Do Levels of Commission in MLM Add to the Price of the Product?
If MLM companies pay commissions on multiple levels of distributors, does that raise the price of the product?
Of course it does. But there are two things that should be factored in when looking at this:
1. Whether those levels add more cost than the traditional advertising budget does.
2. Whether those levels add any value to the consumer.
Open and review this image. You see, all businesses have an advertising budget because each must find customers. For a company to “tell the world” about their products, they advertise on TV and/or radio and/or billboards and/or shelf space in a store and/or direct mail, etc. Each of those can be viewed as a “level” of expense that raises the price of their product.
In 2006 Nike paid out $702.4 million to 25 athletes to endorse their brand. So if someone claims that “MLM’s products are expensive because levels of commissions add to the price of the product,” what do they think $702.4 million dollars does to the price of Nike products?
MLM companies simply pay people like you and me the advertising budget instead of the popular method of paying celebrities.
Let’s pretend we have a company. We’ve set aside 50 million dollars to advertise the products. How should we spend that 50 million? In a traditional company we would pay some of those 50 million dollars to a celebrity to appear in our literature or in a television, radio or Internet ad.
By contrast, if we were an MLM company we would pay those 50 million dollars to people like you and me to advertise the product.
Which is better for the customer? If the distributor for an MLM company is a professional and builds their business in a first-class way by knowing their product and competing companies’ products, MLM is much better for the customer.
I’d be willing to bet that Catherine Zeta-Jones doesn’t know how T-Mobile is better than AT&T - yet T-Mobile paid her 20 million dollars for promoting their phone service. This adds no value to the customer whatsoever. But a knowledgeable sales person who can “un-confuse” a customer IS very valuable.
Recommended next page: Do MLM companies collapse?
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This is a very important and well written article to my view. There is sometime a perception about the relationship between the price of the products versus the commission that is being paid to distributors. The fact that the “marketing budget” is spread over multiple people (distributors) rather than going into the pocket of one celebrity makes the marketing efforts more effective. Since they are real users of the products, they can honestly talk about their benefits. We all do that anyway with restaurants, movies, etc., it is the human nature..
Thanks!
As a single mother, I’m so happy that my company pays the “individual” rather than the super-star these advertising dollars! Hopefully everyone will open your image as you have done an excellent job of giving a visual of this!
What a great explanation! Commissions are like getting thank you checks from the company for you doing the advertising. It is a win - win. The company gets advertising and I get paid for doing the advertising. Second, the person promoting the product to you in M.L.M. actually uses the products. They could not be passionate about them otherwise. How many times do you think all those celebrities use the products they promote, but yet they get paid millions to convince us they do? I would be amazed if Heather Locklear actually uses Preference on her gold mane, doubt it!!!
And isn’t it fairer to spread the advertising dollars amonst the many promoting the products rather than just give it all to one super-star???
I love the Nike analogy - I cracked up when I read it. How true!
Answering this question “Yes commisions add to the price of the product” upfront allows people to hear what you have to say later about the efficiency of this industry. Goes back one of your 14 covenants of a first class MLM — tell the truth.
Great Talk.
The more I read the more I get excited about this site. So much good content. All the right answers in the right places. Thanks again. Patty
With MLM there is no Rent,no Insurance, no shop fittings, no stock, no book work you just get a statement each month, no power bills and you also get paid for advertising.
MLM is the most efficient way of selling a product, as the distributors do not get paid unless product is sold.
Great explaination!
So true. I think that one of the biggest evidence to claim, is the success of the telecommunication companies, since this is a completely price competitive environment. Unless this claim was true, the MLM companies could never reach to their enormous amounts of sales. Moreover, Tim has mention a VERY important issue here. Let’s say you want to buy multi-vitamin. If you go to the store, in the best case ceneraio the seller would give you 5 minutes of helpful information. With First-Class MLMer, the customer would get tons of valueable information, help and “dis-confusion” guide, and consistent, day-to-day support. That’s alone worth AT LEAST 30% higher price, but in reality it is not (in a First-Class Company, of course). Moreover, most customers get to the preffered customer plan, so actually they get the WHOLESALE PRICE. Isn’t it brilliant?
Thank you Tim!
Allowing consumers to participate in the marketing budget seems very reasonable.
When you have high-quality products, it’s the associates who are trained in the knowledge about why their products are better than the ones on the supermarket shelf. The products can only speak for themselves after they’ve been purchased, so it’s our job to speak for them to prospective purchasers to encourage them to try the products for themselves.
And, BTW, a company’s promotional budget can go to give a few people (who are already rich) millions of dollars, or to make thousands of people thousandaires!
I’m sure most people presented with MLM don’t think with this kind of commercial logic - yet it’s obvious if they’d just pause to stop and think for a minute or two. Tim’s clear and graphic explanation means they barely need to pause.
Thank you for explaining how just by shifting their advertisement money, some companies offer average folks the chance of living extraordinary lifestyles.
Simply terrific explanations, Tim!
Another very clear explanation!
I am overwhelmed by the simplicity of your explanation.
You have help me a lot in this
Thank you Tim!!!
Nice article and I think I agree but the crux of matter is (as you stated) whether Network Marketing comp plans add more cost than the traditional advertising budget does. This is impossible to answer without being on the inside and consequently a difficult objection to overcome.
Fascinating site and well worth the visit. I will be back
A fantastic site, and brilliant effort. A great piece of work.o
This site is really superb!!! Thank you for you work! Good Luck
What a great way to look at it. The basic structure of the business and the corporate budget are essentially the same. The main question is which marketing structure is more effective? Take a look into it as each person in the marketplace decides for themselves.
Hi, all. Nice site…I really like your site ! Good job man.k
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