Evaluating a Network Marketing Opportunity

Last night my wife and I attended a presentation for a multi-level marketing business. I don't have the heartburn many folks have about a multi-level marketing business model that many folks have, but I'm not anxious to get involved with one either. This particular company, called ACN, (if you want to join, contact me directly and I will hook you up with my friend... May as well help her out here if I can) markets telecommunication products like telephone, cellular, Internet, and small aperature satellite TV that it bundles from other vendors. It also offers a "gee whiz" technology product in the form of a video phone. ACN even has Donald Trump as its video spokesperson.

So how does one evaluate the "opportunity" offered by this company?

As anyone who has ever attended a multi-level marketing presentation should have figured out, the presentation is based on selling the lifestyle that comes from doing this business successfully. Using assumed numbers, the presenter will show how building an organization can leverage your time and build a substantial residual income. In the case of the presentation we saw last night, the assumptions were: Average customer's local and long-distance bill of $38/month, an "up to" 10% commission" on 20 customers, and a downline organization of 8 levels with each level being the square of the preceding level (1,2,4,8,16,32,63,128 for a total of 255 people below the "Qualified Team Trainer," each with 20 customers). Using these assumptions, the presenter forecast a monthly income of $11,000.00/month. And, of course, the presenter then infers that this income is perpetual without any further work on your part; you are assumed to go on vacation for the rest of your life, and the business is willed to your heirs, who never have to work a day in their lives.

And, of course, the cost to join the club is kept until the very end. (A sales technique that uses building value by discussing "benefits" before cost). In ACN's case, the initial cost is $499.00, with an annual renewal of $149.00. One of the lures, which is also a significant drawback to network marketing, is that it appears to be a low entry cost business with high earning potential. Unfortunately, this low cost can have negative side effects: people don't consider the initial cost as an investment and over look it while salivating over the benifits of the lifestyle they are being sold; and the low cost of buying the franchise often results in a minimal level of committment, which inevitably results in failure. (Contrast this with the hundreds of thousands or millions of dollars to purchase a fast food or other franchise: these franchise owners do their homework, master the system, and work hard to make their business work using the franchise system. They have to, because they are usually heavily leveraged and can't afford to fail.)

There is a serious bit of information missing from these presentations regarding the amount of work that is necessary to make this business work, and the amount of time necessary to build the business to a point where it will pay the rent. At best, this information is downplayed in all network marketing presentations, and this flaw, in my mind, makes all of these presentations suspect. And I get especially suspicious when someone tries to tell me that network marketing isn't "sales." It most certainly is sales, but in this case it isn't selling ACN's product, but selling other people on the "lifestyle" that allegedly comes from selling ... the "lifestyle." The actual products become an afterthought. (Although there is a legal requirement that there be genuine products and that the parent business's primary focus be on selling products.) You are encouraged to buy the products through "loyalty" to your own business.

Is this business model evil? No, I don't think so, but I'm not jumping at the lure either. There are a lot of people doing it, and its variations, and have been for a very long time. Many have become very successful doing it. So how do you evaluate this kind of business and decide whether or not to get involved?

First, you have to separate the facts from the hype. Yes, everyone uses soap, but not everyone uses premium soap, and not everyone uses enough soap to justify buying the minimum (to borrow a phrase from Amway). Research the market. Is there a solid market for the product you'd be offering, or would you be selling "lifestyle." Do you know enough about this market and product to be credible? Do you have access to enough of this market that you can sell the product? Can you justify purchasing the product for your own use? At the quantities recommended to sustain your own business? Is the product really price competitive? Are there bars to entry that would kill your sales, like customers that need to allow their existing service contracts to expire before doing business with you? Are there market risks that could kill this business (think Betamax vs. VHS; Macintosh vs. IBM PC; or Dot.com bust)

Second, recognize that there will be work involved, whether you are selling the products or the lifestyle. The amount of work you will have to do will depend on how fast you want to build the business and how good you are at selling the product or lifestyle. You should consider that you will only capture a small percentage of your existing "natural market," and you should be prepared to continue on with cold sales. How much of this work are you really willing to do? How much time can you devote to it?

