The False Lure of Multi-Level Marketing

The following is a guest post from Marotta Wealth Management. I've written on the topic of multi-level marketing a few times, namely with Make Money with Multi-Level Marketing and Maybe Starting a Multi-Level Marketing Business Isn't Such a Bad Idea.

Multi-level marketing (MLM), or network marketing, is a nonsustainable business model because it does not provide a valuable service but simply a product that has been marked up in price.

MLM is based on the faulty premise that as you network with people, all you have to do is find a few individuals who are excited about the idea and want to join the pyramid. You will get paid not only for your own sales but also for sales in your downline, those under you in the pyramid, all the way to the seventh level.

So theoretically, even if you only recruit two people and they only recruit two people, by the time you reach the seventh level, you will have 255 people in your downline supplying you with commissions. Sadly, nothing could be further from the truth.

First of all, only a limited number of people will be attracted to MLM. Think of fishing for recruits to join your downline like offending all of your friends, neighbors and relatives and seeing who can tolerate it. Most people can't take the constant rejection. The few who can stand being rebuffed can only handle it from someone who is not a close friend or family. Building a relational business model with acquaintances and strangers is not possible.

The few who do respond will be more motivated by the money-making opportunity than the product. And when the hose doesn't flow with cash, the average recruit opts out of the scheme after three months.

With half of your people dropping every quarter, you can't build a business. No matter how hard you work, you'll spend all your energy looking for new people and training them. Burnout is pervasive. Although some MLM participants try to automate the process through audio and video pitches, this strategy simply removes the personal touch required to persuade newcomers. Million who have tried are shamefully quiet about their lack of success. It is like trying to fill a bucket with no bottom.

Even if you could draft sufficient numbers of people, you still would not be actually running a business. True businesses add value to people's lives. If you leave the pyramid, it is irrelevant. Everyone still gets the product. Your presence in the pyramid doesn't add any value, either to the company or to those buying from it.

You don't actually take orders, which typically are transacted online. And you don't actually sell a product or services. People are lured into MLM schemes because supposedly they won't be required to sell. They're told they can simply cash the check, which sounds like a very attractive option. Unfortunately, many people inexperienced in business believe that's what business owners do.

Nothing could be further from the truth, however. Real businesses sustain themselves by making a genuine contribution to society. The more real value they can offer, the more people are willing to pay for it. Every successful business owner knows that to stay competitive, you have to be thinking all the time about how to add more value.

Most MLM participants gross very little. In many cases, the money they earn doesn't even cover their own use of the product. It certainly is not enough to compensate them for their time and expenses even at the minimum wage. Many lose substantial amounts by purchasing additional tools that promise to boost sales and numbers of recruits.

Because it requires more of your time and effort, MLM is even less sustainable than buying lottery tickets. The few successes are simply those positioned at the top of the pyramid who collect from the endless recruiting hopefuls churning at the bottom.

True entrepreneurship, in contrast, is decidedly worthwhile. Many people with a high net worth made their money by starting and running a business. Along with the satisfaction of hard work well done, successful business owners enjoy a plethora of financial and tax-planning opportunities as well as the satisfaction of seeing their vision made real.

Hundreds of legitimate business opportunities are available for entrepreneurs who want to build companies that provide real value. But entrepreneurship is for those who feel empowered by hard work, not those trying to escape it. There are ways to find the right business adventure to sustain a lifetime of hard work, but MLM will always be a distraction from a genuine vocational calling.

Comments

[lurker carl]

Multi-level marketing is nothing more than legalized Ponzi operations with a bit less fraud.

[Bill]

I'm no fan of MLM, but the post here makes it seem useless. There are many people who have made tons of money at even the lower levels of the market. The key is of course to be on "the ground floor" (i.e. top of the pyramid). It's really just a different distribution system.

The difference with starting a business is that the owner takes all the risk and gets all the profits. MLM spreads the wealth down for spreading the risk around. Franchising comes very close to the model of MLM...and any McDonalds franchisees I knew had to own multiple stores to really make money...similar to a MLM salesperson.

[justatron]

"MLM will always be a distraction from a genuine vocational calling."

So very true...I have a friend who got caught up in selling energy drinks in a MLM system. He was one semester away from finishing an engineering degree and dropped out of college in order to focus on his "business". That was 5 years ago and he's still struggling along, trying to make his MLM work. Fortunately for him, his parents are pretty wealthy and they keep him propped up, but when I think of these get rich quick schemes, my mind always comes back to him and that utterly foolish choice...

[The Biz of Life]

I've known no one who has been successful operating under this model solely concentrating on sales. The successful ones create their own sales pyramid and make their money by getting a cut of everyone else's sales.

[David C]

My wife gave an MLM a whirl several years ago. I was supportive, but knew how it would turn out, as I had seen several ex-friends fail at other MLM's. (The reason they became ex-friends was due to their behavior towards me because I could see through the MLM fog in which they were enshrouded.) Anyway, after three months, I ran the numbers for her and it was decided to bail before it got any worse. We don't speak of this experiment, but I know a valuable lesson was learned.

