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Is Multi-level Marketing or MLM a legitimate business opportunity? Find out in this article.
Have you ever had someone try to discuss an incredible “business opportunity” with you? Or perhaps a friend (you haven’t heard for many years) invited you to become her business partner.
Chances are she could be trying to sell you something. Or she could be trying to recruit you into a Multi-level Marketing business.
If the latter is the case, then you might want to do your research before jumping into the incredible business opportunity that is Multi-level marketing. Examples of MLM companies are Amway, NU Skin, Herbalife, Mary Kay, Arbonne, and many others.
Most MLM promoters mock wage earners. They argued that with their system, you would no longer be a slave to your employer. You can buy anything you want. You can earn passive income while staying at home.
With promises like that, we know how tempting it is to join their business proposal. However, can MLM make you rich? What are the odds of making money with MLM?
Granted, MLM may seem like an exciting and profitable business not to mention you would be creating a new stream of income for yourself.
However, whether you need a primary source of income or you want something to increase what you already have, Multi-level marketing should never be your option.
This article will give a clear understanding of MLM based on research published in the US Federal Trade Commission website. We want you to understand the flaws of the business model.
We believe it is not one of the brightest ideas when it comes to business opportunities to invest in. We want you to avoid MLMs at all cost.
Table of Contents
There are varied definitions of MLM. We quoted some of the most popular MLM meanings found on the web.
To start with, here is Wikipedia’s explanation;
“Multi-level Marketing (MLM) is a marketing strategy for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce selling the company’s products/services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system.
The overwhelming majority of MLM participants (most sources estimated to be over 99.25% of all MLM distributors) participate at either an insignificant or nil net profit. Indeed, the largest proportion of participants must operate at a net loss (after expenses are deducted) so that the few individuals in the uppermost level of the MLM pyramid can derive their significant earnings. Said earnings are then emphasized by the MLM company to all other participants to encourage their continued participation at a continuing financial loss.”
Meanwhile, the Federal Trade Commission (FTC) says;
“Multi-level marketing is one form of direct selling. Generally, a multi-level marketer (MLM) distributes products or services through a network of salespeople who are not employees of the company and do not receive a salary or wage. Instead, members of the company’s salesforce usually are treated as independent contractors, who may earn income depending on their own revenues and expenses. Typically, the company does not directly recruit its salesforce, but relies upon its existing salespeople to recruit additional salespeople, which creates multiple levels of “distributors” or “participants” organized in “downlines.” A participant’s “downline” is the network of his or her recruits, and recruits of those recruits, and so on.”
People in the industry often associate MLM as direct selling or network marketing. Sometimes it is called referral marketing or direct consumer marketing.
MLM Definition Based on Research
MLM might appear as a legitimate business opportunity based on the above explanations. However, the only accurate real-world, research-based, and consumer-friendly description of Multi-level Marketing is based on Dr. Jon M. Taylor’s study of over 350 MLMs.
In his book “The Case (For And) and Against Multi-Level Marketing,” Dr. Taylor concluded;
“Multi-level marketing (MLM) is a purported income opportunity, in which persons recruited into a company sponsored program make ongoing purchases of products and services, and are incentivized to recruit others to do the same, in a program dependent on unlimited recruitment of a network of endless chains of recruitment and personal consumption, in order to qualify for commissions and bonuses and to advance upward in the hierarchy of levels in a pyramid of participants. Product purchases become the means of disguising or laundering investments in what is, in fact, an endless chain opportunity scheme – or product-based pyramid scheme.”
Furthermore, he added;
“Typically, prospects are lured into the scheme with exaggerated product and income claims. And because the pay plan is heavily stacked in favor of those at the highest levels in the pyramid, the vast majority of participants spend more than they receive and eventually drop out, only to be replaced by a stream of similarly misled recruits, approximately 99% of whom are likewise destined to experience loss and disappointment.”
To summarize what Taylor said, MLM is a product-based pyramid scheme. In pyramid schemes almost, all people in the structure lose their money.
What is MLM
We believe the most accurate definition of MLM should is based on Taylor’s study.
Multi-level marketing (MLM) or network marketing (as it is often referred to) is a purported income opportunity. You have seen this in almost all MLM companies. Look at this desperate guy from Kenya promoting AIM Global below:
In MLM, you make regular purchases to participate in various compensation plans. The company incentivized you to recruit other participants to do the same.
The MLM business model is heavily dependent on the recruitment of an unlimited network of individuals either for recruitment into the program, personal consumption of the products or both.