Third, build a pro forma set of financial statements based on realistic estimates of what you think you will do with your business. Ask what costs there will be, such as admission to training events, motivational or training tapes and videos, gas and maintenance costs for your car, costs for the paper goods you will use (order forms, contracts, etc.), initial licensing costs, etc. This represents your investment in the business. Then project realistic estimates of earnings based on how quickly you can build your business. I would recommend building two sets of these pro-forma financials: one that uses the goals your sponsor in the organization wants you to reach (and which you should try try if you do join) and one that is based on only hitting about half of those goals (or less...). Ask the question, "When will I get my initial investment back?" If that date is farther out than you want it to be, do a third set and figure out the amount of effort necessary to recover your investment in a time period of your choosing.

For example, using the $499 initial start-up cost for ACN, and the 10% commission figure, and the $38/month figure, you would have to enroll one new customer per month for 15 months before you will have recovered your original $499 investment. At that rate, after two years of building the business, your income will still be less than $100/month based on your own customer base, and still pretty negligible from down line. At two customers per month, the investment will be recovered in 11 months, and the two year income level still be just over $200/month. You can project earnings from downline, but I would suggest caution in doing so; most of the new "representatives" you enroll will fall away without adding anyone else to your business, and the commission rates (for ACN at least) don't return significant revenue until you start to get several layers deep. Of course there are bonuses, etc., but in evaluating the business, you should examine the minimums and middle of the road in making a decision, then once you've opted in, strive for the maximums.

Once you've done those projections, decided if the return on investment is really enough to justify the cost in both dollars, effort and time. If it is, then go for it, and good luck!

If you do decide to take this path, there are a number of books available on the subject of network or multilevel marketing. Here is a partial list available on Amazon:

• The Ultimate Guide to Network Marketing: 37 Top Network Marketing Income-Earners Share Their Most Preciously Guarded Secrets to Building Extreme Wealth
• Your First Year in Network Marketing: Overcome Your Fears, Experience Success, and Achieve Your Dreams!
• How to Sell Network Marketing Without Fear, Anxiety or Losing Your Friends! (Selling from the Soul. Ancient Wisdoms. Modern Practice)
• The New Professionals: The Rise of Network Marketing As the Next Major Profession
  
  

Of course, if you do join in a network or multi-level marketing business, get involved with their training progrmas and follow their proven systems. These systems are built around the success of those that have blazed the trail ahead of you, and are designed to be duplicatable by almost anyone.

More on the Nvidia Paper Trade

Mara and I have let the paper trade of Nvidia stock run, with a trailing stop that stays $0.50/share above the lowest price. The lowest it reached was $7.31, which put the stop at $7.81/share. On Friday, the stock opened at $7.85, which would have triggered the automatic buy order on the stop and taken us out of our position. Since we bought the stock at $8.50, our net was $0.99/per share or $990 on the trade. Not bad, all things considered.

Nevertheless, Amy and I have decided that we're going to invest in our bookstore and affliliate marketing businesses instead of the stock market. Perhaps we'll come back to stocks when we have more than $7000 available.

Selling books on Half.com

One of the business ideas Amy and I are working with is selling books on Half.com. We've listed over 125 books so far, and we've actually sold four of them. Using the Half.com multiple item listing data entry page, Amy and I were able to add about 70 books to our store on Friday. Based on that number, I did some pro-forma projections based on selling 50 books per day, five days per week.

These projections are based on some critical assumptions, the foremost of which is that we can actually sell 50 books per day. It also assumes that we can purchase our inventory for less than $1/each, sell them for $4/each and count on the half.com shipping allowance, which is about $3/each, to cover the shipping expense. Third, it assumes that we can find shipping supplies that will allow us to ship for less than $0.80/ea.

But with these numbers, we can clear about $17,000 per year. Acceptable, but not gonna make us rich. So I set out to refine the plan. The first thing I looke at is the shipping materials cost. Rule number one: Never purchase shipping supplies from Office Depot! By choosing other vendors and purchasing in bulk, the shipping costs went down to $0.40/shipment. That's much better! I think we can make some money here...

Now, the next trick is to build sales to 50 units per day. Then we'll need to find a way to break the 50/day limit and find someplace to put the inventory.

Three Day "Stock Success Course" ROI

The other day I wrote a not-very-favorable review of the Rich Dad's Education Stock Success Course. I stand by what I said, and I'm still not going to pay for the advanced courses, but I thought I would report on the results I've obtained with what Amy and I learned in the three day course. Per the instruction we received, we're "paper trading" for the first two weeks, which is too bad, because I would love to have actually made these returns.

