MLM No More: The New Direct Selling Industry

Jan 26, 2022Sheffield Blog

You heard right: MLM No More. What’s happening to cause us to say such a thing? 

Of course, direct selling continues as a fundamental business model. But the changes taking place in the industry are so profound, we really have to let go of our old conceptions of MLM.

One conception is that an MLM company exists primarily to recruit and reward distributors, with product sales as a necessary consequence. This incorrect mindset has damaged consumers and destroyed companies. Your company exists to sell products, and building an organization of distributors is a way to market those products—and in a modern enterprise, it’s only one of several complementary ways. 

MLM companies are being scrutinized based on the number of non-distributor retail customers they have on their books, compared to the number of distributors. 

An issue doesn’t exist if a distributor is a customer. Matter of fact, if the company has a good product, almost every distributor will be a customer. However, if every customer is a distributor, then by definition the company is considered a pyramid scheme. And, therein lies the challenge: the ratio of distributors to customers. 

It is now widely understood that a compensation plan must never compensate consultants merely for recruiting more distributors into the company, rather than for the sale of goods and services to end-consumers. Paying to recruit is simply illegal. But even if your compensation plan avoids these obvious pitfalls, you can still be running an operation that’s effectively upside down. This is where the ratio of distributors to customers comes in. 

The majority of your customers need to be buying the product because they love what it provides at the price they are paying, just like any other purchase in a retail store or online. Even if your compensation plan is legitimate, your marketing is upside down if you’re giving more emphasis to recruiting distributors than to acquiring customers. That shows up if most of your customers are in the business: it suggests they are buying your product just to qualify, and not because they value the product itself. 

Legacy companies are finding it difficult to pivot away from a distributor recruitment emphasis. Some built their business plan on the concept of inventory loading. Inventory loading is when a distributor must purchase $1,000, $5,000 or who-knows-how-much inventory to join the company and end up becoming “garage qualified” or “basement qualified.”

Legally, a distributor shouldn’t be required to buy any product at all, otherwise you’re engaged in “pay to play” . They should buy the product because they believe in it. Companies should never encourage distributors to order more product in the beginning than what they can reasonably use for personal consumption. There’s no reason for inventory loading because, today, customers should be able to purchase directly from the company, through the distributor’s replicated website. 

Direct selling companies must understand from the beginning that non-distributor consumer product sales are top priority. This is more important than ever, as it is likely that regulatory agencies will require companies to verify customers through some sort of tracking mechanism. This is another reason why direct purchase from the company is preferable. When the distributor buys your products and then resells them, you have no knowledge of who received it. You don’t knoq your customer.

Learn more about our changing industry through Sheffield Global Academy, the only online course for founders and executives of direct selling companies. Or call us for a free consultation: 480-968-6199.