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Starting a Network Marketing Company: 10 basic building blocks for a strong start

By Kevin Thompson, MLM Attorney, Thompson Burton

This article is a modified version of the original publication from September 12, 2019

Back in a prior life when I was competing in the decathlon for the University of Tennessee, one of my favorite events was the 110-meter-high hurdles. The race is probably the most intense event out of the 10, requiring massive amounts of preparation, energy, and focus. It’s also a race where things can fall apart QUICK. The most important hurdle in the race is the FIRST one. If the runner fails to generate enough momentum over the first one, there’s not much of a chance to recover during the race.

I think the hurdles race is analogous to a lot of things in life, concepts I’m constantly trying to remind myself while teaching my kids. Those early efforts require massive energy. Once the work is invested and you “stick the first hurdle,” the momentum can carry you. Blow the start and the remaining obstacles are harder to handle.

The same concept applies for startup entrepreneurs in the network marketing / direct sales industry. I frequently see entrepreneurs make the mistake of being lazy with the early details, hoping that AFTER they launch, they’ll be able to adjust on the fly.

Based on experience after working with close to 1,000 different companies with most of them being startups, I’ve written what I believe to be the basic building blocks for a STRONG START. And in the spirit of the 110m hurdles, I’ve listed 10 building blocks. When founders ignore 1 or 2 of these important building blocks, things can snowball quickly, making recovery nearly impossible.

1: Product

Obvious, right? The Product needs to be amazingly fantastic. So fantastic that the average person can love it, learn about it and share it. The product will require STRONG margins to support a healthy pay plan. When the average pay plan in the industry pays out between 35% to 45% of all sales revenue, there needs to be enough money left over to fund a healthy company. Weak margins mean weak pay plan, which means networkers will spend their time where the ROE is higher (Return on Energy). Weak margins is also a signal for a commodity product, which is a non-starter in direct sales.

It also requires a commitment to product innovation. The product a company starts with will likely not be its flagship product in 5 years. The intelligent owner has an instinct for investing in the company’s future by developing long-term product strategies. To summarize this point: While one amazing product can get a company going, it’s not enough to keep it going.

2: Pay Plan

If someone asks you, “What’s the best vehicle out there,” what do you say? It’s not an easy question to answer. Obviously, the answer depends largely on personal needs. Is the person working a delivery job? Is the person in construction? Will the person be driving around small children? It all depends on why one needs the vehicle in the first place. The same is true with compensation plans.

In its simplest form, the pay plan is an algorithm designed to distribute the margin in a way that incentivizes good behavior. How should the revenue be distributed throughout the genealogy? It depends on the goals and needs of the organization. The plan needs to reward healthy behaviors that are (a) rewarding for the field; (b) rewarding for the company’s bottom-line; and (c) legal.

It’s important to get this step right. The pay plan is the “operating system” that drives the organization. It’s a series of dominos that lead to predictable results. I’ve seen plenty of clients that know what they want and they’re able to design the plan themselves. I’ve seen others that retain a pay plan designer that will custom make a plan based on the goals of the organization.

The smart founder is careful not to copy a plan that they think is “good.” The margins of the other company’s product, prior associations with other leaders in the industry, goals of the organization, sales culture, tolerance for risk…those are all “under the hood” factors that can make it completely different from YOUR situation; thus, copying the plan might not be the right move. Choosing the right plan is like choosing an organ — there needs to be a match before you proceed.

3: Lawyers

“Lawyers are some of the most amazing people on the planet, beloved by all,” said nobody ever. In all seriousness, this is a vital building block for a strong start. Yes, I’m a bit biased in this category. But I’ve seen what can happen when startup clients charge forward, willfully ignorant of the legal landmines around them. They, and those around them, blow up. Spend the money upfront, save A LOT down the line.

