One of the greatest strengths of the network marketing profession is also one of its greatest weaknesses. I am referencing what is known as “ease of entry” – many people perceive it is easier to launch a network marketing company because it has the potential of spreading nationwide quicker than any other industry. While that may be the case, it is wrong to assume it is easier. There are many factors that must be considered when launching a network marketing company to ensure its success and longevity, otherwise it could result in irreparable failure. Why do MLM companies fail? From my experience, these are the top 10 factors:
Unlike traditional businesses, or in particular the high-tech industry where you have the ability to bootstrap a business on a shoe-string budget, the network marketing profession is entirely different. Reason being that most individuals joining the profession are solely joining for their potential earnings. A new startup network marketing company just won’t be attractive to those that are looking to be a part of a multi-million dollar venture in the making.
Traditionally you will seldom see a customer interested in a product that judges the company by its financial stability, since mostly people are interested in the actual product itself. Whereas in network marketing, most join for the opportunity and eventually become a customer.
Network marketing companies are not a scalable business model. Going from a few thousand distributors to a few hundred thousand distributors in very little time would require substantial financial backing to support that infrastructure. Therefore, the #1 reason why MLM companies fail is the lack of funding to support the potential exponential growth, the unforeseen and unpredictable business model that may require instant cash injection, and any potential legal issues that may arise.
2. Corporate Experience
Lack of corporate experience is another reason why MLM companies fail. Although it is not imperative to have the corporate experience initially, it is still extremely important for any company that wants to sustain longevity to either acquire the talent or partner with a consulting firm. Partnering with a consulting firm arms companies with the necessary guidance to ensure proactive measurements are in place to ultimately reduce risk and prevent any major catastrophes.
Many companies create an outstanding infrastructure but have no strong leadership team in place to sustain the momentum.
By contrast, some companies with good leadership seem to thrive in the face of structural limitations. How can this be?
Consider a talented pianist that plays Beethoven’s Concerto No. 5 on a $50,000 Steinway grand piano. Now, if the same pianist were to play on a $2,000 piano, would the Concerto No. 5 still sound beautiful? Absolutely. It’s not about the piano; it’s about the pianist who has spent a lifetime improving their talent to bring Beethoven’s work to life.
Similarly, the traits, behaviors, and characteristics of the person or persons outlining the opportunity for you represent a critically important dimension of a company’s leadership style. The company itself might not be the Steinway concert grand of infrastructures, but the skills of the leaders make the magic happen. Without this kind of leadership, the likelihood of success is limited and is another huge factors as to why MLM companies fail.
Culture, in my opinion, is the main reason why companies have become billion-dollar entities; or, contrary to that, companies have gone from being among the top to taking a violent nose-dive for lacking to instill culture.
Although culture is not necessary during the initial stages of a new company, it does play a significant role while the company builds its foundation in the field. It is vital to implement culture that carries a unified message throughout the entire field; regardless of the market, location, position, or team – culture needs to be carried throughout.
Personally, culture is what has helped me become extremely successful and maintain my team, ultimately increasing retention. Without culture, the company simply becomes all about money, leaving nothing left for people to believe in.
5. Compensation Plan
There are many reasons why compensation plans can be a major contributor of failure for network marketing companies, and these are the general reasons why:
- The compensation plan is designed to generate high profit for the company rather than high rewards for distributors
- The compensation plan has a low distributor retention rate
- Limited payout with many restrictions
- Lack of transparency in business volume in relation to dollars spent
- The compensation plan does not support seamless global compensation
In addition to the above reasons, another major contributor as to why companies suffer or lack momentum when it comes to the compensation plan, is frequency of modifications.
All network marketing companies claim that their products are the next best thing since sliced bread. That makes it essential that you try some of the products and form your own opinion. While some companies do, indeed, create or have access to innovative products, it is also imperative that the company offers their products on an exclusive basis. The last thing you want to market is a product that turns out to be a repackaged version of something that is currently in the marketplace under a different brand name.
The product also must be:
- 100% Consumable
- Instantly Gratifying and Emotionally Satisfying
- Competitively Priced
- Scientifically Sound
Although 95% of network marketing companies are product based, those that are service based must offer a service that is extremely competitive, provides tremendous value and is emotionally stimulating. A good example of this would be travel-based companies that offer long-lasting memories in addition to the value of savings.
In this day and age, systems are no longer an option, but a necessity. It’s really the difference between “making it or breaking it” – a comprehensive technology system has to be in place for a company to have longevity in addition to sustaining growth on a consistent basis. These are the basic components every system must have:
- Multilingual & Multicurrency Capabilities
- Fully Comprehensive Replicated Sites
- Recruiting Sales Funnel System
- Social Media Automation
- Online & Offline Training Systems
These are just a few examples of the necessary components needed to ensure proper duplication takes place and continues to do so without leadership’s daily presence in the field. Without a secure system, it is without a doubt that some MLM companies fail.
8. Social Proof
Twenty years ago, social proof would never have made it to the top 10 list, and ironically it now sits in the 8th spot playing an important role in the growth of any company. Although this is not the main ingredient for success, it does contribute to exponential growth and creates massive momentum in the field.
Social proof is beyond social media; rather it becomes a talking point, accepted in the community, and well known among everyone. This alone won’t cause the company to fail, but it does help make the company successful. I’ve known companies that have gone from just a million per month, to 40 million per month in less than 4 years and one of the key contributors to this “4-year overnight” success was their massive social proof. Social proof may not be the reason why MLM companies fail but why it continues to be successful.
Legal is another area where you will not see any positive or negative impact until years into the operation. If checks and balances are not in place, and the t’s aren’t crossed and i’s aren’t dotted, eventually it will catch up to you and the outcome could be disastrous.
For example, if products promote medical claims, a compensation plan lacks validity, or a company’s vision promotes financial gain only, then these are often great ways to run into legal troubles. I have seen it happen time and time again where companies fail to address false claims made by distributors, the compensation plan heavily promotes excessive frontloading, or as many of us have probably seen, the company’s executives solely focus on high earning potentials. These issues explain why some MLM companies fail.
A good company will have a comprehensive plan in place for going global. Rapid expansion on a global basis requires support systems that keep pace with the local ethnic culture. They must also represent a crystal-clear understanding of the legal requirements in every country where business is conducted.
For example, here in North America, most companies often provide simple Live Chat or email support, whereas in Asia, an actual phone call or in-person support might be a necessity. In addition, rarely will you find a company that offers an actual printed brochure here in North America; whereas in Asia, most companies have all their marketing support material available in print. These are just simple examples of support systems that need to be in place or the company will find itself unable to grow.
Mind you, this list could be extended with many other contributing factors to why MLM companies fail. However, if a company can master these 10 and avoid the pitfalls, it greatly increases its chance of massive success and longevity.