While I was searching for a stock to "invest" in, my daughter Mara asked me what I was doing, so I started to explain the candlestick chart, the Stochastic chart and the MACD chart to her. We looked through several of the stocks listed on the top and bottom 100 fundamentals in the "Edutrader" software. Nvidia corporation, a manufacturer of video hardware for computers and video games was listed on the top 100 with a fairly strong score, but when we looked at the technical analysis charts, the Stochastic was sending a clear sell signal, and the MACD was sending a soft sell signal. The candlestick indicated that the stock was near resistance levels and likely to fall. So Mara and I decided to "short" sell it.

Our strategy was to sell 1000 shares at $8.50/share. The stock was trading about 8.70 at the time and we thought this would give us a market confirmation that the stock was going down. We set our stop-limit originally at $9.50/share. This limited our losses to $1/share or a maximum of $1000. We later narrowed this to $9/share. We forecast that the stock could go as low as $5.50 per share, which is the prior support level. If it goes that low, our investment will return $3,000. With the narrower stop, this is a risk return ratio of 1:6.

We enetered the position last Thursday. Today NVDA closed at $7.51, or $0.99/share down from where we entered. If we were to buy the stock today, we'd have a $990 profit, but the signals don't indicate that the trend will change any time soon, so we're hanging out in this position for a while longer. If we'd put actual money into this trade, we'd have paid for the three day stock course almost twice over with these returns. So, the three day course was worth the $499 we paid for it.

Good Grades not predictor of Economic Success

This week I'm reading The Millionaire Mind by Dr. Thomas Stanley, Ph.D. Stanley surveyed 733 "millionaires" (what he calls "Balance Sheet Affluent" or people with a net worth of > $1,000,000). I'm only a couple of chapters in so far, but a lot of what he reports was rather eye-opening. One of his key findings is that most millionaires, other than those that made their money as attorneys or physicians, weren't particularly stellar in school (either college or in high school.) According to Stanley, most millionaire don't attribute their success to having high IQ, being near the top of their classes, or to having attended a prestigous university. Although some of the linkages seem somewhat anecdotal, Stanley seems to be saying that academic success, as measured by grades and achievement tests is not a significant predictor of economic success.

Instead, the attribute their success to: choosing the right vocation or niche, integrity (hmmm), tenacity and leadership ability.

As I've read through this material, I've pondered some of the things I've read in Kiyosaki's books, especially Rich Kid, Smart Kid, as well as Oliver van de Mille's A Thomas Jefferson Education and Gatto's Dumbing us Down. All four of these authors reach the conclusion that our public and post-secondary education system is geared to produce factory workers or self-employed specialists, but that the system does not produce leaders or provide a solid education in financial literacy.

As an education reform activist, I'm beginning to wonder if the attempts to reform the system are falling victim to the same myths that brought the system to its current pass. It appears that analytical intelligence just isn't what its cracked up to be.

Kinda makes me feel like I got cheated...

Stock Success Course

Monday, Tuesday and Wednesday of this last week, Amy and I attended a three day "Stock Success System" training seminar put on by Rich Dad Education. The seminar cost us about $500, and came with "Edutrader" software. On a scale of one to ten, I'd give this course about a 4.

Here's the run down on the course: First we received an invitation to attend a "free" one evening seminar at the South Town Expo Center. Included as a promotional give away was a flash drive with valuable information already installed. The valuable information was a video presentation by Robert Kiyosaki. In the one evening free course, we were introduced to the concept of the MACD chart and shown how an astute trader could have made about 15% over the course of a year trading a fairly stable stock. We were also shown one options trading strategy called a "covered call" that promised great results without much risk.

But of course, we were not given enough information to actually go out and make any of the trades they showed us that night, because that was the bait to get us to sign up for the three day course and pay our $500. Amy and I both felt that the three day course would be a great educational investment and signed up. We were given this really nice yellow bag with the Rich Dad's Education logo screened onto the side, with the software and a very thin booklet inside, as well as the contract and other paperwork.

The first sign of trouble came when I installed the software. We had signed up for the course in my name; my name was on the "buyer" line of the contract, and my signature was on the bottom. My name was encoded into the user name for the software. And so on. But we used Amy's credit card to pay for the software. When I logged on to the website to takecare of license agreements, and so forth, there were four different sets of agreements I was supposed to read and agree to. Since this involved significant financial transactions, I read through all of them. One of the agreements required me to certify that I was a non-professional and that I would use the software for my personal investing and not to advise others. Not a problem for me, so I checked the non-professional status boxes and continued through the agreements.

