MLM Pricing Strategies

MLM is an excellent alternative to traditional marketing strategies; however, it’s important to keep in mind some of the primary differences between MLM and conventional marketing.

Direct Sales vs. Traditional Marketing

How is marketing a product through direct sales different from more familiar types of marketing, you may wonder?

The truth is that the two are very different. In traditional marketing, if you want to take a product and build a brand on a national basis, you’re going to have to invest in advertising through TV, radio, newspapers, magazines, or the internet, among other channels. That means you spend money before a sale is made. Since you don’t know what the return will be, you’re taking a significant risk. 

In direct sales, multi-level marketing, or party-plan programs, we have low-to-no-cost customer acquisition. And every industry, customer acquisition is primary. There are Fortune 500 companies that are constantly trying to figure out how they can get a customer and actually make a profit. Here’s the answer that’s unique to MLM: through word-of-mouth, person-to-person promotion and advertising from a customer who loves and/or believes in the product. When a person is a distributor of the product and uses it themselves, he or she naturally becomes a cheerleader for that product. 

Where’s the motivation? Apart from creating a great product that people love, distributors are paid through commissions and bonuses. The customer and the upline get paid – these are the people higher up in the family tree who helped bring that person into the business.

The other thing to note is that the direct selling business consists of one-on-one presentations. It’s not about shelf retail and trying to differentiate yourself from 500 other products that may be in that store. You have somebody who understands the product, who is likely a personal user of the product, and who is telling its story.

Other times there are world-class products that everybody knows about, but that need to be demonstrated. Sometimes a potential customer needs to try a cream on their face or sample the product in some other way. Some products demonstrate very well but they don’t sell when they are sitting on a shelf.

The bottom line is, people like buying from people they know and they trust. That’s why 1 in 4 households in America buy something from a direct seller every month.

Profit Margins

• If you are starting a true multi-level marketing company that’s selling consumable products such as nutrition or skincare or weight loss, then a good margin to aim for is between 6 and 7-1/2 times the cost of goods to suggested retail. This range will ensure that you’re competitive. Highly-consumable line extension products are particularly suitable for internal distributor use, while also complementing an existing product. For these types of products, provide a non-commission sales aid to assist distributors in successfully running their MLM business.

• If you choose to sell a product with lower margins, it’s important to adjust the compensation plan to fit that difference. This can become a little difficult because it can make you less competitive. But again, it can be done, and companies have been successful with even a four-times markup cost of goods to retail, often because they have a unique product that people want to buy. You can also make up the discrepancy through bonus volume (BV) by assigning a dollar amount less than distributor wholesale for commission purposes.
  

• Party-plan companies typically have lower margins because they are often selling non-consumable products. They may only have a three- or four-times margin cost of goods to retail. That being said, the average sale is typically higher, not because it’s higher per individual customer, but because the party-plan structure sells products in a group setting. This means you have the leverage of 10 or 12 customers at one time hearing a single sales presentation or demonstration. For that reason, having a little less margin isn’t a problem. You make it up in volume.
  

• Then we have those higher- ticket products – things like water filtration systems and air purification systems – that may sell anywhere from a few hundred to a few thousand dollars. With these products, the margins may not be near the type that we’ve talked about. Sometimes they may be 3 to 1 or even 2 to 1, but when the price of the product is high, we can pay a healthy commission on a single sale, and we can also afford very good bonuses.
  

Product Pricing

There is a general rule for pricing your products in multi-level marketing. A common pricing strategy is to determine what the average person would be willing to pay for a specific item or service and then add 25% or higher for premium products.

It’s always possible when pricing products to bring the price down, but it’s very difficult to increase the price of an underpriced product. Decisions like these can be the detriment of the success of the company. Alternatively, it is easier to charge a premium price for a product because there are all kinds of ways to bring down the perceived cost through specials, 2-for-1 programs, or even lowering the price later on down the road as the business grows.

Conclusion

The cost of taking a product to market through traditional marketing methods is vastly more expensive compared to MLM. Quite frankly, if you’re an entrepreneur who has a great product or service that you want to take to market, but you don’t have several million dollars to work with, then direct selling  is the place for you. Your MLM business can be grown organically and you can use the leverage of the geometric growth of MLM to create a national and international brand for yourself.