Here is an excerpt from our recent Q & A with a valued friend who serves in an MLM consulting role. As a result of our work in and around hundreds of active, high-growth MLM and Party Plan companies, we have been fortunate to learn about MLM distributor retention, which is very much at the core of our MLM consulting work.
Question: As the recipient of the DSA 2009 Partnership Award for your work in distributor service and retention, what information do you have about distributor drop-off rates or retention in their first 90-100 days?
Answer: We have done a lot of research over the years, and have been very fortunate to work on the inside with some great companies. In the journey, we have gained both our own insights based on some thorough studies, some funded by our clients and two that we did independently. In addition, I have studied some of the work by the Wirthlin Group, and I am a big fan of a book called “The Loyalty Effect” by Frederick Reicheld. In it, he established that a 5% increase in retention can yield from 25% to 100% increase in profits. His thesis and proof has provided a substantial basis for my own work.
The simple conclusion that we have reached, working with just over 300 companies since 1988, is that there is a very reliable trend and algorithm of retention patterns. They are distinctly different for MLM companies as opposed to Party Plan companies. MLM companies experience, in general, an 80% annual attrition. We have learned a distinct outcome in our MLM consulting work that this means that if 100 people join in January, 20% remain in December. Of course, there are deviations from this norm, where we have seen as much as 80% annual retention, just the inverse; but the deviations are quite rare.
Party Plan companies experience, in general, a 60% annual attrition, with 40% remaining in the end of the first year.
At ServiceQuest we have employed a simple metric that we call an “Entering Class Report,” named for the idea that we track a group of new distributors or consultants in a given period (usually a calendar month) and track their behaviors in each of the subsequent months. The behaviors are basically reordering, remaining on autoship, and/or enrolling at least one new person. The most popular is the reordering metric. In this process, we learned that of those who drop out in the first year, 50% are gone in the first 13 weeks. We have called this the “13-week rule,” and learned that John Fleming (formerly VP North American Sales for AVON, now editor at the Direct Selling News) had worked with this concept for many years. He taught that they (at AVON) knew they had 13 weeks to get a new representative ready for the period that followed their arrival. The basic idea was that a new rep would work through her entire warm list in that short period, and if she hadn’t been trained how to prospect business beyond her warm market, she would fizzle out at about 13 weeks. That was one interpretation of the reason behind, and a significant solution to, their 13-week rule.
In graphing the retention trends for companies, the shape is typically a hockey stick on its back. The early drop comes in the first 90 days, then it really levels off after the first year; regardless of where it lands at the end of the first year, it only drops a few points in subsequent years. Thus, if a company figures out how to impact the declines that occur in the first 13 weeks, the resulting gap is significant over time (in favor of the company’s profits) and proves out the 5% rule introduced above.
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