Law Library

The Preeminence of Value

Two of the first questions I love to ask prospective or current network marketing executives are, "What do you believe is THE most important factor in the long-term profitability, viability, and future of your company?" and "What is 'the magic' in the network marketing equation?" As you might suspect, the answers are all over the map. Owners and executives have responded with "the compensation plan," "the products," "the culture," "the story," "the sizzle," "the excitement," and many more equally erroneous answers.

One hundred and thirty six years of direct selling history in the United States absolutely establish that the most important factor is the value of the products.1 Value is not only a business issue, but it is also one of the most important factors affecting the legality of any network marketing program.

What is "Value"?

This begs the question, "What is value?" The dictionary defines "value" as "an amount considered to be a fair and suitable equivalent for something else; a fair price or return; monetary or material worth." I believe that value can be quantified by a mathematical equation:

Quality  +  Benefits
Price

For example, let us assume that you are an entrepreneur who has a very high quality product that is better than 80% of the similar products on the market. Accordingly, we would say that it is in the eightieth percentile in terms of quality and benefits. Let us further assume that the price of your product is higher than 80% of the similar products on the market. Thus, we would say that its price is also in the eightieth percentile. The "value equation" would be:

80%
80%
       = 1

Since the quality and benefits of the product are commensurate with its price (80% divided by 80%), the product is an average value.

If, on the other hand, the product had 80th percentile quality and benefits, but a 40th percentile price, the numbers would be:

80%
40%
       = 2

Thus, the product would represent an outstanding value. Indeed, the quality and benefits are effectively worth twice the price of the product. The higher the number, the better the value; the lower the number, the poorer the value. Don't confuse the "price" of the product with its "value." Low prices don't necessarily represent value. In fact, low prices can mean extremely poor value because the quality can be even lower than the price.

The process of determining value is admittedly subjective, because the quality and benefits of most products is a matter of opinion. That said, you are just as much an expert consumer of consumer products as is anyone else, and your opinion is equally valid. If you think the quality of the company's products is at the 25% level and your prospective sponsor claims that they are at the 99% level, ask him to prove or substantiate why he think so. Just because he says it is the best on the market doesn't mean it's true.

The Relationship Between Value and Opportunity

Prospective distributors need to analyze the quality, benefits, and price of the products of any company they consider joining. All people, whether customers2 or distributors, want value. Everyone wants the best products they can afford at the lowest possible prices. This point cannot be overemphasized enough.

The desire for high value does not vanish merely because a compensation plan is attached to the products. . . although it can momentarily fly out the window when intelligence and common sense are overcome by greed. History, however, has repeatedly and conclusively taught that individuals will not pay inflated prices for products over the long-term simply because there might be a check attached to them. Sadly, this is a lesson that many in direct selling have never learned.

Allow me to use a hypothetical example to make a point. Let's assume that you are a budding, but brilliant, entrepreneur looking to bring a proverbial "widget"3 to market. Let us further assume that you have not yet chosen your distribution channel (i.e., retail, direct marketing, and direct selling). As a consummate business person, you have diligently surveyed the market for widgets. You have found that the market ranges from the "bottom dwelling" lowest priced widget at $3, to the highest quality widget in the world, which sells for $10. You have also discovered that the vast majority of widgets congregate in the $3 to $5 range, with the notable exception of the superlative $10 widget.

You conclude that there is a substantial market and opportunity for a high quality widget, perhaps in the 70% to 90% arena. Consequently, you decide to produce a widget that is, in terms of quality and benefits, second only to the $10 widget. Let's say it is in the 80th percentile of quality and benefits.

You decide to utilize the retail channel to market your widget, and to this end, you open retail widget stores across the country. In addition, you have priced your 80th percentile widget at $15 (which is 50% more than the best widget in the world).

How long do you think you will be in business?4

Do you really even have a viable business?5

Do you have an opportunity?6

Do you have a future?7

Why are the answers to the preceding three questions, "No?" It is because the value of your widget is abysmal. Consumers can get a better widget for substantially less money. Only an idiot would buy your widget.

Let us now assume that instead of the retail distribution channel, you elect to utilize the direct marketing channel (mail order, catalogs, and the Internet) to sell your widget. The quality, benefits, and price remain the same. Now . . .

How long do you think you will be in business?

Do you really even have a business?

Do you have an opportunity?

Do you have a future?8

Consumers who make purchases in the direct marketing channel are no less intelligent than those in the retail channel. Thus, your company's fate will be the same.

Lastly, assume that you elect to use the direct selling distribution channel to market your widgets.

Do you really even have a business?

Do you have an opportunity?

