One of the important decisions you will need to make for your new direct selling company is how to set prices for sales to your independent representatives and their customers. In this article, we’ll talk about options and provide you with some wisdom to help you in making your pricing decisions.
If yours is a party plan company, you will definitely want to have at least two or more price levels. The first price level will be for your independent representatives. The other price levels will be applicable to customers.
You can choose to have just one customer price level, or you can have more than one if you decide to offer a lower price on autoship orders placed by customers, if you offer them. In this case, you may have a customer “retail” price as well as a second customer price you might call “preferred customer” price or something similar.
The difference between customer retail price and independent representative price is “retail profit.” Retail profit is the reward earned for selling products or services. Most party plan representatives earn the majority of their income from retail profit, so retail profit is important.
The percentage of retail profit you offer should be set with consideration for your company’s average party retail sales. The higher your average party retail sales, the lower this retail profit percentage can be. Likewise, the lower your average party retail sales, the higher the retail profit percentage should be. Most party plan companies set their base retail profit percentage between 15% and 30%.
In your compensation plan, you will need to decide whether the retail profit earned on orders placed with your company by customers will be identical to the retail profit earned by the representative if she bought an item and sold it to her customer at the retail price.
To encourage placement of orders by customers directly with your company, we recommend that you pay the full retail profit, or if you don’t, that you charge a minimal fee (perhaps $1 per order) for processing of the order. If you reduce the percentage of retail profit paid, you will discourage representatives from even offering this option to their customers which is bad for your business.
Network marketing companies can decide whether to set a higher price for customers than for independent representatives. This is not required.
If you do have published retail prices, make sure that these retail customer prices are real. Real prices are prices that people will pay for your products or services.
If it’s possible for you to have real retail prices and you want them, be careful on how you calculate the retail profit percentage. Be aware that (a) your retail profit percentage, (b) the average retail value of a customer order, (c) the fees your charge for your starter kits, (d) the value of the products in your kits, and (e) the number of months for break even together will impact how often customers enroll as independent representatives just to save money.
I used to say that there is nothing wrong with customers joining as reps to save money, as long as that is what you want, but that is no longer true as a result of FTC actions in 2015 and 2016 against network marketing companies Vemma and Herbalife.
Be aware that your pricing decisions have ripple effects. If you need help in this area of your business, contact Sylvina Consulting at 503.244.8787.
If your margins are low, the prices you set for independent representatives may be so high that you feel you can’t charge more than these prices to anyone, because customers won’t pay more than the prices you’ve set for your independent representatives. In this case, we recommend that the prices you charge are the same for both your independent representatives and their customers.
No Retail Profit?
If the prices you charge to independent representatives are identical to those charged to customers, there will be no retail profit. This is OK as long as you compensate your reps in other ways on customer sales.
Here are the other ways. In your multilevel compensation plan, use one or as many as you’d like.
- Pay representatives identically on customer orders as you would pay them on level one sales to independent representatives.
- Pay representatives a rebate on volume in excess of a minimum. This approach will reward “customer getters.”
- Create a pool that is funded by a percentage of all sales to customers. Share the pool among top enrollers of customers. Publish a minimum customer sales volume each pay period to participate in this revenue pool.
However you proceed, make sure the providers of your MLM software understand the requirements created by your pricing decisions.
What matters first and most when you set your prices is that the market perceives the products or services your company offers are a good value for the money. Having been an MLM consultant for 28 years, I agree that value is in the eye of the purchaser.