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I’m sure you’ve heard this question before, Why are top network marketing company’s products so expensive?
This is one of those ever-present questions that networkers and direct sales people will continue to encounter (probably) forever–and there’s always more to it than meets a simple answer.
One key is not to side-step it. There are good and genuine reasons for legitimate, premium-priced products–and of course there are over-priced ones as well. Honesty is best, as always, and I’ll endeavor to give you the general truth with my answer to the question.
Special Products at Special Prices
First, the products available through top network marketing companies sales and distribution model are mostly what are called “specialty” items. They are higher priced products to begin with, having more costly ingredients and more complex designs or formulas; they are simply more expensive to make and package. Some well-known non-network marketed examples are Clinique makeup and fragrance products, Apple computers, iPods and iPhones, Armani clothing, Mercedes and Lexus automobiles.
Unless you’re dealing with a scheme or a scam, these premium products outperform their cheaper, off-the-shelf counterparts, giving consumers more and better benefits. Since they have greater value, they cost more.
If these products are being outsourced by the networking company (produced by a “third-party” vendor/supplier), they tend to be manufactured in smaller production runs that do not allow for all the optimal low-cost advantages of buying and making in the high volumes mass-marketers enjoy. The manufacturing processes are more complex and exclusive. The profit margins are higher. This results in a higher quality product with more attention to detail and quality control.
The reason manufacturers and marketing companies select network marketing and direct sales is because these higher-priced products are of higher quality, and they therefore require special methods of distribution and sales.
Simply put, they cannot compete with the lower-priced, lower quality “commodity” products, which are sold based mainly on discounted mass-market pricing and brand awareness alone. Think Wal-Mart and Costco.
Specialty products are “education-intensive.” They need greater explanation; for example, what formula, ingredients and/or processes makes the product more expensive than those mass-market goods available through direct response marketing (such as the Internet and mail-order) or retail chain store sales. Many require demonstration.
Mass-market products depend on advertising, promotion and merchandising at “point-of-purchase,” all of which are required to get consumers’ attention, let them know the product exists (to create “trial” especially if it’s “brand” new), and to give them enough compelling reasons to purchase and keep on purchasing.
Going head-to-head with nationally advertised products, many to most of which are heavily discounted and sold at the lowest price possible, is a tough game for just about all smaller businesses to win. Imagine trying to sell vitamins or nutritional beverages or “prestige” cosmetics against a major manufacturer selling through Wal-Mart, or a natural toothpaste against a tube of Crest® through Kroger or Publix supermarkets.
Specialty products are perfect for the person-to-person, information-rich education, demonstration and service oriented methods of network marketing.
And that’s where the important second aspect of network marketing’s “higher price” comes in: the added value which you as a “distributor” add to the specialty products you sell.
Added Value Added
Network marketing and direct sales representatives add significant value to the product they sell and they are well paid when they do so successfully.
We reach consumers with the awareness of new products and services that ads and merchandising–no matter how persuasive or promiscuous–would not be able to reach out and touch. And by virtue of our one-on-one, personal relationship with these buyers, we appeal to them with a level of trust and service no mass-market, retail product advertiser could hope to compete with.
The extraordinary level of service Network Marketers provide is not available when buying through mail order or retail outlets. It is a real and tangible benefit, part of the product’s value–and its price.
For example: Someone tries a network marketing anti-aging health product. It’s personally presented for them–either in person or via mail–with a host of educational material about the product: scientific studies, article reprints, even books or tapes explaining how the product was made, how to use it, its unique features and its benefits.
Within one to two days, the network marketer again contacts the person to follow up, asking how they are doing, checking to see that their customer is following use directions properly, make recommendations, etceteras. These service calls continue daily, bi-weekly or weekly until the customer is satisfied and happy.
The network marketer will also continue to send informative and educational material such as updates from scientific literature. He or she will also let the customer know about other products the company offers that this particular customer with his or her unique needs and wants might also enjoy.
This is an extraordinary level of service that is a real and tangible benefit for the consumer. This kind of personal and knowledgeable attention is not available when buying through the Internet alone, or mail-order or most all retail outlets. It is one of the things network marketers are paid for and it is part of the product’s value–and its price.
