Thinking of joining a MLM? Read the truth behind the ‘income opportunity’
What is an MLM? And why are they so dangerous? Find out why very few people make money from them, and why you should avoid at all costs.
Honest confession: until we recently we thought MLMs were fairly harmless. In fact, we’ve even unknowingly profiled them on our site (we weren’t aware some businesses were MLMs). While they didn’t particularly appeal to us, we didn’t see the harm in them.
But then we watched Betting on Zero, a documentary featuring a US hedge fund manager’s battle with Herbalife – and some of the lives the company has apparently ruined. After watching the documentary we did some more digging. And the more we learned, the more concerned we became.
So concerned, we felt the need to write this article, as we know mothers are a big target group for MLMs (read on to find out why). So if you are considering joining one, please do read this first – and forward to any friends tempted by promises of ‘income opportunities’.
What’s an MLM?
So what’s an MLM? Here’s Wikipedia’s definition:
Multi-level marketing, abbreviated as MLM, also called pyramid selling, network marketing and referral marketing, is a controversial marketing strategy for the sale of products and/or services where the revenue of the MLM company is derived from a non-salaried workforce (also called participants, and variously known as “salespeople”, “distributors”, “consultants”, “promoters”, “independent business owners”, etc) selling the company’s products/services, while the earnings of the participants is derived from a pyramid-shaped commission system.
You’ve probably come across, and even bought from, an MLM without realising. Here are some of the more common MLMs that we’ve heard of:
- Usborne Books
- Mary Kay
- Forever Living Products
- Juice Plus
- Tropic Skincare
- Utility Warehouse
- Nu Skin
(This list is by no means exhaustive.)
How do MLMs work?
The main issue with MLMs is in the way they usually work. Rather than your profit coming from the actual products you sell, it comes from recruiting people into the business as sellers under you (your ‘downline’) and making commissions on their sales (and their downlines).
And these sales aren’t just to customers. You see, in order to join an MLM you usually need to buy products to sell (often referred to as a starter kit, or similar). And then in order to remain a seller, stylist, supervisor (or whatever term the company uses) you often need to make a minimum number of sales in a given time period.
Often the only way to make these sales is to recruit people under you (making commission off their starter kits) or to buy products yourself. Otherwise you’re left trying to sell your products to friends, family, mums at the school gates, and anyone you come into contact with (one of the reasons why some of the more pushy/desperate MLM reps get a bad reputation).
Or, you create opportunities to sell. For example, by starting a buggy fitness group for mums in your area and selling to/recruiting them while their guards are down (a strategy we’ve seen Herbalife reps use).
Indeed, one of the biggest complaints we’ve heard about MLMs is that once someone joins one, they see every social interaction as an opportunity to make their sales, or add to their downline. Friendships have ended and relationships have broken up through this.
Why are MLMs so dangerous?
We didn’t see MLMs as anything other than an irritation until we watched Betting on Zero, and understood how they really work. This is why MLMs are so dangerous:
- You usually need to pay (‘invest’) to join them.
- Once you’re in, you may need to sell a certain volume to receive your commission or even just remain a representative (or other label).
- Their products are often expensive, and hard to sell.
- So, in order to make money you need to recruit people under you.
- You’ll then make money from their investment in the company, and any sales or recruitments they make.
- This means in order to make money you usually MUST recruit.
MLMs also appear to prey on the weak and vulnerable with promises of wealth and an easier life. They are touted as an ‘income opportunity’ and yet, very, very few people DO make any money out of them.
So, can you get rich from MLMs?
A few people do make big money from MLMs. And these people are often trotted out in promotional videos, celebrated at annual events, and very publicly ‘rewarded’ with prizes like white Mercedes cars (although these ‘prizes’ aren’t as generous as they first appear – you simply get a discount on the lease which you must take out in your own name, and if your sales fall, the discount ends…). You also need to promote the company on the Mercedes they ‘give’ you.
The people who succeed at MLMs would probably succeed in other small businesses too – they have the right network and skills, and (importantly) they got into this particular MLM in your area early.
And this is one of the reasons why most MLMs aren’t ethical – they sell the dream that anyone can be successful with their ‘opportunity’. They don’t make it clear that only a small percentage of people who join them will make a liveable income (or any income at all).
Instead, those who fail just didn’t work hard enough (funnily enough one of the new promotional UK videos for a MLM emphases ‘hard work’ several times). The message? It’s not the MLM that didn’t work, it’s you.
But it’s not you. As this research of 11 MLMs by MLM expert Robert FitzPatrick discovered:
- 99% of all distributors earned on average less than US$13 a week in commission – which didn’t even cover the minimum purchases they were required to make in order to qualify for commissions.
- In half of the MLMs, 70% or more of participants earned no income at all (the study found that 96% of Arbonne’s sales representatives apparently never earn any commissions).
