“Cost multiple” has been a very popular concept in direct selling. For those who are not that familiar with this concept, it is a numerical value showing how much retail sales is to be achieved with “one unit” of product cost.
Direct selling consultant Dan Murphy says in his article The Implications of a Trade War with China on the Direct Selling Industry, “A typical direct selling company in the US markets its products with between 6 to 9 times cost multiple. This cost multiple can be explained in simple math that if a company purchases an item for $10 they charge the end consumer between $60 to $90 dollars for that item. This markup is necessary to support a lucrative compensation plan (usually paying between 40 to 50 percent of each sales dollar) to those that are selling the products, as well as the overhead to manage the business.“
Traditionally, the cost multiple has been one of the first things that entrepreneurs and investors look at when investing in a network marketing business.
Symbols: AVP= Avon, HLF = Herbalife, MTEX = Mannatech, NATU3= Natura, NATR = Nature’s Sunshine, NHTC = NHT Global, NUS = Nu Skin, ORI = Oriflame, TUP = Tupperware, USNA = USANA, YGYI = Youngevity
This analysis above shows cost multiples from a wholesale revenue perspective, though.
For one thing, we only have reliable, public figures of companies’ wholesale revenues.
Secondly, in many countries, direct selling companies cannot impose the prices that individual direct sellers will sell at. They can only “recommend” them.
Thirdly, direct sellers choose either to sell the products at cost or even give them for free to start a relationship with the customer that could end up with recruiting that person.
Last but not least, we know that in most larger direct selling companies, there is a huge crowd who sign up as distributors merely to be able to purchase the products they like at discounted prices.
This is a controversial issue, on the other hand. The industry has been criticized for a long time for using high mark ups to be able to offer higher commissions to network marketers.
Hakki Ozmorali is the Principal of WDS Consultancy, a management consulting firm in Canada specialized in providing services to direct selling firms. WDS Consultancy is a proud Supplier Member of the Canada DSA. It is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.