For those who don’t know, network marketing is the business model in which independent representatives (sometimes called distributors) are the primary method for a company to market products. Think of Pampered Chef, Amway, Avon, Discovery Toys, etc. How did you hear about those products? Probably not from a Super Bowl commercial, but instead from a friend or family who is trying to sell them.

The Business Model

The business model runs off the extremely successful theory that the best type of marketing is word of mouth, or endorsement marketing. It has been around for decades and will be around for a long time to come. The commission structure is different for every company, but usually it is a multi-tiered commission structure.

For example, if I sign up under my sponsor, Person A, for every sale I make, not only do I get paid, but my sponsor (Person A) gets paid a small portion as well. If I sign up you, my reader (Person B), every sale you make will pay me a commission, and for some companies will also pay my sponsor, Person A, a commission as well. Terms such as upline, downline, "team", roll-up, one-up, two-up, residuals, and many more are used to describe the payment structure.

Network Marketing vs. MLM

Multi-level Marketing, or MLM, is a type of company that has multiple levels of commissions. Like the example above, if you, Person B, makes a sale, I get a commission, my sponsor (Person A) gets a commission, his sponsor gets a commission, and so on. For your first sale, everyone gets a commission except, well, you, the person who made a sale. Some companies (called 2-ups) even have the policy that you won’t get paid until after your first TWO sales.

MLM has had a very checkered past and does not enjoy the best of reputations. They have been hit pretty hard by the FTC and rightfully so. It is illegal (in the US) to require someone to join a program in order to sell it. For instance, it is illegal for the a company like the Global Resorts Network (GRN) to make you buy one of their vacation packages before you can sell it. This law came about when people were joining Amway, buying thousands of dollars of stuff in order to be able to sell it, and would go bankrupt because they couldn’t sell it.

The way current MLM companies get away with this type of practice is requiring what they call "qualifying sales". If you do not buy the product or service, the MLM company segregates you from the rest of the distributors who did, and requires you to make even more sales before you start receiving your commissions. It is not uncommon to have to make 5, 6, or even 10 sales before you get paid for your first sale. Even worse, all the people who sign up as distributors will be signed up under your sponsor instead of you, potentially costing you thousands of dollars.

As you can see, this is shady at best. Because of these practices, the MLM industry has gotten a bad name. It is so bad, in fact, that my best advertising ads included the phrase "NOT MLM!"

So the term "Network marketing" was born. Sometimes it is synonomous with MLM, sometimes it means something completely different, but the concept is the same. The MLM business model is slowly dying away but is being replaced with the direct sales model, in which you get paid, from day 1, for every sale you make. In addition, your sponsor will get paid, and that’s it.

The Stigma and How They Get You to Join

Quickly (maybe it’s obvious), I found out that the best people to join your "team" are those who want to start a business and market the product themselves, not someone who wants to buy the product just for the product. This way, you can take advantage of the residual income they make for you by selling the product (no advertising cost for me). I’m sure you’ve heard the pitch: what if, you were to get 5 people to join, and they got 5 people, and they got 5 people. It’d be easy to make millions! (in truth, you may get 5 people to join, but any one of those 5 people may get a total of 3 people, only 1 of which will actually make commissions for you, and it goes on from there)

So for you relatively advanced marketers, it should be obvious that the ideal persona for these companies is a business opportunity seeker with enough cash to spend a significant amount of money on advertising. In fact, the best chance to get someone in your downline is by recruiting them from another company. MLM is extremely incestuous, with the top earners usually coming off a bad experience with another company.

Herein lies the first fundamental problem of running a network marketing/MLM business online. I’ll discuss that in a second, but first I want to get into the basics of who profits from MLM companies.

Who Profits, and How Many Fail?

It should be obvious that the people who profit the most in an MLM company are those who are at the top. Who is higher than the original founders of the company? There are a few sporadic cases of extreme success sprinkled throughout the organization, but by and far the most successful people are the ones who "got in at the ground floor".

The reason behind this is one that not many people see right-off-the-bat. I’ll put it in another light.

What if I, right here and now, revealed that I was making about $100,000 a month in the croquet niche? Then I went on to say that the way I made this money was by selling croquet balls, and I told you who my manufacturer was, what my keywords were in Adwords that I was advertising on, where I placed my banner ads, etc. all for the low price of $39.99. Then I went on to say that you, too can get into the croquet niche, sell the same balls, and make the same amount of money? What would you do? Would you go out and start your own croquet site using all my information? Maybe some of you wouldn’t, but most of you would.

What just happened? I became rich selling croquet balls. Then, I got rich again, selling information on how to sell croquet balls. What else did I just do? I made it a million times harder to sell those croquet balls because my competition just went from 0 or very low to extremely high. The same thing happens over the lifetime of a MLM or network marketing company. As the number of distributors increase, so does competition.

