So, you’re thinking of starting a multi-level marketing (MLM) business. You’re passionate about the product offering you have in mind. You believe there are lots of other people who would be passionate enough to join your direct selling business as independent sales representatives. And you can see a path to growth for the company. What else do you need?
While product ideas, passion, and a path to grow are a great place to begin, starting a successful MLM business also involves significant research and decision-making related to the company structure, the sales team, and marketing strategy. Whether you’re considering launching an MLM company or you already have, take a look at this A-to-Z guide outlining key considerations and steps toward building a thriving direct selling company.
The appeal of the MLM model
Adapting a direct selling retail model means a company’s products or services are sold directly to consumers by a team of independent sales representatives. Rather than traditional retail stores, MLM companies rely on their field sales team to build one-to-one – direct – relationships with a network of customers. Through these relationships, the MLM sales representatives sell the company’s products and services and recruit others to join the organization as sales representatives.
With less capital and lower fixed costs, the MLM business model offers an appealing and cost-effective alternative to traditional retail for entrepreneurs looking to get a product into market and ramp up sales quickly. Today, the MLM industry encompasses a range of product categories, including health and wellness, clothing, jewelry, cosmetics, nutrition, home goods, and leisure. Successful direct selling companies can also be found across the insurance, energy, and educational categories.
As the U.S. workforce continues to prioritize work-life balance and flexibility, the direct selling industry is booming. As of 2020, the Direct Selling Association reports that more than 7.7 million people work as MLM representatives in the U.S., which is a 13 percent increase over 2019. Overall, direct selling companies achieved a 14 percent annual sales growth rate in 2020, equaling a total of more than $40 billion in retail sales for the year.
Assess the MLM model for your business
To determine whether the MLM business model is a good fit, start by evaluating how well the following elements align with the vision for your business.
- High-quality products and services: Because of the direct relationships between MLM representatives and their customers, successful MLM companies focus on differentiating themselves based on the quality of their products and services combined with a personalized customer experience. Typically, MLM companies offer premium-quality products and services delivered through a sales distribution model that allows them to price their products at a margin that’s approximately 5x higher than the cost of goods. While the margin will vary slightly based on the type of product or services, it’s necessary to accommodate a competitive compensation program for the MLM company’s independent sales representatives.
- Elevated customer experience: To succeed at delivering premium products that are priced with enough margin to fund the business and the sales team, MLM companies must deliver high perceived value to their buyers. The one-to-one direct sales approach – whether it happens face-to-face or virtually – is ideal for products and services that benefit from a demonstration or a personalized explanation of how it meets a customer’s individualized needs. When MLM sales representatives are able to convey the value of the product or service, as well as the value that they bring to the experience, they connect with customers on an emotional, rather than transactional, level. As a result, customers feel good about making a purchase and building a loyal relationship with an MLM representative. In today’s highly automated and often impersonal world, customers appreciate a personalized shopping experience. In fact, research shows that three in four consumers say experience is an important part of their purchase decisions.
- Independent salesforce: MLM representatives are not employed by the MLM company. Instead, they work on a 1099 basis, which lowers the overhead costs for the company. For the representatives, joining an MLM company provides a turnkey way to pursue an entrepreneurial opportunity by creating and running their own business on either a full-time or part-time basis, without significant startup costs or infrastructure investment. The MLM company provides field representatives with the resources they need, including products, marketing, and MLM software tools that enable the representative to make online and offline sales and handle the operational aspects of running their business and building a downline team of representatives. Along with these resources, the MLM company also provides competitive compensation that motivates and rewards the representatives’ sales activity.
Build a business plan
As with any business venture, having a solid business plan is crucial. When launching an MLM company, create a detailed three-to-five-year business plan to provide a roadmap that shows not only the destination (long-term goals) but also the “turn-by-turn” directions for how you are going to get there.
A good business plan outlines the company’s purpose and goals, along with short-term objectives and actions. It should be a written document that you can share with other company leaders and update and refine as the company and market opportunities evolve. Your business plan is a living document that you will refresh at least annually, adding detail so that it always outlines a plan for the next three to five years.
One of the most important attributes of a solid business plan is to ensure that all of the numbers, objectives, and projections are grounded in fact. Conduct research – formal or informal – to understand customer needs, target market size, and the competition. Use this information to craft realistic revenue, customer, and sales objectives for at least the next three years. Based on these objectives, calculate how many MLM sales representatives you will need to recruit and onboard in order to achieve them. The key is to set challenging growth objectives that inspire the team to push themselves, but not to set such unrealistic goals that they act as a demotivator because they are impossible to achieve.
Spend the time upfront to research and develop the following components of your MLM business plan:
- Product assessment: For direct selling companies, the product or service is the centerpiece of both sales and recruiting. It’s worth it to do customer research and product testing to determine how the product meets the needs of potential customers, how interested they are in the product itself, and how willing they are to purchase it. If you can, conduct formal market research through methods like surveys, focus groups, and product testing. Supplement the formal research with informal insights gleaned through customer and sales representative interviews. Through this research, you will also be able to test how customers value your products and solutions by gauging how much they are willing to pay.