Are there cases where the above education and service are not offered? Of course.
Are there products that do not have special ingredients or qualities that support a higher price? Sure.
And are there times when a network marketed product is simply more expensive to pay for the multiple-level commission structure? Yes.
Back in the early 1950s, a dog grooming service was opened in New York City to serve people living in the exclusive Park Avenue, 70th and 80th Streets area. They charged $25 to shampoo and clip a dog. They had no customers. Then they jacked-up their prices to $250 per visit–and were an instant success. The Cadillac Seville, when first introduced in test-market showrooms priced at under $10,000, bombed; at $14,000 the very same automobile became an instant best-seller.
Value is a perception. The relationship between quality, benefit and price, i.e., value, is in the mind of the consumer-beholder. Businesses price goods and services according to what the market will bear. Successful marketers come up with just the right mix of value-benefit-price.
The majority of network marketing direct sales products are of the genuine higher-quality variety, not available in stores, special in ingredients, design and making.
Most offer the convenience of in-home or on-line ordering and to-the-door delivery. They are also special in terms of…
Marketing and Customer Service
The network marketing “sales person” adds value to the product through his or her education, service and sales to the customer.
All of this has its price. And according to consumer trends and the explosive growth of network marketing direct sales companies and their products worldwide, more and more people every day think it’s worth it.
What’s the truth about the price of products offered through network marketing? Are they too high? And if so, why?
The full answer to this one is complicated. If you need a short one, mine is:
High? Usually, yes.
Too high? Sometimes… yes, but generally no.
So, if they are high, why? Let’s start with looking at what kind of products we’re really talking about here.
The Truth is, Specialty Products Cost More
Network marketing is predominantly a “specialty products” business: The products we sell most often tend not to be the type you’d find in supermarkets, drug stores or any other mass merchandiser. They are not the kind that combines the lowest possible price for the least acceptable level of quality. For a conventional retail parallel, look at the products in a natural or health food store, beauty salon, boutique or upscale department store.
Specialty products cost more to make. The ingredients are unique and high quality and production is low quantity–the amounts manufactured usually are not great enough to take advantage of the economies of scale enjoyed by big-time, high-volume, mass-market producers. So these products more expensive–both to make and to buy.
Also, specialty product makers usually cannot depend on major advertising to increase sales: they don’t have that kind of money. So they have to use more expensive forms of distribution, such as small, individual retail outlets whose profit margins are higher than mass-market stores and chains.
Profit Margins and Markups
Here’s an example: a discount chain drug store might be able to markup a bottle of vitamins that normally sells for $3.00 wholesale for less than the normal 33 percent retail profit margin. And, because they buy in large volumes, they’ll get the product for less than $3.00 to begin with.
A natural or health food store might buy that same product at the full $3.00 wholesale price, and use a markup of 50 percent to get their full 33.3 percent retail profit margin.
To the consumer, buying at retail, here’s the difference: $3.99 at the drug store and $4.50 at the health food store.
And then there’s “what the traffic will bear.”
There are sexy boxes of imported chocolate that go for $38.00 each, and poly-bags of 50 mini Reeses Peanut Butter Cups you can get for less than $3.80. If your taste tends towards expensive, you’ll generally pay more–in “margin” percentages to middle-people and in total dollars.
Let’s look at a comparison of one single product offered through the conventional manufacturer-to-retailer distribution system and the exact same product sold through network marketing.
$$$ From Conventional Manufacturer to Consumer
We know specialty products cost more to make; again, the ingredients are unique and high quality, and the production is low quantity, so they are simply more expensive.
Manufacturers speak of “Cost of Goods” (CoG): that’s the figure that a product costs the company to make, including overhead, ingredients, packaging and labeling, sales commissions (such as broker’s fees), etc.
The very minimum a manufacturer needs to sell that product for is double, or a 50 percent margin. Considering that most competitive businesses operate on a six percent pre-tax profit, that leaves them 44 percent to pay for everything else. So, the $2.00 CoG product they make, they sell for $4.00.