Besides, what USP are they going to have? They haven’t been successful yet, so they can’t talk about that. If you couple this with the fact that most people who start a network marketing business do not have much experience in marketing and have very little time and money to devote to success, you get a failure rate of 98%.

Seriously, a failure rate of 98%

What I personally started to see is that as soon as the company started getting very popular, the top distributors in the company started accepting the fact that they would break even, or even lose money their first sale.

In my company, this was a $2,000 product that we were breaking even on!!

How can you possibly expect a new distributor to get started if they 1) have to pay for a $2,000 product, 2) don’t make money on any of their follow-on sales and instead make money from their residual check.

If you’re a numbers person, here are the graphs from the Direct Sales Association, the guys who want to legalize pyramid schemes:

Keep in mind, these are THEIR number, and they are estimates. (they’re still not good)…

US Sales (Worldwide is worse):

US Sales FORCE…

 From this data, this is what I have determined. Amount of sales, per person, per year (in dollars):

Now here’s the sick part. Amount of yearly sales, per person, after adjusted for inflation:

WOW! Not a very good trend, huh? Would you invest in a company with trends like this? Not only that, but the average person only sells about $2117 a year in the US and $1866 a year worldwide! That’s about $176 a month. And here’s the kicker: commission is usually around 10-20%, so that’s what, $17 a month? What kind of business is that? Do you think that offsets the fact that they had to buy hundreds of dollars of equipment to get started? Absolutely not. The numbers do not lie, folks.

They’re all Liars

So what drives so many people to network marketing? The money. There seriously is a lot of money to be made if you are successful, and the people who make the millions shine very brightly and attract a lot of distributors.

How do the new distributors attract other distributors when they don’t have a great success story? When a prospect calls and says "how much money have you made so far", how do they say, "Well, actually, I haven’t made any money, but I’m sure I will soon."

It’s simple… they lie.

I did it. Everyone under me did it. Everyone above me did it. I didn’t tell them over the phone that I was successful, but I did on my landing page. I joined a marketing company called Carbon Copy Pro. The landing page says "A Realistic $250k First Year Income". It tells the story of Jay Kubassek and how successful he was with this exact same marketing system.

I bet 80-90% of the people who opted into my system thought I was Jay Kubassek. They had no idea who I was until they bought from Jay me.

The Present and Future State of Network Marketing, Particularly Online

Network Marketing and MLM are here to stay. If you don’t think so, just google the term "business opportunity" and see what ads pop up. Advertising, however, is to the point where it is too expensive to compete unless you can make a significant amount of money on each sale. The companies where you make $5 or $12 a sale will not be able to advertise on any sort of bid-based medium (which most ad platforms are now)

The success rate will stay the same – around 2% – because most who join do not have the deep pockets or heavy time commitment required to participate in Web 2.0, pay-per-click, or banner advertising. That’s the statistics I saw in my business and that’s what I believe it will be.

Even though there are successes in this industry, I DO NOT recommend getting started in it. If its purely for the money, there are plenty of other ways to make just as much money online with a much higher success rate and in a much more honorable way.

I personally am quitting the company I’m in because I cannot market something that claims to be able to transform anyone into millionaires overnight and doesn’t deliver. After 9 months, I felt sleezier than ever before when I started to find out that the honeymoon may be over for my company. I would much rather focus on my guilt-free businesses.

My father is a relatively successful entrepreneur and my mother is a piano teacher. Even though they accomplished a lot,  unfortunately, they’re not very good at saving money. After 40 years of working, they have about $10k saved to their name, and a retirement plan (not including social security) that will pay them out about $700 a month after they retire in 3 years. Not if I have anything to do about it.

The truth is, I’ll end up paying for their retirement. I don’t mind. They took care of me for 18 years, so now it’s my turn. I have enough money set aside that they can live off the interest for the rest of their lives.

That’s not enough, though. I want to give them a huge "happy retirement" present. What better present than to buy them a waterfront house on an Adirondack Lake? Unfortunately, I don’t have the $550k to buy the property and the $300k to buy the house. Yet. However, they’re retiring in 3 years. Here’s how I’ll make $850k in 3 years and how you can, too.

First off, you need to set a goal. Obviously mine is set; $850k in 3 years. Now we need to break it down into smaller goals.

Well, an online business usually sells for 12-14 months net profit and if it has potential all the way up to 24 months. This means that with 3 years, I would have to make ($850k/4=) $215k a year in online profits. ($215k x 3 years + 1 more year for selling the business). Can I make $215k a year online? Seems like a lot, doesn’t it?