- Market assessment: One of the secrets behind successful direct selling companies is that they’re not aiming to sell to everyone. Rather, they target a defined market niche that’s well-aligned to their products, receptive to the direct selling model, and large enough to support the company’s long-term growth objectives. A niche market has distinct needs and preferences that make it unique and can be defined based on demographic attributes like gender, age, or income level, and psychographic attributes like customer interests and values. When defining a niche market for your company, “niche down” so that you’re as specific as possible. This way, you’ll be able to be more targeted in your offering and positioning. However, before finalizing the target niche segments, do a comprehensive market assessment to understand the size and potential for growth.
- Sales projections: This is where you map out the details of exactly how many sales made by how many representatives it will take to reach your objectives in years one, two, and three of your business. Whenever possible, base your projections on actual sales results and data-based analysis of future results. You should always factor in representative recruiting variables, including experience levels and how long it takes representatives to onboard and begin selling. When you crunch the numbers and evaluate best- and worst-case scenarios, you come up with viable projections that you can use as a measure from month to month and adjust based on what you learn about your products, field sales team, and the market overall.
- Contingency planning: As part of your planning, build out detailed contingency plans for what you will do if results don’t go according to plan. This includes planning for faster than anticipated growth. Consider supplier, manufacturing, and distribution needs to develop a plan for how you could scale if customer demand outpaces your projections by 10 or 100 times. This will help you anticipate what it takes to scale your business and ensure that you’re prepared to capitalize on market opportunities.
- Corporate structure and legal advice: During the business planning phase, you should also consider how you want to structure the company at the corporate level in the short and longer terms. Which roles at the corporate level need to be filled on day one? And how much direct selling experience will the ideal leadership candidates have? (More is better!)
Along with the people in the corporate office, you should make a decision early on about whether you want to form the company as an LLC (Limited Liability Company), an S Corporation, or a C Corporation. While an MLM company can operate as a Sole Proprietorship or Partnership, the LLC and Corporation structures offer liability protection and tax options. An LLC limits an owner’s personal liability, provides additional options on how the business is taxed, and offers flexibility on how many owners a company can have. The S Corp structure – for companies with 100 or fewer shareholders – offers the benefits of incorporation, along with the federal tax advantages of a partnership. A C Corp structure also limits owners’ personal liability but is subject to corporate income tax and is often used by companies that are seeking venture capital investments.
At this point in your business planning, it’s a good idea to consult with an attorney with experience and expertise in the MLM industry who can review your plan, advise about the appropriate corporate structure, provide guidance regarding compensation strategies and compliance, and identify opportunities for patents, trademarks, and copyrights.
Decide on an MLM genealogy structure
Along with a corporate structure, you’ll need to determine the MLM genealogy that best fits your products, business plan, and growth strategy. Much like a family tree, an MLM company’s genealogy structure provides a hierarchical record of the independent field sales representatives based on the representative who sponsored them and where they sit in the overall organizational structure. As representatives build their own businesses, they recruit new representatives for their downline teams and add levels to the MLM genealogy tree.
The genealogy structure is critical because it is a primary driver of the company’s compensation plan, and while it can be adjusted and enhanced as the company evolves, it is difficult to change the underlying structure of the compensation plan down the road. The basis of an MLM company’s genealogy is to define the number of representatives included in the plan’s “width” and “depth.” Depending on the structure selected, the width and depth can be fixed at a certain number or unlimited. For example, a Binary MLM compensation structure has a fixed width that includes two representatives, but the depth or number of levels within the structure is unlimited. As new sales representatives enroll, they are placed in two-person-per-level tiers below the initial two-person frontline.
The most common compensation structures used by MLM companies are Unilevel, Binary, Matrix, and Hybrid. With one of these structures as the foundation, many MLM companies elect to bring in elements from other plan types to help drive specific growth. Each structure offers different options for defining revenue opportunities for field sales representatives while also managing the company’s overall bottom line.
In addition to defining the compensation plan, outline complementary recognition that’s designed to motivate and reward successful sales representatives. This should include creating criteria for a series of ranks within the sales organization that come with a distinct title and perks that inspire representatives to want to achieve them. Strike a balance between making the ranks attainable without making them too easy or too difficult.
You’ll also want to supplement your compensation plan with other incentives, such as bonuses and sales contests. Strategically planned bonus opportunities can play a pivotal role in your MLM company’s sales growth. For example, many MLM companies offer a starter bonus to reward new representatives when they make initial sales after joining the organization. This type of extra compensation gives reps a taste of the financial rewards available to them over time and helps to keep them engaged. Research shows that when MLM sales representatives have early success and make their first sale within two weeks after joining, the rep stays with the company for an average of six years – well above the overall average MLM retention rates for sales representatives.
Choose your MLM software
Another critical step when starting an MLM company is selecting the MLM software that will serve as the operational hub for the business. Along with choosing an MLM software platform that provides the technology tools you need to run your business and integrate with your corporate back-office, you’ll want to work with an MLM software provider offering solutions that can be seamlessly added as your business grows. Just like selecting a genealogy structure, determining your MLM software is a major decision that will impact all facets of the company.
