Home Business Glossary
Pyramid Schemes
A business structure involving multiple levels of membership, where the majority of income is a bonus from signing up new members, or where you are required to buy more products than you are likely to sell. Pyramid schemes are illegal in most countries.
Ponzi Schemes
Where payouts to old members are funded by payments from new members.
Franchise
You may have considered buying a franchise. There is an excellent resource at www.franchisebusiness.com.au, with a listing of franchises in Australia, and articles covering areas such as the importance of the operations manual, a system to follow, personality profiles that suit franchises, shop location, competition, rental and wage costs, and marketing.
The benefits of a franchise include a proven track record, lower risk, brand awareness, business support and purchasing power.
However a franchise agreement can also limit your creativity and freedom, work hours and suppliers, and generally has a sizeable startup cost.
Ensure you clarify any restrictions on location, length of the commitment, exclusivity, and performance guarantees, on both your part and the parent company.
Well known franchises incude Gloria Jeans, Coffee Club, Domino's Pizza, Contours fitness, Holy Sheet, McDonalds and more. These would involve a significant financial investment upfront.
Direct Selling
Traditional Direct Selling generally depends on you being comfortable with the idea of personal deliveries, customer contact, and retailing products.
Direct Selling is a business model suited to products that benefit from personal demonstration, or a more detailed explanation that you normally get at a shop.
www.dsaa.asn.au is Australia's Direct Selling Association, and is an excellent resource for standards and governance of Direct Selling companies.
Direct Selling includes party plans, catalogue/door-to-door selling and some forms of network marketing.
The DSAA site lists Party Plans businesses such as Creative Memories scrapbooking, Intimo Lingerie, Tupperware, Mary Kay and Nutrimetics.
The DSAA site also lists Catalogue businesses such as Avon and Homecare.
The DSAA site also lists Networking businesses such as Amway and Herbalife.
Affiliate Selling
Affiliate Selling is based around affiliates earning a commission based on sales they refer to the parent company.
It is a common model for web-based businesses as the product owner only pays when an actual sale takes place.
For the parent company, it saves on marketing costs by utilising a virtual army of websites to send it traffic.
For the affiliate, there is generally no cost to becoming an affiliate for a business. You simply signup, place a link on your website to the parent company, with a special affiliate tracking code added to the link to identify you. When a sale takes place, the parent company calculates the commission. You may need to reach a minimum commission before being paid, by cheque or direct funds transfer.
The hard part for an affiliate is generating traffic to your website. Then presenting your website so that visitors click on the link.
Companies such as commissionmonster.com.au and clixgalore.com.au provide affiliate management software services that tracks and calculate commission earnt by affiliates.
Multi Level Marketing
Many direct selling, franchise and affiliate business use multi-level systems to reward distributors and members for sales.
This means that in addition to benefitting from commission from your own sales, you can earn commission on sales made from people you referred to the parent company, through multiple levels of distributors.
Distributors (also often called associates, independent business owners (IBOs), consultants or agents) are independent, unsalaried representatives, paid by commission and signup bonuses. Commission is based on direct sales by the distributor, and also a percentage of sales from distributors in their downline. MLMs often provide bonuses for achieving large sales. To avoid inventory loading to achieve bonuses, most MLMs follow a 70% rule, requiring you to sell 70% of previously purchased products before purchasing more. This may or may not include personal consumption sales.
MLMs have had a bad reputation, partially resulting from confusion with pyramid schemes, and partially from practices during the 90s, when the emphasis was on:
- treating friends and family as prospective business partners instead of your friends and family
- having to nag people to purchase each month
- having to deliver products in person
- secrecy about business meetings
- overhyped earning potential
- misleading earnings, where income came from motivational sales aids, rather than products
- encouraging inventory loading to qualify for bonuses
- people who got in early, sitting back and doing nothing
- cult-like, isolating behaviour
Many MLMs have tried to overcome these problems. But the stigma remains.
Minimum requirements for an MLM should be the ability to return unsold goods or business materials within a reasonable period of time, strong proven management, and products based on facts, not just the latest natural remedy recently discovered in an obscure part of the world.
Ensure you research the MLM compensation plan to ensure it encourages and rewards ongoing sales activity, and that income is primarily from commission, rather than signing up new members.
CDM
Consumer Direct Marketing is a business model where repeat personal consumption is a core business strategy. Has characteristics in common with MLM, namely earning commission from multiple levels of referrals, however does not have a requirement for retail sales, does not involve deliveries to others nor paperwork for others.