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Product Part 3 - Physical Products

Multi-Level Marketing Physical Products

The multi-level marketing space is awash with physical product-based networks. Physical products have their advantages, but they also have some serious drawbacks. If you already have the product and your supply and fulfillment buttoned-down, then I recommend you skip to the stock holding. If not, read on.

How many products do you need?

I have customers in the fashion jewellery industry with thousands of products. Every few months they fly around the world looking for new line items. Once they find the correct items, they order very large volumes to ensure continuity of stock. If they order too much they are sitting with dead stock. If they order too little they run out of stock - and running out is not an option. Their supplier offers a 6-week lead time on minimum volumes creating even more pressure. This is very capital intensive.

Once the stock lands in the country, it needs to be photographed, copy needs to be written, a catalogue created, and the individual items need to be uploaded to their MLM Management software.

When the new catalogue hits the field, the old stock stops selling. This leaves them with a serious dilemma. Do they write off the old stock or try to recover their capital? Due to minimum order quantities, there is often too much stock left over to write off. They are, therefore, forced to offload the old stock onto their network. They implement discounts, special offers and various other incentives. This reduces the sales of the new stock resulting in profitability issues. To top it off, they have created an expectation in the network and if they want to retain their distributors, they need to keep the cycle going. All the above requires an army of people to ensure that nothing falls through the cracks. What a nightmare! They really do have their hands full!

I have another client who has only one product. It is a high-value product with a good profit margin. The product is produced locally, has a very short lead time and can be ordered in small volumes. They run the business with a very small team and ship out of a fulfillment house. The startling thing to note is that they are doing 5 times the turnover of my fashion company. Five times more turnover for a fraction of the effort.

Bootstrapping the product

As I have mentioned in previous posts, the product needs to offer value for money. That is not to say that it needs to be cheap but rather that it needs to be high quality, have a good story and be desirable.

Let’s assume that you don’t have a large budget and are looking for a way to bootstrap your business. If this is the case, there are a few options.

Lotions and potions

When it comes to cosmetics and supplements there is no shortage of manufacturing companies. These companies, for the most part, are desperate to acquire new customers and will bend over backwards to get your business. This is a great position to be in. They have hundreds of formulas for all sorts of lotions and potions and if they don’t have what you are looking for, they will formulate something for you quickly. This will short circuit your development timeline and get a high-quality product out of the door fast.

Labelling and packaging

When you are starting out, the last thing you want is to invest in large volumes of packaging and labels that you may never use. The contract manufacturer you chose will have standard packaging that can be purchased in small volumes. You can then have small runs of high-quality labels printed and cut out on a large format printer. The labels are applied to the packaging by hand allowing you to produce small runs at very low cost. This radically reduces your risk.

If the product takes off, you can order product, labels and packaging in larger volumes thereby achieving better economies of scale and lower manufacturing costs.

Stock holding and lead times

Multi-Level Marketing teams can grow at an incredible speed. We have a client that signed up 60,000 distributors in 6 months. If each distributor sold 4 units per month the company would have shipped 1,440,000 units in their first 6 months. If the cost of these units was $10, they would have purchased $14M worth of product.

If they had a short lead time with their manufacturer, which they did, they could finance the stock from cashflow. If they had a traditional lead time of between 6 and 8 weeks, they would have required ever-increasing capital to fund the growth.

Let me tell you my story

I started a small company selling children’s bath products. We had a 6 week lead time so I decided to maintain three months of stock at all times. Each month I would analyse my sales and growth over the previous three months and order with the three month stock holding in mind.

All was going according to plan until we achieved critical mass and the business went vertical. We sold all the stock we had, every item, in just 2 weeks.  I ordered a lot of stock and pressured my supplier to get it to me fast but that did not prevent me from being out of stock for 4 weeks. As you can imagine, the team lost faith and sales plummeted. By the time my stock arrived the sales had slowed to a trickle. To cut a long story short, it took years to recover our reputation.

This brings me to the next issue - the supplier agreements.

Supplier agreements

Part of my story that I neglected to mention was that when the supplier found out that I was under pressure for the product they did two things. The first was that they charged me a premium for pushing my order up in their production schedule. The second was that they decided to increase their prices by over 100%. Up to this point, I had been doing everything on a handshake. I discovered that I did not own the formulas, had no binding agreement on lead times, and could not specify quality or ingredients. Basically, they had me by the b…s and there was very little I could do. It nearly bankrupted my business.

To save the company I approached a new manufacturer and got them to reverse engineer the formulations. I purchased the formulations, signed an agreement with them that included pricing strategies, delivery times and non-performance penalties, and started almost from scratch to build my business.

Let this be a warning to you. Make sure that your supplier agreements are tight and that you can penalise your supplier if they fail to perform.

Another issue to focus on is capacity. Will your supplier be able to produce the volumes when they come? And they will come! Multi-Level Marketing companies can grow at a ridiculous rate. Take our client who has 60,000 distributors purchasing 4 items per month. This requires a manufacturer to produce 240,000 units per month. And what happens if each of the 60,000 distributors doubles their volume due to an incentive or introduces one new distributor (or both)? You suddenly find yourself ordering between 500,000 and 1,000,000 units per month. Make sure that your supplier has the raw materials, packaging and manufacturing capacity, and most importantly, the quality control to ensure consistency at scale.

If your company fails then all of this is irrelevant. If you succeed, then this is a serious issue that needs to be addressed before you sell your first unit.

Shelf life

Lastly, it does not pay you to hold vast amount of stock with a very short shelf life. The last thing you need is to have a warehouse full of rancid stock that needs to be destroyed. This is as bad as not having enough stock.