As a start, look for solutions that simplify and automate everything from tracking the organization’s genealogy tree through commission payout calculations and comprehensive reporting. Next, evaluate the software platform’s tools for facilitating sales. The best MLM software provides a consistent Ecommerce experience through replicated websites that include responsive design for mobile devices and shopping cart features that enhance browsing and buying. For example, choose MLM software with shopping cart capabilities like product categories, filtering, and search built in. You’ll also want software that enables you to tag new or best-selling products and alert shoppers when an item is on sale or close to selling out. These shopping cart features can be difference-makers as customers make their buying decisions.
Along with serving as the operational hub for your business, your MLM software should also serve as an important hub for engaging and communicating with the field sales representatives. When comparing MLM software options, make sure to explore how it can help you deliver online rep enrollment experiences, journey-based onboarding training, and integrated customer relationship management (CRM) capabilities. The best MLM software solutions will offer reps a centralized dashboard view of their business and access to relevant training modules alongside communication updates and notifications about their rank and bonus qualification status. In today’s busy, mobile world, you’ll want your MLM software to be able to provide automated alerts to reps whenever sales or enrollments happen.
When comparing providers, don’t simply look for the lowest price. Low pricing is often a sign that an MLM software provider is cutting corners by delivering fewer releases, limiting access to live support, or overloading its servers – all of which can result in slow and less than optimal experiences for your representatives and customers. Ask providers about their experience in the direct selling industry, their history of providing technology upgrades, and their customer reviews. And always ask for references and case studies to get a real-life perspective on how the provider works with companies like yours.
Pricing will always be an important factor. For high-quality MLM software providers, expect costs in the range of $20K – $35K to launch your platform and monthly hosting fees of $3K – $4k. Plus, choose providers that offer flat-rate hosting without additional hosting fees per order or representative.
Lay the foundation for sales success
With your business plan, genealogy structure, compensation plan, and MLM software platform in place, the next consideration is creating a roadmap for sales success for your representatives. One of the most important things you can do is develop journey-based onboarding for new representatives. Journey-based onboarding enables you to provide step-by-step training and support modules that are triggered based on an onboarding timeline or as representatives achieve defined milestones.
With journey-based onboarding, you can put relevant information and content in front of representatives at the point in time when it is most useful to them. Best of all, by providing the information “just in time,” you help representatives avoid information overload and keep their focus on what they need to know in the moment. Your MLM software can help you build out and automate training content delivery from a welcome message that arrives when a new recruit completes their online enrollment through detailed product, service, and compensation information down the line.
Journey-based onboarding and ongoing training can play a major role in engaging and retaining MLM representatives. Organizations with standardized onboarding programs achieve 50 percent higher retention rates, on average. With MLM industry turnover rates at 50 percent within the representative’s first year, an uptick in representative retention can have a significant impact on the company’s bottom line. For example, by improving representative retention by just 10 percent, MLM companies can see a corresponding increase in revenue of 49 percent over ten years.
In addition to developing a robust training program, leverage your MLM software to deliver automated alerts to let representatives know where they stand in terms of qualifying for a new rank, bonus, or sales contest. Establishing a culture of recognition – both formal and informal – can greatly influence a rep’s long-term direct selling success.
Establish a strong brand
It’s never too early to start building a brand identity for your MLM company. Over time, a strong brand is one of the most valuable assets a direct selling company will have – and it will extend far beyond designing a logo, website, and product packaging. Along with establishing a consistent, recognizable look and feel, your brand will help tell your company’s story to prospective customers and representatives.
While a brand is constantly evolving, consistency is key. That’s why it’s important to take the time in the early stages of building an MLM company to research your target market and create a brand story and design that resonates with your audience’s needs as well as your company’s strategy. As you launch the company, gather feedback from target customers and representatives about everything from your logo’s design through the positioning of your marketing messages. Getting reactions from the people you’re looking to reach is vital for refining and optimizing your company’s brand identity.
Document brand guidelines from the very beginning to help ensure consistency. The guidelines will help you and your sales team optimize the value of your brand and consistently deliver it in market. Written guidelines will also help you track and make strategic decisions about changes to design and positioning as your business grows.
MLM sales representatives are the best ambassadors for your brand. Build brand training into both their onboarding and ongoing training. When your representatives understand the brand story and what the brand stands for, they can effectively incorporate it into their day-to-day interactions with customers and potential recruits. Make sure to provide the turnkey marketing materials that reps need to consistently deliver the brand, including replicated websites, social selling tools, email message templates, and product marketing content.
ByDesign Technologies partners with MLM companies as they grow. With 20 years of experience in the MLM industry and lessons learned while serving nearly 1,000+ clients along the way, ByDesign’s MLM software solutions are designed to help direct selling companies grow, and sales representatives succeed. Learn more at ByDesign.com or contact us to schedule a consultation today.