Take that $215k a year and divide it into months. $18k a month, roughly. Do you think you can make $18k a month? That also seems like a lot, doesn’t it?

How much is one visitor worth in your business? $1? $2? $0.10? Let’s say one visitor to your site is worth about $0.50, a conservative estimate. That means in order to make $850k in 3 years, I’ll need to get 36,000 visitors a month to my site. Does this sound more achievable? It still sounds like a lot, doesn’t it?

How about if I started about 7 websites and marketed every single one of them the correct way? 36,000/7 = 5,200 visitors month. Hmmm… doesn’t seem so bad now. What if I started 10 websites? Do you think you can start 10 websites in 3 years and market them to the point where they get 3,600 visitors a month?

That’s only 120 visitors a day!  Between all of the traffic methods you know already, do you think you can get 120 visitors a day?

This blog already gets twice that amount and it’s only 4 months old! Do you think you can create a blog like this 10 times in the next 3 years (every 3 months)? Doesn’t seem so hard now, doesn’t it?

So what did we just do? We just found out a way to pay for an $850,000 waterfront lakehouse with cash just by being successful entrepreneurs. We broke down our goals into smaller pieces that actually became achievable.

The next step, of course, is to take the next step and put this plan into action. One….step… at… a… time…

I know some of you may have objections and think this is not achievable. What are they?

Today you may have noticed that I have added something to my right sidebar. That’s right! I’m now offering what I like to call "business reviews".

What are business reviews?

Good question. I’m glad you asked. The founding principle of this service is that you can tell a lot about someone’s business just  from their website. You can get a good idea of the revenue they are generating, how they generate it, what type of backend products they have (if they have any at all), etc. With a business review, I will review your website and a little bit of your business, and give you some hints as to how you can increase your profits dramatically (start building more than one list, test headlines and colors, cross sell other products that aren’t in your niche but in your demographic, etc.)

Are you making as much money as you should?

The answer is, probably not. You’re probably not testing correctly, not optimizing your site layout for both visitors and SEO, you’re not offering the right offers, the right products, etc. By fixing these things, you can quickly, and I mean within a few days, explode your income to levels where you probably didn’t think you were able to.

A fresh set of eyes

Even if you think you know more than me about internet marketing, which you may, it is always good to get a fresh set of eyes and brains on a business. Even Michael Jordan had a coach. Sometimes you are a little too close to a problem to be able to fix it.

Tons of free traffic and exposure

I intend on putting the business review on the front page of my site, which should bring in quite a few visitors to your site. In addition, you will receive a backlink with the anchor text of you choosing: kinda like the cherry on top of a sundae.

Why Free? Why would I waste my time?

I have my reasons. No, seriously, in about 6-10 months I would like to offer my coaching as a service. I’ve always had a passion for teaching and nothing gives me a greater thrill than someone becoming successful because of my help. In order to do this, I need success stories. That’s my selfish part of it. The beauty of it is that you get some very valuable advice for free. You don’t even have to take the advice if you think it was just terrible advice.

So if you want to take advantage of this service before it gets too popular for me to handle, sign up here. Or look on the right sidebar, it says "Free Business Reviews".

Left Behind

Last month, the NY Times did an article on Small Businesses and how they are just warming up to the internet. According to last year’s Jupiter Research poll, only 36% of businesses with less than 100 employees are online. What? Are you kidding me?

I guess I just assumed that I was unable to find many businesses because they didn’t know how to market their business, but I guess I was wrong. They just flat out aren’t there.

I find it hard to believe that a small business could even stay in business in this age without being online. The internet gives a business such a huge advantage and there is reaelly absolutely no reason any business shouldn’t be online right now. The cost of entry is zero or near zero, and even just setting up a simple blog should increase customer relations to the point where they can double sales if they do it correctly. Think a down-home local bar advertising drink specials and upcoming DJ/bands while talking about and sharing pictures of what happened last weekend. Powerful stuff, but most just aren’t doing it.

Be The Leader

What does this mean for you? Just the fact that you’re reading this blog puts you lightyears ahead of the competition. You are thinking about things like cost per visitor, conversion rates, backend sales, autoresponders, etc. If you’re not, you should be. These tools will increase your bottom line by at least 100%.

Which brings up the next point in the article: most businesses, when they do get online, focus on all the wrong things. They focus on the beautiful flash design that so many web designers push, when they SHOULD be designing their site with conversions and usability in mind.

Where To Start

Where should you start? Read Don’t Make Me Think. That will get you started thinking about usability. Then attend all of my website reviews. One of my strongest emphasis is on usability and conversion. SEO is a distant second, followed by everything else.

Anchor yourself in your market by focusing on the right things and you will be unmovable. You will thank me when the other 64% are trying to enter the market and PPC costs are triple what they are now.