Thursday, April 25, 2013

Chicken And The Egg: a MLM Startup Problem

English: A chicken egg (Gallus gallus domesticus)
English: A chicken egg
(Gallus gallus domesticus)
(Photo credit: Wikipedia)
Recently, on the subject of a "launching" MLM, an interesting question was brought up... How does a MLM company sustain interest in itself when it is mainly in an affiliate acquisition mode instead of customer acquisition mode? At first this question seem to be a "chicken or the egg, which comes first" question, but in the end it turns out this just means the company has a serious identity crisis.

For discussion's sake (as it's company neutral), I'll only mention the name at the end. Let's just say their business model is to launch a way to let people try products, and if they like them, buy them, then they'll get revenue that way (or get some affiliate fees / commission), then share with the affiliates (using whatever formula / rule that was defined).  The affiliate's job is to show people that specific way.

So now you have a problem... The chicken and the egg, or in this case, customers and affiliates.

MLM relies on affiliates to advertise to customers, and turn some of those customers into downline affiliates (who then goes out and advertise to more customers).  You can't have one without the other.

So in case of this business, people who buy the products are the customers, and people who share the "way" would be the affiliates.

Except this business can't keep them apart. In the way business was described, any one can "share" the way (it's an app that shows off other apps, and if you like it, you share it). Any one can share anything.

So what is the difference between an affiliate and a customer?

Nothing... except one had paid into the system (and can earn via the system), and one had not.

Burnlounge, a pyramid scheme shut down by the FTC, had the same problem: no distinction between affiliates and users/customers. The end result is affiliates are getting paid to recruit affiliates. You'd be stupid NOT to upgrade yourself to affiliate (mogul) "just in case".

In MLM, there is always something being sold, and that something should be a product or a service. And that is where the company profit is coming from. Amway sells vitamins and household stuff. Herbalife sells "lotions and potions". You get the idea. And MLM just describes how the sales force is organized and paid. But there is a clear separation between a sales force and a customer (not so much in Herbalife's case, as it turned out, but that's a different topic already discussed in earlier blog posts)

In a normal startup, they have a warchest where money is spent on getting “ambassadors” or “evangelists” to show the app to people and get them adopted for free, but merely acquiring them is a cost that is paid out of company’s budget as operating expenses.

Twitter, for the longest time, had NO income and was basically burning through its reserve for YEARS. (2006 to 2009)

Does a startup MLM have such a warchest? Good question. But the difference between customer and affiliate now is even more relevant... 

A customer (MLM or not) is someone who wants to PAY money and buy product or service.

A MLM affiliate is someone who wants to EARN money by finding customers (see above) and gets a commission by the sales (and those of his/her downline affiliates)

Completely different mindsets, completely different goals, and completely different acquisition approaches.

Yet several companies wants to "turn fans into entrepreneurs". One such was Burnlounge. It... crashed and burned. They have no separation between affiliate and customer.

Sure, MLM works by recruiting some affiliates, but the PRIMARY focus of MLM is to MOVE PRODUCTS (or service). Signing up affiliates is SECONDARY.

Remember? Customers want to PAY money. Affiliates want to EARN money.

Can you really recruit a bunch of affiliates, who went out and recruited MORE affiliates, and expect them to suddenly flip a switch one day and they started recruiting CUSTOMERS instead?

I doubt it.

At best, you end up with a business in limbo... like Herbalife, where a significant portion of the sales (30-60%!) was to "non-selling affiliate" who was really a customer, but joined as affiliate to get wholesale price rather than pay retail.

At worst, you end up with Burnlounge... where there's almost NO retail (2% of revenue), just members selling memberships, and you end up with a pyramid scheme.

Or to beat the chicken and the egg metaphor to death... a startup has two choices, depending on how much of a warchest it has.

CHEAP BUT SLOW: Start small, buy a few pairs of chickens are let it slowly double and double into a large herd, but without “sales” to tap for revenue there’s nothing to feed the chicken with. And nobody want to give you feed if you don’t have enough chickens.

EXPENSIVE BUT FAST:  Buy a few thousand chickens (i.e. pay for the affiliates out of your own budget) and hope that’s enough to get some interested parties to use you instead of established avenues. THEN someone may give you feed.

Or there's a third way:

WTF ILLEGAL: Say what? You want the chicken to bring their own feed?!? So you can give it to other chicken? All for the PROMISE of more feed in the future?

It really is as stupid as it sounds.

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