I really didn’t think I was going to spend any more time on the basics of picking a network marketing business to work from home with, but an email I received this week changed my mind.

It was an email asking me to check out a company that this individual thought was . . . → Read More: Network Marketing and Product Sales]]>

Where Does The Money Come From?

I really didn’t think I was going to spend any more time on the basics of picking a network marketing business to work from home with, but an email I received this week changed my mind.

It was an email asking me to check out a company that this individual thought was a “winner” and wanting to know what I thought about it. Since one of the things I do to continue my own education is check out other companies, I did go to the website and look around a bit.

Doing so got me to wondering if people have any clue where the money comes from in a business – traditional or network marketing – either one.

What does a company get paid for? Anyone want to take a guess? Yes, you there in the pink blouse? Sales, you say. Well, close, anyone else? Okay, you there in the cowboy boots. A product or service. That’s right!

The only thing a company gets paid for is delivery; delivery of service (think electrical company providing electricity, lawyer providing legal service, phone company providing phone service) or delivery of product (anyone not know what Wal-Mart, Target or 1-800-FLOWERS sells). Every company is in the business of delivering something, whether it is a service, a product, advice or access to information.

Some people think it is sales because that is where the money usually changes hands, but what is that money paying for? It’s paying for the past, present or future delivery of the service or product.

You may be asking by now, what the heck does this have to do with network marketing? (Or, maybe not, you might be brighter than I was when I first started in business for myself.) But bear with me, I’ll get to the point shortly.

What Does The FTC Say?

In a 2004 United States Federal Trade Commission (FTC) Staff Advisory letter to the Direct Selling Association states: “… The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.”   – Kohm, James A. (January 14, 2004) (reprint). RE: Staff Advisory Opinion – Pyramid Scheme Analysis. Federal Trade Commission.

In plain English, that means that if you make money from recruiting other people into the program without any product or service changing hands, you might be in a pyramid. On the other hand, if nobody makes any money from recruiting, it’s probably not a pyramid.

If the product or service sale is obviously separate from signing up for the business, it’s probably not a pyramid.

This gets tricky to evaluate sometimes because less ethical companies try to obscure it.

Where Does The Money Go?

In a traditional business, money gets allocated to various parts of the business; so much for basic overhead (rent, lease or mortgage; lights; phones; water; trash service; etc.). Then so much for marketing and advertising, so much for salaries, so much for the sales force, accounting department, the actual production of the product or service, and so on, to cover all the various functions that make a business go.

In a network marketing business, money gets allocated the same way. But it gets divided up differently. In a network marketing company, you still have the basics of putting the company there, just like with a traditional company. There has to a headquarters, production facilities, lights, phones, etc. But all the money that a traditional business puts into marketing, advertising and sales gets put into the compensation structure to reward the independent sales force for their work promoting the company and the product and making sales.

Traditional Business (Brick & Mortar)

Now, I’m probably belaboring the obvious, but here are a couple examples of traditional businesses.

TV Repair Shop – rent, test equipment, advertising, employees’ salaries, electricity, phone service, internet service, heating/air conditioning, water, trash disposal, shelving, computers, TV parts, etc. plus profit. Product  = repaired TVs. People pay for repaired TVs which pays for all the foregoing.

Flower shop – rent, advertising, employees’ salaries, electricity, phone service, internet service, heating/air conditioning, water, trash disposal, shelving, computers, flowers, vases, baskets, balloons, greeting cards, ribbons, stuffed animals, etc. plus profit. Product = beautiful ways of saying thank you or congratulations, Happy Birthday or “I love you.” People pay for those, which pays for all the foregoing.

Network Marketing

The network marketing company itself has to pay for the home office, the home office employees, rent, electricity, phone service, internet service, heating/air conditioning, water, trash disposal, product development, product delivery, etc., but theoretically no marketing or advertising. (Most companies do some marketing and advertising to their sales force, that’s you and me, to keep them motivated, interested and in the know about company plans.)

Then there’s the independent sales force. You/me/they sell the product or service the company provides which brings in revenue for the network marketing company, which in turn pays you for those sales.

Examples:

Mona Vie – sell a bottle of their nutritional drink and get paid for it.

Pre-Paid Legal – sell a legal plan and get paid for it.

Primerica – sell an insurance plan and get paid for it.

Seems Simple, Doesn’t It?

But, some companies don’t keep it simple like that.

One company I investigated paid a residual commission on cell phone service that your job was to find customers for. That’s legitimate. Where it got murky was that they paid commissions on the purchase of the website you needed to do business on line, they paid commissions on the sale of their promotional magazines, and there was a bonus on signing someone up for the business. Near as I could tell, most of the money was not being made on the sale of the cell phone service.

Point! I said I would get to the point shortly. Here it is, the company this individual wanted me to check out was a grocery company. You pay a one-time fee to sign up, I think it was $200. You recruit others into the company, who pay their $200, after five people cycle through under you, you get $500 of which part of it goes back to start your new “cycle” and part of it is paid to you in the form of a voucher.

The selling point was that this $200 voucher, which you could earn as often as you could sign up five people, would pay for your groceries and so you’d never have to pay for your groceries again.

Now stick with me here, if nobody ever actually buys groceries except with their vouchers, and you can’t get vouchers without recruiting people to work with you, what are you getting paid for? If you answered that you are getting paid for recruiting, go to the head of the class.

They are selling it as a business where you can earn free groceries, but in reality you’re getting paid for recruiting people. Which means when enough people complain to the FTC, they’ll look into it and shut it down. The people who haven’t had time to recruit anyone when the FTC shuts it down are out their $200.

