Assess Network Marketing Opportunities

September 16, 2008
Sandy Botkin, CPA, Esq

Physician's Money Digest, June15 2003, Volume 10, Issue 11

Walk into a hotel lobby, restaurant, orfriend's living room almost anyevening of the week, and you'll findanywhere from 5 to 100 people listening attentivelyto enthusiastic speakers explain the benefits ofbecoming a distributor or representative for theproducts and services of Amway,Colgate-Palmolive, Free Life, or Gillette,among other companies that arepart of network marketing's new waveof friends selling to friends. These companiesare joining over 1500 companiestoday that have already found networkmarketing to be one of the most effectiveways to get their products distributedquickly.

ALLURING FEATURES

Because of job loss or insecurity,many people are looking for part-timeopportunities that will help them developuseful skills and earn extra income.They want these opportunities withoutlarge liabilities or large capital investments.Network marketing is seen as away to meet these needs. With virtuallyno overhead, no employees, and nolawsuit worries, costs are low. Mostnetwork marketing businesses validate these high success-rate/low-investment possibilities.

Consequently, don't be surprised when theengineer next door calls, offering you a chance toearn some money in your free time. A few dayslater, you find yourself on your way to your firstmeeting. After all, you saw some homeopathicsupplement in your colleague's waiting room lastweek and were shocked to find out he was a networkmarketer. What's the deal?

In the meeting, you look around and find that,for the most part, the people around you arealready making good salaries in full-time jobs,however, few feel secure, and they're looking fora safety net. The sales presentation promises youthe possibility of earning a significant 6-figureincome if you're persistent. Moreover, you learnabout the tremendous tax benefits available tosmall businesses. Your skepticism begins todiminish as you wonder if network marketingisn't something you should consider.

ASSESSING COMPANIES

At this point, stop and breathe deeply. Beforeyou get caught up in the enthusiasm, and buy inimmediately, take this advice: Let the enthusiasmcool off. Then begin the process of decidingwhich company to join by answering the followingquestions:

•How stable is the company? You can judge acompany's stability by obtaining a credit reportfrom Dunn and Bradstreet and by finding out howlong the company has been using network marketing.Most companies don't survive beyond 2 years.Therefore, at least 2 years in the business is a goodyardstick in judging a company's stability. Checkto see if the company has third-party creditability,such as double-blind studies or newspaper articlesextolling the virtues of the company.

•Does the company stand behind the promisesit makes about its products? This question isimportant to ask product companies. Does thecompany validate their products'claims? What isthe company's refund policy? What is the company'sbuy-back policy on inventory purchasedby distributors? Most companiespromise to buy back inventory not morethan a year old. But sometimes this policyis illusory because of the complexadministrative hoops the distributormust jump through and because there'sno limit on when the refundable moneymust be paid back to the distributor.

•What's the company's customerretention rate? When a company pays50% of its revenue for commissions, ifthe customer retention rate on a productis 5%, your net long-term commission isonly 2.5%. But, when the company paysonly a 10% payout, and if the customerretention rate is 80%, your long-termcommission rate is 8%. The customerretention rate is critical.

Call the company and, if possible,repeat and nonrepeat customers, to findthe answers to these questions.

COMPANY STRUCTURING

Finally, buy the product and try it. Do youlike it? Does the company want you primarily tosell products/services, recruit people, or both?Most companies want you to recruit people todistribute, who in turn will recruit people to distribute,who in turn will recruit people to distribute.But if the company is only recruitingpeople and no one's selling the product/service,you may want to look carefully at the company.Will the distributors sell enough products tokeep the company afloat?

Furthermore, you may just want to market aproduct, and not manage a whole sales force ofdown line distributors (ie, the people you get tosign up under you). If so, find a company that willlet you do that. Your commission should beenough to let you make money retailing the productor service without having any down line. Thismeans that the commission paid on retailingshould be about the same as the commission paidon recruiting new distributors.

Nevertheless, it's useful to remember thatmost of those who earn top money in networkmarketing are the people who are able to get othersto overcome the stigma of network marketing—to recruit, train, and finally support thepeople who are able to get others to recruit,train, and support people, and so on.

EVALUATING THE PRODUCT

Will the products sell? Before you buy toomuch inventory (ie, more than you can sell or usein a month), do some comparative shopping tofind out answers to the following questions:

•Is the price of the products reasonable?Usually network-marketing companies offerproducts that are only available through themand that claim to be better than comparableproducts offered elsewhere.

•If the products are not unique, are theypriced competitively?

•Are the products so desirable that people willcontinue using them and recommending themeven if they stop being distributors? This is animportant question, since most companies have ahigh attrition rate among distributors.

•Will the products sell even if they're not marketedthrough network marketing?

•Does the company really have momentum?Every company will claim that the time to join isnow because of the "S-curve,"a curve that marksrapid growth times. Momentum is importantbecause growth magnifies efforts. If you join duringa growth period caused by the age of the company,the introduction of a new product, or the acquisitionof a new patent, this growth can attract newdistributors and more sales. If the company orproduct is growing at 3% a year, your businessgrowth will mirror the 3%, but if the company orproduct is growing at 30% a year, then your businessgrowth should also mirror that percentage rate.

YOUR COMPENSATION PLAN

After investigating the quality of the productsor services offered by a company, one of the mostimportant considerations is the company's compensationplan. Comparing various companies'compensation plans is difficult. Companies usemyriad formulas. One way to simplify the processis to ask the following:

•How difficult is it to make it to the top? Doyou need 5 good lines (ie, active distributors underyou) or will 2 lines do?

•What do you get by acquiring customers vsacquiring distributors? Customers, not distributors,should be the focus of the company. Thus thecompensation plan for selling products/servicesshould be at least as generous as that of bringingin new distributors.

•Does the company offer their network marketersrealistic noncash rewards?

•Are you pushed to buy a lot of inventoryupfront to make a higher commission rate?

Some companies provide distributors withthe equivalent of the franchises without a franchisefee. They provide marketing materials aswell as management information, tax information,and even an accounting system. Find outwhat it contains in both the distributor andupgrade kits. Many times, the upgraded packagemay be the better deal.

If you're dissatisfied with the compensationplan, you or the people you recruit will not staylong with the company. Even if you stay, you maylose people you have invested time and money into other companies.

You can't promote and sell what you aren'tconvinced is the best. If the answers you get tothese questions enable you to believe completelyin the product or service and its company, youmay be among those who find network marketingto be very lucrative.

Sandy Botkin, a former IRS tax attorney and trainer of IRS attorneys,

is CEO of the Tax Reduction Institute in Maryland and the author

of Lower Your Taxes—Big Time! (McGraw-Hill; 2003). He travels nationwide lecturing on tax planning and audit proofing

techniques for small and home-based businesses. He welcomes questions or

comments at 301-972-3600 or www.taxreductioninstitute.com.