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Economics of Multilevel Marketing
THE ECONOMICS OF MLM
The nature of Multi-Level marketing capitalizes on the economic fears and insecurity of the human spirit. It leads distributors into believing they can be delivered from the perils of downsizing, debt, and global competition by using the newest compensation plan, lead-generation processes and a revolutionary product that has no competition in the world. We will examine the relationship between low cost entrepreneurship and economics. Including the red flags of MLM compensation plans, why they benefit the founders and not the front line distributor, lastly we will dive into the relationship of supply, demand and competition for the “patented products”.
When the economy is strong consumers become complacent and typically build larger amounts of debt due to a secure feeling of economic well being.
History shows us that when economic recessions occur (historically approximately every 8 years and last on average 18-24 months). Those who are proactive move to finding alternative sources of income to cover the rising cost of debt, interest rates, and insecure job prospects. Baby boomers also contribute to this trend with the realization that they have under-funded their retirement with respect to inflationary costs of day-to-day living.
With this said, it is a compelling argument that consumers are looking for the best quality product at the best prices. Recessions have a profound effect on people. The feelings of scarcity or economic insecurity cause people to search for business opportunities and alternative sources of income. MLM companies work hard to convince the potential distributor that they can start a home-based business without spending large amounts of money. That is one aspect what attracts new distributors? Others aspects are home-based business, tax incentives, being your own boss, no physical plant or retail storefronts, warehousing, employees, advertising, or other costs typically associated with running a business. Such an organization can be built from one’s own home without the expenses and complications typically associated with other types of businesses. MLM offers distributors not only financial independence with minimal investment, but a level playing field in which anyone can participate, regardless of sex, age, education, or financial resources. Other advantages include the social benefits and recognition. The new distributor is suddenly surrounded by a personal support network (A veritable fraternity that is interested in them and their success) to help build their very own business. The new distributor is also backed by a company that is touted as debt free solid track record, years of double digit growth, a research and development budget the size of Zimbabwe’s GDP. MLM sell the opportunity, piece of mind and ease of success to trusting individuals. These “debt free” privately owned companies will provide the products and infrastructure necessary for success. It sounds like network marketing is the ultimate “recession-proof” answer to your financial life!
Unfortunately, the economics of network marketing are changing. The cost incurred to market and sign up one distributor is increasing at the same time the actual return and return on Life Time Value (LTV) is decreasing. Let’s analyze the math. You enroll five investors and each investor just has to enroll five more each. This is what is called a 5×5 Matrix. This will equal 3950 people in your “Organization” Let’s assume and conservative return on investment of $1 from each distributor per month. Your earnings would be $3950, sounds easy. What you are not told is 1) that if you just carry this down 12 levels you exceed the population of the earth, and 2) The industry posts a 99% failure rate. Therefore the real role of a distributor is in essence a recruiter. Recruiting networks are classified as Ponzi schemes and are illegal in the USA
In 1996 the industry boasted approx 6.1 million distributors, one year later it was 6.5 Million. A 6.6% increase in distributors sounds great. However, the number of companies went from 200 to 350 in 1997, a 75% increase in competition for distributors. The net result was an average down line decline of 39%. It gets worse. Industry consultants agree the average number of investors / distributors needed to break even is 4,000. Factor in the failure rate of 99% and suddenly the average company needs 400,000 new distributors annually to maintain a constant break even point. That is assuming there would be no new companies entering the market. Between 1996 and 1997 the industry needed 1.6 million new investors/distributors to maintain break even maintaining the 4000 member down line. This assumption is based upon the number of companies remaining constant at 1997 levels. However there are now over 2100 companies.
The red flags of compensation plans
The pyramid concept in MLM is seen in multiple layers of distributors, with lower level distributors contributing income to an “up line” who have little to do with a given sale. MLM companies also structure compensation plans to pay commissions upwards 5-10 levels above the original sale. This is a much different structure from typical retail scenario in which a retailer may get two or three times the return per sale with maybe only 1-2 levels of commissions paid to manufacturer reps, and managers. MLM and up line distributors may get as much or more on a return per sale (in commissions and bonuses) as the distributor who actually sold the product.
Because MLM compensation systems reward front line distributors only a small commission (usually less than 10%) on the sales of a product. Discounted pricing on products to stay competitive in perspective industries simply cannot occur due to the top heavy compensation systems. The truth is that MLM companies in order to keep successful distributors happy constantly cannibalize their competitive edge for the sake of bigger bonuses and commissions to sell the future. Recruiting to gain income from new down line distributors now becomes the vital activity to earning a significant living.
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#Economics #Multilevel #Marketing