[Cyn94601]

I worked in the corporate office at a network marketing company for over 6 years that sold toys. We had a number of very successful "directors" that really served to evangelize the rest of the recruits.

What I found is that the lure of this company was the working from home, working with friends and women's empowerment. The products were exceptional as well.

There were some very successful women in this company but ultimately I agree that the model is not one that works for everyone.

I would say that if the product is actually valuable (think avon, mary kay, etc) you have a much better chance of being successful.

[Jim]

I think Avon or Mary Kay might be an exception to the general rule here. They would technically be a MLM.

[JoshuaMichael.net]

I do agree that most MLM companies are not a great opportunity for the aspiring entrepeneur. However when considering business a person must examine the business model just as much as the product being offered. Some MLM companies have great business models and offer consistently in demand products.

The good ones are out there.... It just takes a while to find them. It should also be noted that any passive income (such as MLM) will take years to develop into solid cash flow.

[Shawn]

My mom has been selling Shaklee for 20 years. She was a stay at home mom doing it on the side about 10-20 hours a week while we were at school. She makes 80k a year on her hobby and has helped lots of people with the high quality vitamins and all natural personal care and home care products. They have been around for more than 50 years. (one of the first supplement companies around.)

Unfortunately a lot of other MLM companies have given it a bad name. There are some good ones out there. I do agree that there is more bad than good.

I have a few friends burned from Quixtar.

[LotharBot]

I teach in a museum. After a program, I was approached by a parent with a "business opportunity" -- he wanted me to work with him. I tried to probe him for specifics, but the best he could give me is "we sell people stuff they're already going to buy." He couldn't describe how he (or I) would add value to the transaction, only that we'd get a cut. I looked up the company name online, and found it was an Amway offshoot.

This seems to be fairly typical of MLM -- the sales person doesn't add value to the transaction* they just leech off of it, along with 7 layers of leeches above them. The only way to be successful is to be a higher-level leech.

* Mary Kay is an exception because you do things like host Mary Kay parties, creating an impromptu showroom and introducing customers to products that work for them. There, the salesperson is actually doing something worthwhile.

[Laura S.]

Has anyone here heard of ijango? I had a friend recently post about it on their facebook account so I watched the video. Pyramid scam. I don't know how smart people fall for stuff like this. I think the launch is supposed to be soon so I'm expecting an email anytime now....

[Eugene Krabs]

I know a couple of smart people (and a couple of not-as-smart ones) who have participated in MLMs. One of them even has a MBA.

Long story short, even if they know the risk and downside, I think they believe that they could be "the one that beat the odds" or that it's a kind of risk they would like to take, even if they lose in the end.

So many people are just so enticed by the idea of the upsides that MLMs can offer that, even if they are well-educated, they want to give it a shot in the hopes that such a dream could come true.

But I for one will never be caught dead in a MLM.

[Tony]

The issue of Network Marketing is twofold. The perception that all NM=pyramid, which it doesn't. And the validity of the product. Plus, there is also a problem with some people seeing "Network Marketing" as get quick rich and then taking advantage of people (which bring us back to the pyramid issue). Network Marketing with the right product and people is a valid business.

[Eugene Krabs]

Tony is correct. Not all MLMs are bad. Some are decent and legal, and it is up to each of us to figure out whether MLMs are for them, and whether the MLM they are looking at is a decent and legal one or not.

[Henry]

I've made about $22k part time in network marketing over about a 12 year period. The money has paid for my products, my advertising and my bills. My best success was by using paid search on the internet consistently. I taught some people I brought into the business in 2003 to use the internet like this and they continue to make money that way to this day. The most remarkable thing to me is that I have customers not just distributors that have been with me nearly the entire time! I agree MLM isn't for everyone and no one should try being a network marketer unless they are a PASSIONATE consumer/marketer of the product(s) they have chosen. As for the naysayers, it just isn't for them. As for constructive use of your time, I wouldn't be involved with my MLM company if I didn't believe from the bottom of my heart that the products/business change people's lives for the better. This country needs a grassroots economic revolution. I believe MLM is a grassroots entrepreneurial opportunity that can help an under privileged person keep a roof over their head and prevent them from starving. To some people THAT is a dream come true.

[MIchael]

It's interesting to read the excuses MLM supporters give in these comments.

1. MLM is not for everyone. Yes, it is for hardly anyone at all, maybe the top .01%. On the other hand, real jobs and businesses work for a much higher percentage of people.

2. There are good ones and bad ones. Yes, but almost every single one is bad! Many, many more real jobs and businesses are a fair deal.

3. "I know a person..." I know 100 times as many people making bank at real jobs and businesses. I know two six-figure Nouveau Riche salesman and one person who made money by getting in early on Shaklee. I estimate I know about 300 people who make close to six figures or way over at real jobs and businesses -- that's 100 times more. Don't those odds excite you?

Let's flip it around. I think I know maybe 30-50 people who dabbled in MLM and got burned. I only know two people who had a job turn out as poorly as MLM turned out for these 50.

Success is rare and failure is common vs. success is common and failure is rare. Hmm, which opportunity should you get excited about?