Managing Risk in an MLM Business
Risk management in Multi Level Marketing (MLM) based businesses is imperative, considering the unpredictable nature of this business. An MLM is highly dependent on the successful performance of its associates within the network within the network, which makes it more challenging to maintain a consistent performance. The business control is dispersed to a great extent, while the ultimate responsibility remains vested in the business promoters. This makes an MLM more vulnerable to various risks in its internal and external environment.
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Risk of Initial Investment
A legitimate network marketing or MLM business must offer a real product that is sold to the consumers via the network. The business usually involves an initial investment to produce or acquire sufficient inventory that can be distributed to the downline for sales. If the first level of downline fails to perform and build a network, the initial inventory may never get sold off. To manage this risk, the best approach is to test market the product on a small level, and gradually expand the scale of business as the network becomes larger and the market responds positively to the product.
Risk of Poor Performance of the Downline
Risk management in Multi-Level Marketing business is a constant process as far as the downline performance is concerned. The business promoters must introduce programs to keep the downline motivated because the business model is such that there is an over-dependence on the downline performance. At the same time, the promoters must make continuous efforts to add more people at the top layers in order to expand and diversify the downline. Heavy dependence of sales on just a few people can be risky in this business.
Risk of Competition from the Downline
The business model of an MLM is fairly simple and straightforward, and the initial investments are also low. Therefore, the entry barriers to the business are low, and there is a constant risk of a key partner in the network moving away to form his own rival business along with his downline. This risk can be avoided to an extent if the MLM deals in a unique product that is not easy to replicate, and it establishes an exclusive supply contract with the vendors.
Risk of Getting Sued by a Network Associate or Customer
Business control in a network marketing business is highly dissipated. If a network associate or a customer is lured into the business with misleading information or a false representation, he may sue the promoters for fraud. If the product fails to perform as promised, it may also lead to a customer suit. It is important to manage this risk by acquiring an indemnity insurance policy which protects the business against potential costs and losses arising out of lawsuits.
Risk of Operating in Foreign Markets
When choosing a multi level marketing business, many consider operating in different countries. Particularly, online MLM businesses find it easy to run their businesses in international markets. But the advantage of a large world market also comes with the inherent risk of operating in unknown international markets. Legal and tax obligations of each country must be fulfilled if you run an MLM that has an international network. Such MLMs should hire local attorneys in the markets where they operate, in order to ensure they operate in conformance with the local laws. Foreign exchange fluctuation risks may also affect the profitability of an international MLM business. Such fluctuations should be factored into the pricing of the product in order to minimize the risk of exchange rate losses.
"Risk Management in Multi Level Marketing – The three most important risks in MLM – how to avoid them." #Business Risk Management. https://business-risk-management.chailit.com/risk-management-in-multi-level-marketing-the-three-most-important-risks-in-mlm-how-to-avoid-them.html (accessed April 2, 2011).