MLMs as Business Opportunities

You can call it multi-level marketing, you can call it network marketing, you can call it Alfred, but the facts are that MLM-based home businesses are almost universally pyramid schemes (even if they are technically legal) that will drain money from 98 percent of the participants. It’s sad to see how many people get sucked into the ever-growing array of these things.

There are a wide array of articles in the wild that will give many details on why MLMs are generally poor businesses to get involved in. I’ll give a few links to those throughout and at the end, but I want to just look at things from a basic critical-thinking viewpoint first. The main issues with MLMs that I see are that they require you to create your own competition; and that in order to be financially secure, you need to be at the top of the line, which is almost certainly not the case for anyone who didn’t invent the particular business franchise. A couple other points are how much you’ll alienate everyone in your life, and how most MLM-based products are either over-priced or utter garbage.

Competition

So you want to sell cosmetics, or hair care products, or weight-loss devices, or whatever it is that the particular “business opportunity” your best friend got you to buy into over drinks one night. That’s cool. But, the day of door-to-door sales is over, so how do you get people to buy your thing? You could set up a real storefront, but that requires even more money as a sunk cost before you make sales. You could go to vendor shows, but you’ll soon find that there are five Scentsy distributors at every major show, so how do you get traction there? And as you get frustrated not making sales, that bestie who got you started will be there to tell you about passive income. This amazing feature of the multi-level sales model allows you to make money when someone else sells something. All you have to do is go out and recruit people to sell in their own area and you can get a piece of their pie as well as your own. Wow, that’s amazing. But wait a minute – where are they selling, and where is your mentor selling? You all live in the same town, and now you are all trying to sell the same thing to the same market. Gee, that seems sustainable.

There’s a reason you see one guy owning multiple Burger King franchises spread across a city, but you don’t see a BK owner encouraging someone else to build a Wendy’s next door – businesses generally don’t want more competition if they can avoid it. Yet, the MLM model essentially requires that you create your own competition in your own town. The only way to really make any significant down-line income is to recruit more than one person to compete against you. And then you end up with five Scentsy distributors at every show.

Getting Rich

Math is hard. People tell us that all the time. And some math is hard. But simple two-dimensional geometry is not that difficult. Almost anyone can figure it out.

Many MLM plans suggest getting five down-line distributors working for you at each level. So, your five direct “subordinates” would also recruit five people each. And now you’ve got 30 competitors trying to sell the same perfume you’re selling. But, you no longer even try to sell anything, because you’re managing your down-line. And how long can that down-line build? Well, funny you should ask. Let’s look at each “generation” down the line, and you’ll see how difficult it is to make money if you’re not at the very top of the food chain.

One generation below you, five people. Each of the first generation recruits five people and that’s 25 in the second generation. Each of them recruits five people, and that’s 125 in the third generation. There are 625 in Gen4, over 3000 in Gen5, and the entire population of the earth couldn’t fill the thirteenth generation. This looks a lot like a very fat pyramid, but I’m sure that’s merely a coincidence.

Who makes money at MLMs? The founders. They get people to work for them, and the top couple tiers even have a good chance at making a lot of money. Once you get below four levels from the top, you’re lucky to make anything like a real salary. And for most of us, the middle class and working class folks that see an opportunity that only requires a small initial investment – you’re the one paying for the folks above you. Herbalife’s “supervisors” (the top 20% of their distributors) have a median net income of $0 from Herbalife; imagine what the other 80% must be making! Well over 95% of MLM distributors or vendors (or whatever fancy word that means “participant” they use) lose money. When Amway was sued in 1982, the state of Wisconsin found that the average income for a direct distributor (which is one that has a down-line working for them) was a loss of nearly one thousand dollars per year. Adjusted for inflation, that’s over $2500 today. In 1995, over 65% of NuSkin’s profits went to 200 of their 63,000 distributors. Yes, 99.7% of the people lost money or broke even.

Alienation of Affection

If you use social media, you have almost certainly seen many posts from friends, family, and acquaintances who are trying to get you to come to their product party. Yay, day drinking and playing with makeup! Wooo! And then she tries to get you to be in her down-line, and the hangover hits hard. Nobody wants their friends to harass them to buy their stuff. This is not a thing that anyone has ever hoped for.

But, if you want to maintain that passive income, you need to be actively seeking new members of your team, and helping your down-line members recruit more members as well. You can’t just rest on your laurels, because people quit. People quit MLMs as soon as they realize they’re never going to make more money than a real job, or when their spouse tells them they have enough damned Mary Kay and now they can’t afford the bankruptcy lawyer they are definitely going to need soon. In 1999, a big MLM company stated in court that their drop-out rate was one of the lowest in the industry, at a mere 5.5% per month. So, those thirty people in the two levels right below you? One of them needs to be replaced every few weeks, if you’re lucky. In 1995, Excel Communications stated they had a drop-out rate of over 85% per year. Hopefully you’re good at making friends, because you’re going to be annoying the hell out of the ones you already have.

Hard to Sell

An Amway distributor named Sidney Schwartz thought that Amway’s analysis of their products, where they claimed to be cheaper than their competition, was flawed. His own analysis, which he posted for the world to see (in contrast to Amway’s summary-only approach) showed that most of their products were about twice as expensive as equivalent products at the grocery store. At least nobody claims Amway’s soaps and cereals are garbage; they’re just pricey.

Many of the products sold through MLM companies fall into the over-priced category. Some of them joyfully embrace that, such as Pampered Chef. Marketing luxury products at prices above the local store is easier to do than marketing commodity items for luxury prices. The various MLM jewelry companies (Stella & Dot, Premier Designs, etc.) generally sell necklaces and bracelets you can find nearly anywhere for less. It Works, the much-hyped body wrap that was everywhere in 2015, very clearly does not work despite its name.

Conclusion

I’ve got a small business. I’m not in any way opposed to entrepreneurs and the entrepreneurial spirit. But, if something seems to good to be true, or if it seems too easy, it’s wise to be skeptical. If someone is trying to help you start a business, it’s a good idea to ask what they’re getting out of it before you commit.

With the KARE Crafts business, I have attended many local vendor shows. Most of them have been craft shows, and everything there is made by hand, by the people selling it to the public right there in their booths. It’s authentic, it’s real, and it’s almost universally a bargain. Going to general-interest vendor shows can be a very different experience. The vendors have to compete to get in because most small shows only want one of each MLM brand represented, and even in a small city like San Angelo (population under 100,000), there are more Younique and Scentsy distributors than are sustainable. It’s like the small business equivalent of a strip-mall. You know, no matter where you go in the USA, you’ll see the same Tupperware and Herbalife products.

Worse than the sameness and blandness of the MLM dominance of small businesses, though, is the lack of profitability. I’d much rather see my friends and acquaintances making money for themselves than losing money in the likely-vain hope that one day they’ll get the big check.

Additional Reading

It Works does not – a quick explanation of how there’s no way “It Works” actually works

Report to FTC detailing how 99 percent of MLM participants lose money

Amway: the Untold Story – one distributor’s story of his years selling Amway products

Pink Truth started as a community to discuss the truth behind Mary Kay’s pink façade, but they’ve grown to include forums covering a lot of other MLMs that target women (which is their traditional target)

False Profits promotes a book by the same name, but has a lot of articles discussing the various “get rich” schemes, including MLMs and Ponzi schemes