Do you have a future?9

The answers are all still "NO!" Most direct sellers mistakenly believe that they would be "yes," because a compensation plan is now attached to the products. It may take longer for the company to die because some of the purchasers mistakenly believe that they have a "vested interest" in buying the product, but die it will.

Here's the secret that counteracts that mistaken belief - the rules of business do not change merely because the distribution channel does.

Here's another secret - Any network marketing opportunity is ONLY as good as the value of the products. Where there is no value, there is no opportunity and there is no future. Where there is tremendous value, there is tremendous opportunity and a tremendous future.

The Legal Significance of Value

This takes us to one of the tests that regulators use to determine the legality of a program, which should also be one of the first tests that you use "the intrinsic value" test. Simply stated, the test is, "Will the products or services being offered sell on their own merits?" Another way of stating the test is, "If there wasn't an MLM compensation plan attached to these products or services, would people still buy them?" Perhaps one more way of looking at the issue is to ask, "Are distributors the only people willing to buy these products?" If the answers to the first two questions are "no," and "yes" to the third watch out!

The intrinsic value test does not end with the questions. You need to try the company's products and determine their quality, benefits, price, and ultimately, their value. There are many good products sold by direct sellers. If, however, a company charges five times what a product is worth, it probably will not sell very many. Value determines saleability. After you determined their value and assessed their potential market and saleability, ask yourself whether non-distributors (pure customers) will be willing to pay the price charged for them.

The significance of value and saleability is that if the products are not salable, there will be no customers. Distributors will only buy the products to earn bonuses and commissions, which has the potential to make the program a pyramid. If distributors cannot make money by selling or moving the products to end consumers, there is really only one other way in which they can make money -- by activities related primarily to recruiting additional participants!

At the end of the day, there are only two possible models for direct selling companies: (1) a sales-based model in which the primary emphasis10 of the program is on product sales and customer acquisition; and (2) a recruitment-based model in which the primary emphasis is on the introduction of additional participants into the program. If a program is not sales-based, the only other possibility is that it is recruitment-based. A program that is primarily recruitment-based is a pyramid.

Most scams are not dumb enough to pay participants merely for recruiting someone else, so they disguise the payment of recruiting or headhunting fees in a smoke screen of putative products. There are essentially two ways in which they do this. The first involves a practice known as inventory loading. "Inventory loading" is typically a three step process that includes: (1) the enrollment of a new participant; (2) the"sale" to the new participant of a large amount (usually in hundreds, or more commonly, thousands of dollars) of products; and (3) a repetition of (1) and (2) relative to new and unsuspecting prospects.

In the second pyramid model, the recruiting process is inextricably intertwined with product purchases, such that the "sale" of the products is in reality, one in the same transaction as the new participant's enrollment. The fact pattern here usually involves: (1) the enrollment of a new participant; (2) the need to "qualify" the participant's business; (3) the qualification of the business through the purchase of the requisite quantity of products; and (4) a repetition of (1), (2), and (3). Please understand that there is nothing wrong, in and of itself, as regards qualification or activation requirements. The problem with this second model is that it is recruitment-based rather than sales-based.

Conclusion

I wish I knew who said, "Those who forget history are doomed to repeat it." Another anonymous pundit also said, "We learn from history that we do not learn anything from history."

Companies and distributors need to learn the invaluable lessons that 136 years of direct selling history teach us. These include:

  • The rules of business do not change merely because the distribution channel does.
  • Products that have true value will sell exclusive of a compensation plan.
  • Higher value means greater saleability, more customers, and greater revenues.
  • Legitimate network marketing opportunities have real customers the great ones consist mostly of customers.
  • Where there is no value, there is no real opportunity or future.
  • Give the market what is wants (value), and it will reward you.
  • Fail to give the market what it wants, and it will punish or kill you.

Value is the ultimate determiner of a company's profitability, viability, and future. A company can make a lot of mistakes, but if it offers substantial value, the market and distributors can be quite forgiving. No amount of hype, excitement, trips, cars, dream houses, cruises, or even money will overcome poor value, nor will they sustain a company or your business for the long term. Long term success and growth flow only from products that are a good value.

The magic is in the value of the products!



1For the purposes of this article, I will use the term "products" to include goods as well as services.

2Where I use the term "customer," I always mean someone who is an end user or ultimate consumer of a product, and who is not a distributor.

3For those of you who are trying to figure out what a "widget" is, it is defined as "an unnamed or hypothetical manufactured article." They don't really exist.

4Answer Not long.

5Answer No.

6Answer No.

7Answer No.

8The answers to this set of questions are the same as the four previous answers.

9The answers to these questions are the same as the four previous answers.

10Distributor recruiting is an integral part of any legitimate network marketing program. It cannot, however, be the primary emphasis of the program.