Friday, August 31, 2012

The Danger of Large Starter Kits

A "starter kit" in MLM is a recommended "kit" of products that you buy and use to "show off" your products in the marketing effort. There are usually several kits, small, medium, and large (though they usually go by fancy names, like "deluxe"). Starter kits can also be called "business in a box", or even named after specific ranks, like "Instant Coordinator Pack".

However, the starter kit and the comp plan will show a lot on how the business really works, vs. how it was described to work. Thus, you need to look out for the warning signs in a starter kit.

First of all, a MLM is NOT supposed to charge an application fee. If it does, the paperwork cost should be minimal (about $20, certainly no more than $50). If it's any higher, it is in danger of being classified as a pyramid scheme by the FTC for doing a "pay to play".

Second, MLM is NOT supposed to sell "training kits" and such material to affiliates and charge a high cost and profit off of that. Training is only sold to members, and that is also a sign for pyramid scheme for the FTC. Training should be sold "at or near cost" and should not be a profit center.

With the two sources of revenue cut, some suspect MLMs resort to "starter kits" they then "recommend" new members to buy. And these starter kits can be quite costly... $500 or more, and comes in big boxes as they contain virtually everything the company makes.

This is out of pocket expenses for you, and if large enough, it will hurt you in multiple ways.

In modern MLM business, most products are drop-shipped straight from the warehouse of the MLM, not out of local stock by the reps, unless the items are small and/or relatively cheap, like cosmetics, nutritional supplements, and such. However, such local stock is a major problem for the reps. In the Harper's magazine expose on Mary Kay, it was mentioned that the pressure is very high on the reps to "maintain their level", by buying more stock themselves instead of SELLING their stock.

Large starter kit is also a sign that the company's diversification may in fact be di-worse-fication, as it went in too many different directions, and this also confuses the sales reps, who needs to be trained on the new products. The more products one needs to know, the less the rep knows about each of them.

Furthermore, unless the sales reps are really racking up the sales, it is possible that the company is actually subsisting on sales TO the sales reps (members), NOT to customers.

The Harper's expose on Mary Kay also stated that many reps are pressured to NOT seek the 90-day refund because this fact will be revealed to the team and the upline, who then likely will have commission reduced due to "clawback".

Thus, when you see that a company has a large starter kit and it recommends the rep to buy as large a kit as possible, beware. You should shadow a rep to a couple sales events, and see how much of sales is possible, and how soon you can "break even", and if one of the smaller kits will do.

In the MLM model, you, the affiliates, pay most of the marketing costs, and in return, get the huge margins / profit per sale to cover those costs. (and later, training costs when you recruit other sales people)

You are supposed to be MAKING money, not paying out money. Arranging sales meetings, demo events, and such, and entertainment costs will come out of YOUR pocket, so you will be paying even MORE $$$ and chalk those up to "marketing". And if you don't really make that much sales, then you are out even MORE money.

The larger the starter kit, the deeper "hole" (net negative) you have to sell to break even.

It is also a way for a company to sell some of their least popular products... as they are unlikely to sell any except to you affiliates.

So beware of large starter kits, and the pressure to get you to go for a bigger one.
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