Now, some manufacturers sell direct to retailers–not many, but a few do, and when they do, they’ll take a higher profit margin to pay for the Cost of Sales (CoS).
However, most manufacturing companies deal through distributors, who charge for warehousing, shipping and selling the products to retail stores. Normal wholesale is a 25 percent markup, which you get by multiplying the purchase price–plus freight if not included–by 1.33. So, our $4.00 item would be sold by a wholesale-distributor to the retailer for $5.32. (Again, plus or not freight costs which can run 10 to 15 percent additional.)
To achieve a 33.3 percent profit margin, the retailer has a 50 percent mark-up–or higher. Our $5.32 product ends up on the shelf at $7.98.
Now, this is the minimum scenario–not what normally happens except in the more strongly competitive markets. It’s not the least bit unusual to find the manufacturer selling that $2.00 CoG product for $5.00 or $6.00… the distributor working on 35 percent instead of 25 percent… and a retailer – especially from a specialty market segment–look for a 50 percent profit (i.e., a 100 percent markup), instead of “only” one third.
And if all of that were true, the retail price of the product through that sales and distribution system would be more like $14.95.
$$$ In Network Marketing Direct Sales
Let’s work this one backwards (because that’s how most of the numbers are figured for your commissions).
If the networking company’s product sells to consumers for $15.00 it will have an average retail commission to the networker of from 20 percent to 40 percent. So, using a 30 percent retail commission, the company’s “wholesale” price to the mlm distributor will be about $10.50.
Let’s say that your company pays out a full 50 percent in “downline” or organizational commissions. That means that the company’s lowest from-the-warehouse price for the product would be half of wholesale, or $5.25.
That’s right in the ballpark for specialty manufacturing, distribution and sales.
It’s a Question of Value
There is also a greater value, beyond the “specialty products” issues of ingredient quality, cost of manufacture and so forth and that’s the education, information and service delivered by the person-to-person distribution network.
Learning the product’s proper use, additional uses, history, all about the ingredients, etceteras, is all part of its value. And products offered through word-of-mouth network marketing have more of this “added value” than any others.
This last point begs the question:
“Are products purchased through network marketing higher priced to make up for the compensation or commission payments to distributors and their networks?”
Can they be? Yes.
Are they… usually? No and Yes.
In an authentic, intelligent, sincere and sensible network marketing direct sales company, one that’s well-managed and directed… a company that understands that the financial health and well-being of the men and women in the field MUST lead their mission, decisions, strategy, policies and procedures… no.
But that new ostentatious corporate headquarters in the prestige location… corporate jet… an army of “distributor service” personnel… rock concert “conventions”… $50,000 “big name” keynote speakers… resort vacations and incentive cruses to exotic locations paid for by the company… luxury car allowances… are all expenses that need to be paid for. Where does that money come from?
Directly (in terms of potential commissions that will not be paid out to people) or indirectly (in over-priced products and/or inflated charges for marketing materials, self-replicating websites, business building tools and trainings), the money comes from only one place… the men and women in the field.
“So… do network marketed products cost more?” Sometimes yes and other times no.
Can they be more expensive than similar items of equal value offered in a conventional market such as a retail store? Yes, they can.
In fact, you can find numerous examples of both conventionally retailed products and networking products of similar sizes, shapes and qualities at prices that vary by as much as 30 to 40 percent or more.
The only sure rule in product pricing the world over is, “What the traffic will bear…” No matter what distribution and sales route the product travels. It’s not so much a game of “Let the Buyer Beware,” as it is and always will be…
“Let the Buyer Be Aware.”
Factor in the at-home shopping convenience… the customer service… the satisfaction guarantee… personal attention… education and information–and in today’s increasingly competitive global marketplace, the “aggressive pricing” posture being taken by more and more networking companies around the world–along with the generally superior quality of the products available through network marketing and direct sales…
… and I believe a growing number quality-conscious consumers will agree with me, top network marketing company’s products represent outstanding value.
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Source by John Milton Fogg
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