When I got all the way to the bottom and the digital signature, it was Amy's name instead of mine. But Amy is a registered Securities Representative with a Series 7 and Series 66 licensure with FINRA. She could not accept the license agreement as a non-professional. When I called support, they told me I'd have to have Amy execute a "transfer of ownership" to move the software into my name. They'd email the form right over. Well, the form they emailed required both Amy and I to sign before a notary, have the document notarized and then send it back. (It was also partially greeked in transit when they tried to convert a RTF document to HTML in email, but that was only a minor annoyance.) Over the run up to the beginning of the course, I talked with two people in support one supervisor, and emailed another. By the time the course started, we still didn't have the software installed and operational. Major loss of Customer Service points on this.

The "success coaches" that were staffing the three day course took immediate care of the problem and had everything fixed by lunch on the first day (except it still came up with Amy's name that night when we finally installed the software...) The course got off to a great start. The instructor, Scott Stewart, did an excellent job of showing us how to examine the fundamentals of a stock and to predict a stock's movement using the MACD-Histogram, the Stochastic plot, and a Candlestick chart. He also showed us how to indentify trending by using the 15, 50 and 200 day moving averages for the stock, went into a great deal of detail on how to identify support and resisitance for a given stock. He also covered short selling, Stop-Loss orders, and margin accounts I felt very comfortable trading stocks. Then he introduced us to options. he showed us a few simple strategies, and demonstrated how they could make money. Since I expected more detail in the remaining two days of the course, I again felt comfortable.

I didn't have any problem with him mentioning the advanced courses offered by Rich Dad Education, and in fact, Amy and I were planning to take the first course by the time the day was over. All in all, Day 1 was a good presentation and very informative.

Day 2 started out strong, with demonstrations of more options strategies, and how to determine win/loss ratios and Risk/Reward percentages in straight trades and option trades.

The first red flag went up during a break. I asked Scott what the win/loss percentage was on a particular strategy, and his answer was, "It depends on what standard deviation you use." That answer didn't make any sense mathematically, since the standard deviation would describe how closely results would cluster around the mean, but would not describe the mean, which would have been the answer to my question. I let that slide by... He's an options trader, not a mathematician.

The second, and most damaging red flag went up right after lunch when the entire class was playing Cash Flow 101. I will detail this board game in more detail in a later post, but it is an investing game designed teach investing and financial intelligence. One of the players at our table drew a card that allowed him to get into an investment that was beyond his means that provided negative cash flow, but promised high returns on equity. One of the "Success Coaches" coached him to use leverage to get into the investment. The leverage he needed was enough to bankrupt him if he couldn't get back out quickly. At first I thought the coach was using this as an object lesson in proper use of leverage, and was left scratching my head when he allowed, even encouraged the player to make this risky move. Kiyosaki would have characterized the "investment" and purchasing a liability and thinking it was an asset.

A few minutes later, this same coach convinced another player at our table to "over borrow" to purchase a stock that would put him at a negative overall cash flow (it would have taken all of his other cash flow and then some to make the loan payments on the position he took). The "strategy" was to make the loan payments from the extra cash borrowed in the transaction (a loan at 10% interest). In order for him to get out of the position, it would have been necessary for his stock to triple in value within five payment cycles. If he had to make a sixth loan payment, he would be bankrupt and out of the game. Although it wasn't impossible for him to survive, it was highly improbable. When the player did, in fact, run out of cash, the coach told him to borrow still more money to stay in the game.

Needless to say, I started asking myself if I really wanted to have these folks as investment advisors.

As the rest of Day 2 wore on, I began to notice that we were being shown a lot of strategies, with promises of high returns, but we weren't being given enough information to actually make the trades. Instead we were being subjected to a lot of "encouragement" to take the advanced courses (six of them at $5,000 a pop). We were also not being shown the Win/Loss percentages on these trades. (Say that a trade is capable of making a 20% return in one months, but only one out of 4 trades is successful. My actual rate of return on all of my capital is only 5%/month. Not shabby, but not the kinds of numbers Scott was showing us.) By the end of Day 2, I felt like I was in a very long infomercial that I'd paid $500 to watch.