Good lawyers in this industry, commonly referred to as MLM attorneys, are familiar with several areas of the law that impact direct selling companies and distributors, i.e., FTC Policy Guidance, Advertising Compliance, Disclosure Laws, MLM Litigation, Cybersecurity, Consumer Class Action Defense, Consumer Protection Regulation, FDA Dietary Supplements and Functional Foods, State and Federal Case Law, Government Investigations, SEC Guidance / Enforcement Actions, and the list goes on. In this industry, there’s a recurring pattern of issues that trigger certain areas of the law, issues that a good lawyer will identify, understand and convey to startup clients long before there’s a problem.

Good lawyers bring a breadth of experience to their work. It’s one thing to know the law, it’s another thing to have experience/instincts on how the law interplays with the facts — an ability to see around corners, if you will. Those instincts are honed over decades working with countless founders, good and bad business models, distributors, disputes, and random happenings that arise in the industry. To quote the Farmers Insurance commercials, “We know a thing or two because we’ve seen a thing or two.” The experience is valuable. Do not retain a lawyer unless they’re fully invested in the industry.

Good lawyers in our industry charge flat rates for clearly defined services. The scope of work is predictable; thus, the fee arrangement is typically negotiated at a flat rate. At our firm, we’re up front about the fees and scope of work. If someone wants to bill you hourly for startup work, don’t do it.

4: Software

It’s important to stick the landing when it comes to choosing the right software partner. Choose the wrong partner and launch on flimsy code, the entire company will collapse after the first failed commission run. And by the time you get it fixed or find another provider, the damage is irreparable. I think it’s important to work with an established vendor because, candidly, it’s nearly impossible to custom build the back-end software. It is POSSIBLE…just tough if you lack the developer skill and resources. If people in the field are to spend their time and energy promoting your brand, they’re going to expect a first-class user experience online. 

Be careful with who you select. They all have great lead capture pages and provide great impressions on their websites (they’re in the web business after all). Chat with some of their customers and take your time in choosing the right provider. The clearer you are with what you want, the easier it’ll be to find a good fit. And be careful when you bargain shop. There are some very cheap solutions out there, but “cheap” comes with a cost. 

5: Wisdom

Wisdom can simply be defined as good judgment. And as the saying goes, good judgment comes from bad judgment. The unwise founders tend to bend with the winds, allowing distractions to consume most of their time because they’re not able to discern good concepts from bad. In our profession, wisdom is a function of saying “yes” to the right things and “no” to the wrong things. Startup founders learn fast that once they launch a company, they’re going to be presented with infinite choices and ideas. The lobbying starts immediately, usually from early participants in the field that demand adjustments. “We need free shipping!” “We need to increase the check match!” “We need larger starter kits and first order bonuses!” “We need to start buying leaders!” “I’ve got a group of leaders ready once you change the pay plan!”

Intelligent founders listen patiently while sticking to their vision. It’s not that they need to be stubborn, it’s that they need to be discerning with how they’re going to allocate their limited time and resources. Operating a network marketing company is more like being a gardener, less like being a carpenter. Gardeners create the initial environment and wait for nature to work. Carpenters micro-manage, banging on every detail to force a result. In our industry, the “carpenters” make too many changes, which leads to a loss of trust and an eventual lack of enthusiasm. Change is inevitable, but one should proceed with caution in the early days of a company.

6: Operations

In the early days of a company, the term “Operations” can seem like a luxury. In some cases, it’s an “army of one” that’s launching a company. After doing this for a very long time, I’ve learned that the tree can only go as high as its roots allow. If the founder has limited capabilities when it comes to growing an internal team, the upside is limited. I’m not suggesting that a startup needs to have a full org-chart in order to be successful. But as it grows, attention needs to be paid towards building strong operational abilities.

What are signs of a healthy operation? There are more people than just the founders working for the company. There’s a team of dedicated people that show up, every day, working for a paycheck thinking about ways to better serve the company and field. These people can help run compliance, accounting, develop marketing collateral, run customer support, iterate product strategies, manage logistics, plan events, brainstorm ideas about…whatever. When talented people regularly get together, they can spark valuable ideas that maybe the founder is incapable of seeing. Yes, some of the functions can be outsourced. But over time, it’s just hard to replicate the value generated when a consistent cadre of people join forces to get things done.