- People are recruited into the companies with the offer of an ‘income opportunity’, and yet statistics show that the income opportunity is virtually non-existent and falsely promoted.
- Indeed, the 11 MLMs studied had unrealistic retail sales opportunities – the products were overpriced, meaning reps couldn’t make much money selling them.
- Recruitment into these companies created billions of dollars of losses to consumers each year. The losses of these 99% of distributors were passed up the sales chain to the less than 1% of the people at the top as commissions.
- Virtually no MLM companies sell significant amounts of their products to the public, which means they aren’t a ‘direct selling’ business, as they promote themselves.
- Between 60-90% of reps for these 11 MLM companies leave every year, and nearly all these people stopped buying the ‘wonderful’ products they’d been selling when they quit.
- Virtually all of the MLMs require you to meet monthly or annual purchase quotas to qualify for the ‘commissions and rebates’ you are promised.
- Commission pay plans in the 11 MLMs are structured to send most of the money to the top levels. In one MLM, 84% of all commissions go to the top 1% of its distributor chain.
Why you (probably) won’t make money from MLMs
To illustrate exactly how tough it can be to make money from MLMs, this website does the maths:
“What causes the average, otherwise shy person to suddenly think they can be a wealth-generating salesman? Because someone showed them “the math.” I’m sure you’ve heard it. All you have to do is find 5 people to join, and those 5 will find five, and those five will get five, and 6 months later you will have 20,000 people working for you, and you’ll be earning $10,000 per month. Really?
Here’s the reality. Using the 80/20 formula, in order to sign up 5 people you will need to start with a list of 125 prospects. Why? Because of the 125 prospects only 20% (25) will agree to hear your sales presentation. And of those 25 only 5 (20%) will join.
But wait, did you know the average MLM associate quits after just 4 months? That means that you will need to recruit 5 new people (another 125 prospects) every 4 months just to keep from going backwards. And guess what, this applies to your entire organization!”
How are MLMs different from any other small business?
One of the arguments MLM reps make in defending their ‘business’ is that it’s just the same as any other small business. You need to invest to get started, you need to sell, and some people just aren’t cut out to make it in business, so will fail.
But when you look at the number of MLM ‘business owners’ who do fail, you see why the odds are stacked far more against you when you join an MLM, compared with starting another small business.
In research for his ebook The Case (For And) Against Multi-Level Marketing, John M Taylor PhD discovered this about the drop out rates for MLM schemes:
- 50% of representatives drop out in the first year of operation.
- After five years, at least 90% have left the company.
- By 10 years, only those close to or at the top remain, meaning at least 95% have dropped out.
To put these statistics into context, John compared them with the failure rates for traditional small businesses using the Small Business Administration’s statistics for 2008. And he discovered that 44% of small businesses survive at least four years, 31% at least seven years, and 39% are profitable over the life of their business. In 10 years only 64% of small businesses fail.
Indeed, because of MLM failure rates (and other criteria) MLM businesses in the USA apparently don’t qualify for SBA loans or other small business funding and assistance programs.
Why do MLMs love mums?
As we mentioned earlier, MLMs exploit the weak and vulnerable with promises of ‘income opportunities’. And one group who is a dream come true for MLMs is mums. Here’s why:
- Our confidence is often low, making us more vulnerable.
- We’re ask often looking for ways out of the 9-5 treadmill.
- We’d love to earn money from home in hours that suit us.
- We have wide networks of friends and fellow mums.
- We’re a great target audience for their products.
Given the above, the ‘business opportunity’ promised by MLMs can often look like a gift from heaven to mums. We’re told that, with a tiny investment (compared with starting your own business from scratch) you can join an established business that promises a comfortable, easy income – and even great wealth.
And you can get all of this just by selling wonderful products to your friends and family. Easy! But as we’ve learned, it’s not that easy at all. As one writer explained:
“These types of businesses hurt women because they are not informed of the true risks of investment. Their time, relationships and money are not valued, they are used and discarded if they become frustrated or do not meet ‘sales goals.’
Vulnerable women are duped into believing that they too can become business owners, all in their spare time, while bouncing babies on their hips, taking care of a home, and working another part time job. They are given nothing but a promise and a golden carrot to chase, and then sent out to go sell.”
So, should you join an MLM?
If you’re tempted to join an MLM, we hope this has helped give you a more balanced view than the spiel offered by your rep. (If a friend is considering joining one, please send this article to them before they commit!) We also highly recommend reading this research carefully.
Yes, some people do make money from MLMs. But most just learn a very expensive lesson. This is why billionaire investor, founder of Pershing Square hedge fund management company and philanthropist Bill Ackman has put a short bet of US$1 billion on Herbalife, as featured in Betting on Zero.
So if one of America’s richest and most astute investors believes that MLM company Herbalife life is worth zero, are you prepared to invest your money, time and relationships in one?
Thanks to Timeless Vie for first opening our eyes to MLMs.