Why do MLM companies fail? It’s an intriguing question, one that needs answering right away if you have decided to venture into direct selling. After all, if you know the reasons for failure you can devise a strategy that can effectively mitigate them. This way you can ensure the long-term sustainability of your MLM business.
Reasons Why MLM Companies Fail?
MLM is a rewarding business, one that can help you achieve unprecedented growth in a short time. Its unique working methodology that relies on networks of independent distributors enables network marketing companies to grow rapidly, expand their reach, and achieve outstanding sales numbers. But still, the failure rate in the MLM space is high.
The reasons are many, lack of training, poor products, ineffective compensation plans, and more. Let’s dive in and understand why the MLM company plunges into the depths of failure despite the industry having so much potential.
Lack of a Sustainable Product or Service
MLM business starts with a product or service. If the product you are offering isn’t compelling enough, no one is going to buy it. It means no sales, which leads to business failure. Studies claim that as many as 40% of business failure in MLM is due to poor products. That’s a red light for MLM businesses aiming to bid in the network marketing industry.
But why do products fail to entice users? Here are the reasons;
- Low Product Quality – When the product quality is low, customers won’t return to buy it again, leading to dwindling sales. Ultimately, your business will take a hit and go into loss.
- Absence of Product – Market fit – It means you are selling a product that doesn’t have a market. Without a product-market fit, you won’t be able to achieve sales.
- Short Product Lifespan – It’s possible that you have chosen a product with a short lifespan. It could force distributors to continue promoting new products which will prevent you from creating a stable customer base.
- Not solving a problem – Great products solve problems and that is why they sell. If your product isn’t solving a problem, it’s bound to hit the dust.
Poorly Designed Compensation Plans
A compensation plan is an essential component of MLM business. New MLM companies have to give serious thought while adopting a compensation plan or customizing it to suit their requirements. If the compensation palm is poorly designed or executed, your downline won’t receive their fair share of commissions. If that happens, they are sure to leave the business, shrinking the network and impacting your sales process.
- Poorly designed compensation plans lead to inequitable rewards and commissions to team members.
- The compensation plan will be overly complex and confusing, deterring new members from joining the team.
- Poorly designed compensation plans might give off unrealistic expectations leading to false claims.
- It will be hard to explain a poorly designed plan. In that case, the business won’t be able to present itself as transparent which will put a dent in its credibility.
Some MLM businesses tend to focus more on recruitment than actual sales. It’s a big mistake that ultimately leads to MLM business failure.
Let’s understand how recruitment-focussed cultures lead to failure in MLM;
- No value for customers – A high focus on recruitment offers no value to customers. In the absence of sales, businesses fail to keep up with the revenue demands and close down.
- It appears to be a pyramid scheme – When an MLM business focuses too much on recruitment, regulatory bodies perceive it as a pyramid scheme. It is considered a fraudulent activity that attracts legal action.
- High attrition rates – Emphasis on recruitment puts pressure on distributors to continually bring in new members for commissions. It could result in high dropout rates as new members might not be able to maintain a stable downline.
Legal and Regulatory Issues
MLM companies have to abide by tons of regulations in order to function hassle-free. Failing to follow MLM compliance leads to legal troubles and the MLM company might end up as a venture.
Here are some more insights;
- MLM businesses might face pyramid scheme allegations if they don’t follow legal compliances.
- MLM businesses with ambiguous business processes might attract consumer protection agencies.
- Regulatory compliance varies from state to state and region to region. Several MLM businesses can’t cope with legal compliances and have to shut their doors.
- Legal issues put a dent in credibility. It repels new customers which impacts business growth.
- Regulatory compliance changes over time. For MLM companies that are new in the arena adjusting to new regulations could be a massive challenge which might lead to business failure.
Poor Leadership and Management
The entire MLM game plan depends on the leadership quality of the management and distributors. Without strong leadership the downline will lose its focus and may not put in the necessary efforts needed to push the business toward success;
Here are all the ill effects of poor leadership and management that lead to failure in MLM;
- Lack of real goal and effective strategy.
- Inadequate training and support for the downline.
- Failure to address issues and concerns promptly.
- Mistrusts amongst distributors and downline members.
- Short-term focus over long-term sustainability.
- Lack of communication between management and downline members.
Business failure is common across industries and MLM is no exception. However, understanding the reasons why MLM companies fail gives them a better chance to survive and thrive. In this post, we have covered the top reasons why MLM companies have to close down their operations.
Being aware of these reasons allows us to mitigate the risks and achieve sustainable growth. But above all, successful MLM requires effective leadership. It offers clear direction to the company and helps it to adapt to the dynamic challenges of the business environment.