For a direct selling business to be profitable, it must have healthy gross margins.
While margins can be calculated in several ways, at Sylvina Consulting we like to use what we call the “multiplier.” The multiplier is a ratio calculated as the suggested retail price of an item divided by the landed cost of the item to the company.
What You Need To Know
In this video, we will teach you how to calculate your landed cost, how to increase your multiplier (hint: there are two ways), and how to set good pricing strategies.
What Is A Multiplier
Your multiplier is the average number you get when you divide the retail price by your landed cost. For example, if the retail price for an item is $50 and your landed cost is $10, your multiplier would be five ($50 / $10 = 5).
The higher your multiplier, the more you can afford to pay out in-field compensation, and the more you will earn in pre-tax profit.
Sylvina Consulting recommends that network marketing and party plan companies have a multiplier of five or more. Many new companies struggle with this.
It Might Be OK
If your multiplier is less than five, but you know over time when you purchase or manufacture your products in larger quantities, you can get to having a multiplier of five or more, then you will be OK.
Don’t wait until later to find out if a multiplier of five will be possible. The only way to know for sure is to do your research now.
Exceptions
As with most rules, there are exceptions. If your company is selling packaged food mixes or wine, their five is your four or perhaps only three and one-half.
No Real Retail Price
Some direct selling companies encourage retailing of their products by setting fair retail prices that people will pay if they are not interested in the income opportunity. Other direct selling companies set what we call “silly” retail prices that almost no one ever pays while encouraging everyone to join for product discounts. If you do this, too, be careful. You definitely want to have lots of customers who are not representatives of your company.
While we recommend a minimum multiplier of 5 for companies with real retail prices, let’s examine what the minimum multiplier should be if it were to be based on wholesale price.
If a direct selling company’s cost of a product was $20, the retail price with a multiplier of 5 would be $100. The wholesale price, if set to 80% of the retail price, would be $80. The multiplier if expressed applicable to the wholesale price, then would be four, not five.
Conclusion
In our 250-page book Start Here: The Guide To Building And Growing Your Direct Selling Company, in the Products/Services chapter we explain what you should be thinking about as you set the pricing strategies for your network marketing or party plan direct selling company. Did you know our book is available in both English and Spanish?
Jay Leisner, the President of Sylvina Consulting, is a top compensation plan and direct selling expert, a trusted adviser to new and established network marketing and party plan companies. For more than 30 years, Jay has enjoyed assessing and improving network marketing, party plan and referral marketing companies across the globe.
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