Again, this is not imperative to have an internal team on day 1; however, in order to have a strong start, it’s important to have the human capital on the ready to help get things done. When founders fail to delegate as a company grows, the wheels tend to fall off.

7: Capital

“Money isn’t the most important thing in life, but it’s reasonably close to oxygen on the ‘gotta have it’ scale.” – Zig Ziglar.

It’s obvious, right? It takes money to operate a business. I’ve seen clients successfully launch companies with as little as $15,000 and as much as $10,000,000. There’s no magic amount, though I know what happens when the money dries up: It all ends. It’s imperative that clients give themselves sufficient breathing room to get their company from launch to profitability. In almost EVERY scenario, it takes longer than people anticipate for a company to (a) turn a profit; and (b) grow to a size where it makes sense to take that profit OUT in the form of compensation for the founders. In this regard, it’s vital to think through all costs and have enough cash on hand to keep the founders and operators comfortable long enough for the business to yield some fruit.

There are several ways to raise capital. I prefer the clean arrangement of selling equity to early-stage investors, commonly referred to as Angel Investors. This requires robust investor documents prepared by a seasoned corporate attorney. If the business fails to pan out, good investor documents are vital to protect yourself in the event the investors come calling. There are also other ways to fund a company such as self-funding (cash savings) or selling positions in the genealogy (again, with proper investor documentation).

The bottom line: There needs to be enough runway to get the airplane off the ground. How much is necessary? It varies company to company. But generally, it’s more than you think but not nearly the cost of some of the more traditional businesses (e.g., franchises).

8: Strong Vendor Relationships

This is where it pays large dividends to be nice. Vendors are instrumental for the long-term success of the business. These are the product manufacturers, product formulators, lawyers (we need love too), accountants, fulfillment services, packaging companies, software companies, merchant processing companies, pay plan consultants, etc. These are the partners that help network marketing companies operate predictably and efficiently. If any of these relationships turn sideways, it can be catastrophic for the business. These disputes can get ugly. Owner X claims that Vendor Y failed to ship orders on time, Owner X refuses to pay Vendor Y, Vendor Y shuts everything down causing the entire thing to grind to a halt. Trust me, it happens.

It’s important to choose these key relationships intelligently and keep them healthy. And remember, the good suppliers need you less than you need them. Of paramount importance is the establishment of clear and respectful channels of communication early. Practice Pointer: Try to get to know the supplier on a personal level. Ask about their ambitions or ask about what excites them. Ask for their opinions on trends they’re seeing in the industry. They all have unique perspectives and, for the most part, share generously when asked.

9: Marketing

It’s a bad idea to assume the field will take over ALL marketing activities. Yes, the field is paid specifically to move product. However, this is not Field of Dreams where “if you build it, they will come.” The field needs a strong selling proposition and a strong story to tell.

The smart founder never assumes that the field will “figure it out.” It’s up to the intelligent founder(s) to craft a marketing story in a viral package that’s able to spread from person to person. The field will add their magic to the message; however, it’s up to the company to provide the key ingredients. And if the story is too complicated, it’s not going to spread far.

10: Experienced Friends

“Lots of people want to ride with you in the limo, but what you want is someone who will take the bus with you when the limo breaks down.” – Oprah

It pays to dig your well before you’re thirsty. It can take years to develop meaningful relationships in any industry, particularly in network marketing. While having friends in our industry is not a requirement, it certainly helps. Friends can provide intelligent founders with valuable, honest feedback. Friends can also help founders avoid conflict based on their years of experience. And friends want to see other friends do well and be successful; thus, they’re more inclined to show support for the fledgling business. 

The ability to tap into a network of experienced people is invaluable. It’s certainly possible for an outsider to enter the industry and launch a successful business. It’s just that the learning curve is accelerated by having access to people that have navigated these waters before. 

Conclusion

As in the hurdles race, it’s crucial that these building blocks be taken seriously. I’m sharing these insights based on years of experience having represented countless entrepreneurs. Over the years, patterns have emerged and I’m sharing some of the more important elements here. 

By all means, share your thoughts if you think I’ve missed a major area. And if you found the content helpful, please pass it along.

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