Part One of a Four Part Series

Leverage in Network Marketing

In this first of four articles, John Counsel of The Profit Clinic MLM Success Centre explores why 90% of network marketers (and all other small and home-based business owners) are PRE-PROGRAMMED TO FAIL because they simply don't understand what leverage is, why it works or how to apply it successfully in their own businesses.

By John Counsel

At The Profit Clinic, our positioning statement is “Work less, earn more.” This sums up the essential role of leverage in business very neatly. But, as usual, people mistake effect for cause – especially in network marketing, where comprehension of basic business principles can be hard to find. People “talk the talk” but have no idea how to actually walk it. So they never realise the true potential of this enlightened business system.

Instead of realising that working less and earning more are both EFFECTS, not causes, most network marketers have the mistaken idea that “work less, earn more” is actually a statement of cause and effect – that, BECAUSE they work less, they can earn more.

Sorry. It doesn't work that way. Only when you truly understand the principle of leverage, and can find effective ways to apply it in your business, will you enjoy those two benefits, or effects… working less AND earning more. In other words, you'll enjoy more free time and more profit.

Sadly, the typical network marketer's time and effort is spent REMOVING leverage, not creating it.

Of all the lethal boobytraps in network marketing, the worst is appeasement.

Appeasement in network marketing is what happens when a company or distributor network "accepts reality, and modifies its expectations to accommodate that reality."

In other words, if our people are too scared, lazy, incompetent or clueless to do what's necessary to succeed, then we should find a way around any obstacle so that they can at least have the illusion of success.

It's a counterfeit. A fake. Ultimately it can't work, despite any positive, short-term appearances of success as people continue to fool each other and themselves, because they mistake activity for accomplishment.

Appeasement is notorious for creating activity for the sake of activity because, all of a sudden, what was previously hard to do is now easy, so everyone begins doing the "soft option." (Another name to disguise an unpleasant reality with "positive spin.")

Why does this happen so often and so easily?

Because the average person is conditioned – by their upbringing, by their education and by their working experience – to be two things in life:

Employees
 
Consumers.

So when they're confronted by the need to make a decision as a BUSINESS OWNER, instead of thinking like

Entrepreneurs and
 
Marketers,

they default to thinking in their conditioned modes – as employees and consumers!

Is it any wonder that they consistently end up doing the wrong things for the wrong reasons, and sabotaging their businesses?

Let me give you a very familiar example.

If you ask most network marketers which is easier to come by, customers (product users) or distributors (business builders), the answer is invariably that customers are much easier to find. But customers are a pain. You have to contact them regularly to obtain their orders, then contact them again to deliver their products and collect their payments.

Can you see what's coming?

Appeasement to the rescue

Why not recruit your customers instead – and let them buy at wholesale?

Look at the benefits!

1. It's easier to recruit customers than business builders. Sure, they don't buy as much or have the same commitment to the business, but look how your personal network numbers explode! Instead of only 50,000 people in your company's network, overnight there's 250,000. And that makes it look much more attractive – and easier to recruit because of the explosive growth taking place.
    
2. You no longer have to do any work, or waste any time on those customers. No more selling, No more deliveries. No more phone calls. No more paperwork. No more money handling or order processing.

Sounds pretty good, right?

It's a poisoned chalice. It's the Kool Aid that disguises the taste of the bitter poison swallowed so eagerly by followers of false prophets. You drink it at your peril.

Here's why.

Basic business realities

If you join a network marketing opportunity, you go into business for yourself. And the definition of business applies to ANY businewss, including network marketing:

“Business is the exchange of resources for profit.”

That's it. Cause and effect. Process and result.

Business only exists so you can exchange resources you already have but don't need, for resources you need but don't have, in order to make a profit.

Profit is what you get when you SELL something for MORE than it costs you to make, provide or buy. (Any fool can sell it for less. That's called a LOSS – and you'll soon be out of business if that's what you keep producing.)

So you need to get a bigger result than what you put into your business. The output needs to be higher than the input, or you're not in business for long.

That's called LEVERAGE

Leverage involves taking a small number and turning it into a LARGE number. If you have to use a LARGE number to produce a LARGE number, little or no leverage is involved.

This is a principle that very few network marketers understand. Most believe that if they can just get enough people (LARGE numbers) involved, they'll create LARGE incomes (numbers) for them.

In other words, their notion of leverage is distorted. They're focused on quantity, not quality – and that's mistaking effect for cause. Again.

Quality versus quantity

Quantity is the EFFECT of leverage, not the cause. The real cause is quality. By starting with quality people, then applying quality training, leadership and support, we create quantity of productive people and quantity of results – sales and income growth.