Amy and I did some talking and figuring on the way home that night and decided not to take the advanced courses right away, and we were wondering if perhaps it would be better to get our financial education from another source. Especially since they were suggesting that we finance the courses/packages. (Leveraging an investment in our education, encouraged by the same folks I'd just seen coach two Cash Flow 101 players in to bankruptcy.... hmmm)

Amy stayed home from Day 3, but I wanted to get more information on picking a brokerage. I was a little disappointed there, but still got some good information. During Day 3, they introduced the package deal for the advanced courses, and offered a discount to anyone signing up that day.

Artificial urgency! Anytime someone tries to sell me a large ticket item using this tactic, my first question is why? If this is such a great deal, why can't I sleep on it for a couple of days? Or are you afraid that if you let me think it over and run the numbers, I'll realize that it isn't a good deal after all. Since Amy and I had already made our decision, I took advantage of the time to run some income statement comparisons.

Amy and I have about $8,000 we can invest, with another $5-6,000 coming about February. My earlier projections indicated that we could expect to make about 35%/year swing trading. Scott's presentation said we should be able to make about 5%/month, or about 60%/year (yes, I know that it works out to 79%, but Scott just multiplied, so I'll do the same).

Not taking the course:
Invest $8,000 with a 35% annual return, returns $2,800, for a total capital at the end of the year of $10,800.

Taking one advanced course and paying cash for it:
Pay $5,000 for course, leaves $3,000 to invest
Invest $3,000 with a potential of 60%, returns $1,800 for a total capital at end of year of $4,800.

Obviously compounding the 60% return over a longer period would eventually overtake the 35%, but the real question is whether or not I can acquire the financial education necessary to obtain the 60% results for a smaller investment than the $5,000 within the space of one year. I think I can. And the 60% result is actually based on taking 10 courses, not just one. Financing the courses makes about as much sense as the advice the coach gave to "over borrow" in the cash flow game.

(For anyone interested, for any initial capital greater than $32,000, then the education investment makes sense if the objective is to recover the original investment capital within one year. To calculate the amount of initial capital necessary to make the deal work for other "tuition" amounts, multiple the higher rate of return -- in this case 1.60 -- by the tuition cost -- $5,000 in this case -- and divide by the difference between the rates of return -- 1.60 - 1.35. So, using the package deals they offered at the seminar, the discounted price for all of the advanced classes was $41,485. This would be a good deal for someone looking to invest $265,504 and recover initial capital within one year.)

This three day course was not consistent with the philosophy Robert Kiyosaki develops in his books. I hope that the books represent the real attitude he has toward financial education, and that this experience was merely a fluke.

Industrial Age Education in the Information Age

Kiyosaki's Cash Flow Quadrant concludes with "Seven Steps to Finding Your Financial Fast Track." The first step he recommends is to "mind your own business." Kiyosaki's point is that most of us are minding everyone's business but our own. He points out that the typical "Employee" or "Self Employed" (Kiyosaki's "E" and "S" quadrants) who follows the conventional wisdowm of, "Go to school and get good grades, so you can find a safe, secure job with good pay and excellent benefits," ends up becoming:

1. Employees, making their bosses and owners rich.
2. Debtors, making the banks and money lenders rich.
3. Taxpayers, making the government rich.
4. Consumers, making other businesses rich.

This is actually very consistent with writings by John Taylor Gatto (Dumbing Us Down, The Undergorund History of American Education), who traces the rise of socialized education to the beginning of the Industrial Age, and the need to create a cadre of docile workers educated sufficiently to work in the factories, but not sufficently well educated to move beyond.

Kiyosaki is quick to point out that the models of the Industrial Age are not appropriate to the "Information Age." Those of us that continue to follow the advice and patterns of the Industrial Age will be left behind; those of us that are able to educate ourselves will prosper.

Kiyosaki recommends several action items to complete the first step of "minding your own business" The first is to complete a set of personal financial statements. I won't publish Amy's and mine here, but I will say they aren't pretty.

The second action item is to set financial goals for 5 years out, with milestones at twelve months.

Our twelve month goals:

1. To eliminate half of consumer debt, excluding our mortgage (liabilities) from our financial statement.
2. To generate $2,000 per month in passive income from our assets.

Our five year goals:

1. Generate $5,000/ month positive cash flow from assets (passive income)
2. To have online/brick-and-mortar businesses generating income from affilliate marketing and passive sales, 5 - 7 rental properties either occupied as rentals of under lease-option.

Stay tuned and see how it comes out.