Friday, February 16, 2007

The problems with MLM

A while back, I posted about Dragonfly Innovation. In that post, I mentioned that their sales channel strategy was multilevel marketing (MLM). If you're unfamiliar with that term, it refers to the old Tupperware sales model, home parties put on by commissioned sales reps, with a multilevel commission structure where reps get paid not only on their own sales, but on the sales of reps that they recruited. I promised in that post to share some thoughts on MLM, and running into the Dragonfly founders Scott and Susan Dalgleish at the Entrepreneurs Martini Group last night reminded me that I hadn't done so, so here goes.

MLM is a very popular sales model for many companies. It is overwhelmingly targeted at the stay-at-home mom, because it provides her a part-time income that she can scale as she desires and that she can work on according to her own schedule. That kind of flexibility just isn't available anyplace else.

Because MLM is targeted at these moms and, for the most part, they're going to be selling to other moms, the products and services tend to be oriented toward moms: indulgences like beauty products, jewelry, clothing, or lingerie; children's products like Dragonfly or Discovery Toys; or kitchen products like Pampered Chef. (I have also recently seen MLM plans for investment services, although I'm not sure I understand that model.)

My impression, backed by no data whatsoever, is that there has been an explosion of MLM offerings in the past decade. It could just appear that way to me because I have come to a point in my life, married with two young kids, that I'm in the middle of the target zone for these kinds of offerings. Or there could actually be far more offerings because of various social or economic trends, and I believe this is the case.

The desire for higher standards of living (bigger cars and houses, better vacations, etc.) has led to a dramatic rise in two-income households, which has put immense pressure on family life. MLMs offer at least a partial income alternative that allows moms to stay at home, easing those family pressures, but still helping the family checkbook. And the promise of MLMs is that, when the mom wants to increase her income, she just needs to increase her effort, signing more reps and having more parties. This is why I think there has been a big rise in MLM offerings.

But, as in so many things in life, it's not quite that easy. If the mom has preschool-age kids, then she doesn't have a lot of time during the day to work on sales or recruitment, but in the evening she's exhausted from taking care of the kids all day. If her kids are in school all day and she has some more time, she has the opportunity to put in the hours to grow her business. However, her parties, the events that actually make her money, are almost always in the evenings, which takes her away from her family, when spending more time with her family is why she's not working full-time anyway.

And then, after she has worked through her entire personal network of friends, she needs to start essentially cold-calling acquaintances or friends-of-friends. That's hard. That's real sales, not just selling to friends, and most people just aren't cut out for that.

There are obviously exceptions to these issues I raise, but I'm just pointing out that it's not necessarily a perfect option for the rep mom.

It's also not a perfect option for the startup company trying to establish sales channels. If there has indeed been an explosion of MLM offerings, then how do you make yourself stand out from the others? Marketing dollars. And if you want to grow fast, then you'll need to hire paid, direct sales reps in each region in which you want to get established. Sales dollars. Lots of dough to spend in a crowded marketplace. That's a tough road.
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