In his article, "The Science of Pay Plans," network marketer Mike Akins says:

“In traditionally structured programs, it requires at least 10-15 individuals purchasing product (equal to the qualifying dollar amount) in order for one distributor to break even on their personal qualifying purchase and get into profit. In the highest paying programs it will still require at least 4-6 purchasers. With either of these extreme approaches, there will always be from 75-90% of all distributors not breaking even on personal qualifying purchases or earning a profit. It is vital to your success to understand this principle. Failure to address this issue has been a major reason that a number of leaders in the industry have not been able to maintain a consistent degree of success. They are always in a rebuilding mode.
 
“The difference between the number of distributors earning a profit in the best paying program and the worst paying program is only about 15-20%. At best, only 25% of your distributors will be earning a profit or breaking even on their qualifying product purchases. What are the other 75% going to do? If they are networkers involved to make a profit, they will drop out. You cannot escape this ratio. This dynamic is a foundational principle built into the very concept of network marketing. There has to be end users who are not earning an income. The program that you are involved with has to be able to attract non-income earners…. If you never understand anything else, it is vital to your success that you comprehend this principle. In order for one person to break even or make a profit, there must be 4-6 people who do not! Write this down on paper. Work through the figure over and over again, until you capture a vision of what I am sharing with you. This factor must be considered when selecting a program.“
 
– Akins, Mike, "Science of the Pay Plan," www.pro-networkers.com/science1.html

Akins is right. But it's not just a fact of life in network marketing. It applies to any business. There has to be a high percentage of people involved who just want to buy the products and not actually earn an income for the serious business builder to be profitable. The more of these product-users you can attract, the more profitable your business will be.

In non-MLM businesses, these people are called CUSTOMERS!

In intelligent, high-leverage network marketing programs, retail customers are a key factor in your personal leverage. If every one of your distributors had 10 to 15 retail customers buying from them every month, the profitability of their businesses would boom.

But, as usual, their time and effort goes into REMOVING leverage, not creating it.

Here's an example:

Amway® has two requirements that distributors must meet to be eligible to earn a bonus, regardless of the size of that bonus. These requirements lie at the heart of distinguishing legitimate network marketing from illegal pyramid selling schemes.

A distributor must sell to at least 10 retail customers in the qualifying month, and
 
70% of all purchases from the company must be for retail sales to customers (and must be able to be documented).

So, in general terms, at least 70% of all distributor volume must be generated from OUTSIDE the network. If every customer and distributor purchased the same amount of products each month, that figure would rise to around 90%.

But what's the reality?

According to Amway's own publicly-available figures (USA), only 19% of products move outside the network. (I'm happy to adjust this for Australia if the company is prepared to release local figures.)

Those same statistics also show that more than 90% of all income earned by distributors went to around only 2% of the network.

This is not a problem confined to one company. It afflicts most MLM companies. In Amway's defense, this is NOT company policy. It simply means that most bonuses are paid in breach of the rules.

But in many companies, this IS company policy. So there's no real leverage in those businesses right from the start. Hence Mike Akins’ reference to the need to have such a high proportion of people in your downline who are basically there to buy at wholesale and not to make any income.

Raising the risks

It also raises an important question:

If you recruit your customers into your downline, are you actually crossing the line and putting yourself in breach of anti-pyramid selling laws?

At best, you blur the distinction between the two.

Perhaps the following analogy will help you gain a clearer picture of the true nature of the problem.

Farmers keep livestock – cows, pigs, sheep, goats, etc – because those animals provide them with milk, wool, meat and money (when the farmer sells the produce or animals that exceed his family's needs).

They're important. They're his leverage, especially when they breed and multiply.

But, no matter how fond of his animals a farmer may be, he keeps them in the fields or in the barn, chicken coop, etc. He does NOT keep them inside his home! If he did, he'd have mess, chaos and his quality of life would be severely diminished. He'd also run out of room, fast.

Are YOU keeping YOUR milk cows in your living room or kitchen?

Don't sponsor customers. Doing so just shows how much you've lost the plot when it comes to putting leverage into your network marketing business.

Distributors and customers have totally different expectations. Don't confuse the two. Keep them separate.

Intelligent, high-leverage compensation plans distinguish between different types of interest, priorities and motives. The company I’ve chosen to join offers three distinct levels of involvement:

• Retail customers (who can also register for special incentives in return for minimum purchases each month)
   
• Preferred Customers (who can't sponsor or earn income, but who buy at wholesale and can qualify for free shipping)
   
• Business builders (who earn reciprocal income as well as residual income – the essential mix if you want to add genuine leverage to your business, not just the illusion of leverage gained by sponsoring customers).

Next, we'll explore the true nature of leverage in network marketing, why so many get it so disastrously wrong, and how YOU can get it brilliantly right, quickly and simply.

Part One  |  Part Two  |  Part Three  |  Part Four

 
© 2001 John Counsel. All rights reserved. No reproduction by any means permitted without prior written consent of the copyright owner. This article appeared originally in Australian Business & Money-Making Opportunities magazine.

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©1998 The Profit Clinic. All rights reserved.