For more on pyramids and scams and how to detect them, you can look at Pyramid, Scam, or For Real.

Free Groceries? Or Free Information?

One of the 7 Insider Secrets is what kind of products to look for, along with what kind of company to look for.

It’s really a great set of criteria to evaluate a company with. Go to www.AlansMLMTips.com and sign up for the “7 Days, 7 Insider Secrets” email newsletter.

Quote

I always wanted to be somebody, but now I realize I should have been more specific.  – Lily Tomlin

I sometimes wonder why there is any confusion on these terms as they apply to working from home, but then other times I think it’s just par for the course. There seem to be people on this planet who enjoy denigrating, confusing and muddling up the issues. . . . → Read More: Pyramid, Scam, or For Real]]>

What Are They and What’s The Difference?

I sometimes wonder why there is any confusion on these terms as they apply to working from home, but then other times I think it’s just par for the course. There seem to be people on this planet who enjoy denigrating, confusing and muddling up the issues. So, to piss off those types of people (who like to denigrate, confuse and muddle up things), I am going to inject some clarity into the subject. All right?

I guess being the unserious type; I should inject my humorous look at it first. The difference is in who gets screwed: with a scam everyone gets screwed (except the guy who thought it up); with a pyramid, the latecomers get screwed; and with a real business or opportunity – no one gets screwed.

Definitions

Scam – A fraudulent business scheme; a swindle. An illegal plan for making money. A scheme for making money by dishonest means.

Pyramid – An illegal scheme in which participants give money or other valuables in exchange for the opportunity to receive payment for recruiting others to participate in the scheme.     A fraudulent money-making scheme in which people are recruited to make payments to others above them in a hierarchy while expecting to receive payments from people recruited below them. Eventually the number of new recruits fails to sustain the payment structure, the scheme collapses with most people losing the money they paid in.              From the Federal Trade Commission – “Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.”  – http://www.ftc.gov/speeches/other/dvimf16.shtm, paragraph 4

Network marketing – Most definitions of network marketing get way too complicated; here’s my favorite simple definition: “Any method of marketing that allows independent sales representatives to recruit other sales representatives and to draw commissions from the sales of those recruits.”  – Wave 3  The New Era in Network Marketing by Richard Poe ©1995  “Network marketing is a form of distribution of products and services that, through word of mouth promotion, uses the power of duplication  of effort.”  –  The New Entrepreneurs by Rene Reid Yarnell ©1999                                           “Some people confuse pyramid … schemes with legitimate multilevel marketing. Multilevel marketing programs are known as MLM’s (or network marketing) and unlike pyramid … schemes, MLM’s have a real product to sell. More importantly, MLM’s actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system. MLM’s may pay commissions to a long string of distributors, but these commission(s) are paid for real retail sales, not for new recruits.”  –  http://www.ftc.gov/speeches/other/dvimf16.shtm, paragraph 7

Another way to define it is who gets paid; in a scam, the originator gets paid; in a pyramid, the early birds get paid; in network marketing, anyone who makes a sale gets paid.

Examples of Scams

If you get an email from Nigeria wanting you to send money to prove you’re worthy of helping them transfer money into the U.S.; delete immediately, it’s a scam.

If you get a check from anywhere that you weren’t expecting, and when you call to verify, they ask you to send them the cash in exchange for the check; call the authorities – it’s illegal and is called bank fraud & mail fraud; and yes it’s a scam.

Examples of Pyramid Schemes

If there is a one-time fee to buy into the program or “business,” and there are no ongoing product sales, it’s most likely a pyramid. If all recruiting stopped today, where would the commission payments come from?

If most of the money comes from recruiting someone and the actual residual income comes from a tiny percentage of an ongoing purchase of a product or service, that is probably a pyramid even though it is well disguised.

If the ad says “One-time fee, no buying, no selling, no recruiting, we build your organization for you.” RUN quick like a bunny! If they don’t need you to sell or recruit or buy anything, why do they need you? (Hint – it’s your money) Your money/cash/commissions are only coming from the people that join after you. It is a pyramid.

If the start-up fee is your cost to purchase a report, and you make money by selling others the report to get them started; look out Martha, it’s a pyramid.

Examples of Network Marketing

Okay, I’ll admit I’m only going to pick obvious companies here that have stood the test of time. The whole point of this series of blogs is to teach you how to pick a good and worthwhile company that you can use as your vehicle to create that stable, long-term, leveraged, residual income.

Disclaimer: I am not recommending any of these companies as your home business opportunity, if you are looking at joining any of them, it is up to you to research them and do your due diligence and figure out if it’s the right company for you.

Amway, Herbalife, Mannatech, NuSkin, Pre-Paid Legal, Shaklee, Visalus, Xango are all network marketing companies.

Mary Kay Cosmetics and Melaleuca are not network marketing companies, but if they were, I would put them on the list too.

If you want to be amused, check out how many company names are on a reasonably current list of network marketing companies at: http://www.mlmconsultant.com/mlm_company_list_directory.htm

Now That You Know The Difference

You have learned one more of the basics, for more info, go to www.AlansMLMTips.com and sign up for the “7 Days, 7 Insider Secrets” email newsletter. (No money down, no obligation, it’s freeeeeeee…)

Quote

“If I had to do it all over again, rather than build an old style type of business, I would have started building a network marketing business.”  – Robert T. Kiyosaki, entrepreneur and author