
succeed when selling a product of high quality at a reasonable price
to a market that purchases the product on its own merits. Over-priced
products of dubious worth have no real long-term future. The death
knell occurs when distributors are caught informing business opportunity
meetings that the product is really irrelevant and is merely an
excuse for the marketing plan. Another vocabulary term for this
phenomenon is "pyramid."
Equally important to choosing the right product is
the assurance that your marketing will not be impaired by poor planning.
Your initial vendor agreements should be drafted or reviewed by
MLM Legal Counsel so that you do not find yourself stranded without
product, or worse, find your manufacturer in competition with you.
Regulatory compliance is essential for such issues as FDA for labeling
and claims, consumer standards for water and air products or compliance
with discount buying legislation. If you are importing products,
you should be assured in the beginning that your product will not
be subject to embargo or detention. And, obviously, you should be
assured that your distributors and customers would have an uninterrupted
supply of product because you have established adequate capacity
to produce the product or service.
Having viewed the tremendous international success of companies
such as Avon, Nikken, Amway, NuSkin, Mary Kay and Tupperware, many
owners of startup MLM companies are tempted to go into international
markets immediately. The short answer is "don't do it."
Starting the successful MLM company is a daunting and complex task,
a process that should be perfected one step at a time. For most
companies, it is important to first develop a working model in the
United States or country of origin. Mastering the marketing plan,
establishing distributor and customer service departments, refining
the support technology, etc. are best accomplished in one country,
with duplication and adaptation in foreign markets to follow once
the machine is working in the home country. In addition, it is important
to cause distributors to first focus their efforts in one market
rather than ineffectively diluting their efforts in multiple markets.
Of course, all rules have exceptions, and if your company is a multi-billion
dollar conglomerate with worldwide retail stores or international
catalog operations, the resources may be available for a multi-country
launch. For the "small guy," the logical progression from
the U.S. is to Canada, Europe, Australia, Asia, Mexico and South
Many companies believe that the internet has made
international expansion an instantaneous event. Unfortunately, the
internet and technology are far ahead of the legal and business
requirements of going international. For those who really wish to
approach international markets in a rational business and legal
manner, the following points are summarized from the author's article,
MLM Going International, which can be found, with other resources,
- Corporate and Foreign Lawyers. Locate counsel
in the foreign country that has expertise in direct selling. You
may need to locate several different lawyers with expertise in
direct sales, including food and drug, taxes, corporate structure,
etc. Include your usual corporate counsel in the loop as you move
into foreign countries to create some continuity throughout the
- Trademarks. Look into registration of your
company trademark and product and service trademarks as early
as possible, and preferably even before entry to the country.
Companies are always surprised to find themselves being held hostage
to well-meaning distributors or greedy pirates who have already
registered important company trademarks.
- Consumer Legislation. Every country has
variations on deceptive trade practices, laws, consumer laws and
anti-pyramiding statutes. These vary around the world and you
should check out the local pyramid scheme acts to make sure that
your compensation plan and method of marketing are in tune. In
fact, in many countries, you may be able to receive opinion letters,
advisory opinions or approvals by government agencies as to the
marketing program before entry.
- Earnings Claims. Check out the sort of restrictions
that you and your distributors may make with respect the business
opportunity you are offering and how it may be presented.
- FDA Issues. Food, drug and cosmetic laws
vary widely from country to country. You may need to reformulate
your product's ingredients. You may find yourself forced to manufacture
within the country. Get an early start on labeling as this may
slow you down considerably. Get yourself to a lawyer knowledgeable
in FDA-type law.
- Product Compliance. Check out the government
standards for manufacturing with respect to your product. Your
product may need to be manufactured within the country. Specific
type products may have their own regulations within the country.
You will need to check out your entire product line on this point.
- Intellectual Property. In addition to trademarks,
you may need to register patents for your products in the country.
You may need to check out restrictions regarding transfer of intellectual
property, such as software licenses, etc.
- Immigration. You will be sending key employees
from company headquarters to work for indefinite periods within
the country. You need to check out short and long term business
visas or other necessary documentation for ongoing residency and
- Language. Verify language restrictions for
labeling and literature. In some countries, you may be required
to have dual language labeling.
- Banking. There will be large scale movement
of monies in and out of countries. You need to verify restrictions
on currency movement across borders and whether profits can be
repatriated to the home country or must be reinvested in the foreign
- International Sponsoring. Every company
has its own unique method for international sponsoring. Make sure
that the new market is receptive to your method of international
sponsoring. Determine the relationship of sponsoring distributors
in both the home country and foreign country. Will distributors
need to sign up country by country or is the company considering
a seamless international sponsoring system with inter-company
accounting for commission payments?
- Customs and Tariffs. Although more free
trade is coming about in the world, you need to explore in detail
customs and tariff issues with respect to your product into the
foreign country. In particular, taxing authorities of foreign
countries will pay attention to transfer pricing with respect
to both customs issues and tax issues.
- Taxes. You need a good overview of national,
provincial, sales, value added and other taxes. Your corporate
counsel, tax accountants and foreign counsel need to advise you
on the most tax advantageous method of operating whether it be
as a subsidiary, an affiliate, a branch office, etc.
- Corporate Form. Must you have local ownership?
Must you have local residence of shareholders and members of your
board of directors? Will your distributors be considered employees?
You need to fully understand what your presence will mean in the
- Manufacturing and Supply Agreements. Must
your manufacturing be local? If you are having local manufacturing,
make sure that you have adequately secured under foreign law,
your rights and responsibilities with respect to local vendors
and suppliers. This may include both production as well as protection
of your trade secret formulas of confidential information.
- Marketing Literature. Everything that is
passed out to the consuming public or your distributors must be
brought up to speed, including distributor agreements, policies
and procedures, compliance with door-to-door sales rules, distributor
cancellation rules, buy-back policies, termination notices, etc.
- Advertising. Before you bring your products
into the country, are they required to undergo testing to verify
claims that you may make about the product or other specific advertising
rules that require compliance?
- Antitrust and Trade Regulations. You need
to check out restrictions on pricing, relationships with suppliers
and vendors, relationships with your distributors, relationships
with the other competitors, etc., all to verify that you are not
in violation of local antitrust and trade regulation rules. For
instance, may you ask your distributors to adhere to suggested
prices or trade practices imposed by the company?
This Advice from Experience
You won't find these rules in a textbook. You will not find them
in a college course. You will not find them at Staples or Office
Depot. You most definitely will not find them by consulting with
corporate business lawyers or general business advisors. These very
important factors are forged in the furnace of experience. These
are practical rules that arise from two decades of practical hands
on involvement. These rules come from the school of "been there,
done that." If you pay attention, is success guaranteed? Well,
go to rule number one, which is "success is never a sure
thing, but opportunity is always guaranteed." Look for more
detailed "rules of engagement" in Parts
I and III of MLM Corporate
About the author: Jeffrey
Babener is widely recognized as a leading legal counsel in the
MLM and direct selling industry. His law firm, Babener and Associates,
has, for two decades, represented leading direct selling companies
headquartered throughout the U.S. and abroad. He lectures extensively
at such universities as the University of Illinois, University
of Texas and University of Houston, publishes extensively in books
and articles and has served on many committees of the Direct Selling
Association as well as general counsel for the Multilevel Marketing
International Association. He can be reached at his Portland,
Oregon office at 503-226-6600 or visit his website at www.mlmlegal.com
for an expansive selection of information on direct selling, MLM
and network marketing.