You earn commissions for your sales and a portion of the total sales of other participants under you. The goal is that the more your recruits, the larger your downline will be.
A bigger downline means more money and better chances of climbing up in the hierarchy of levels in a pyramid of distributors.
How Your MLM Business Works
First, you will pay an initial amount for the registration fee (sometimes your upline will get a piece of it). At times, they call it as starter kit fee. It may include products you can sell.
Next, you start selling those products to your friends and family. You try to convince them how great your goods are. Then, you flood your social media account telling your circles how amazing this business opportunity you have right now.
Perhaps you get some sales, but it is not enough to cover your expenses and get your investment back. Also, you find it difficult to sell those expensive products because people don’t need them. In short, there is no demand.
Later, your upline will tell you to recruit more people to join your sales team. That way, you can make more money.
Every time someone joins your team, you will get a portion of their registration fee (though not often). You will also earn based on your recruit’s sales volume.
However, to maintain your status and gets a commission as an associate, seller, distributor, participant, member, affiliate (or whatever term the company use), you are required to have minimum sales order.
Now, you realize that to make money in the scheme, you must recruit many people. Also, you may be forced to purchase a specific volume of products to participate in various compensation plans.
Flaws of MLM
MLM is a deceitful and fraudulent business practice. It is viral and predatory, pulling recruits into a world of make-believe “income opportunities” with exaggerated income and product claims.
The structure strengthens the coffers of the MLM companies. However, it is detrimental especially to the new distributors at the bottom of the pyramid.
Below are some defining characteristics of MLM that stand out as structural flaws. We think these are clear red flags in this supposed business opportunity.
MLMs are Recruitment-Driven
MLM companies do not have a retail-focused structure, that is, one strictly designed to reward participants who sell products outside of the network.
In the typical MLM structure, products are mainly sold to the participants in the programs and rarely ever to the general public who are often reluctant to buy the overpriced items.
In reality, the entire Multi-level Marketing structure is financed principally by incentivized purchases of the often-unwitting customers who are the participants themselves.
When you are recruited, you are empowered and incentivized by the company to sponsor more distributors. The unlimited recruitment creates an endless network of participants recruiting participants–with absolutely no regard to market saturation.
This endless chain of recruitment is perhaps the biggest flaw of the system. It is inherently flawed because it is dependent on an infinite expansion of a finite market, which is a literal impossibility in the real world.
While the new participants may be spurred on to recruit more individuals by exaggerated income claims and incentives, the real benefactors of this scheme are usually the company executives, the founders and the participants at the top of the pyramid.
Money moves upwards in the chain, never downwards and the success of the business is mainly dependent on the continuous recruitment of new participants to bring in more.
MLMs Ignore Market Saturation
Enthusiasts and promoters of the Multi-level marketing structure tend to argue that market saturation is impossible. However, while a total saturation of the market may never be reached, there is a possible level of saturation from dwindling interests and opportunities.
In this context, saturation refers to a state where recruiting opportunities have been diminished to a point where further recruitment becomes unprofitable.
To illustrate, let’s assume there are 5 Walmart stores in a city of about 50,000 people. That seems fair right? Take the number of stores up to say 100, and the place becomes saturated. Why would Walmart need up to 100 stores in a small area?
Now, let’s apply that structure to MLM to see how market saturation works. Ideally, 10, 30 or even 50 distributors in an MLM program should be enough to cover a small city. Anything more would be saturation.
However, the structure is dependent on the relentless and endless recruitment of new participants, regardless of market saturation. The more the members of the program, finding new prospects is tough. When recruits are no longer trickling in, a market collapse is imminent.
Most MLMs try to “avoid” a market collapse by bringing in new products into the system and entering new demographic markets. Some companies may even go as far as rebranding its products and services to create a whole new company for a fresh market.
However, if the structure is dependent on recruitment of participants as primary consumers, market saturation and consequent collapse are inevitable.
MLMs Do Not Distinguish Buyers and Sellers
As earlier explained, MLM is recruitment driven. If you join, you will be rewarded more if you bring more members than retailing the products and services to non-participants.
This system would explain why the top participants are always after a large downline. But, why is this continuous recruitment so crucial to the structure of Multi-level marketing?
Simple. You become a buyer when you join the program. You are encouraged to buy products usually to qualify for profits from recruiting other participants.
Most times, you have no intention to profit by selling the products to the public (people outside of MLM). Neither you have any concrete needs for these items.
As such, you recognize recruitment as an opportunity to bring buyers into the system, make huge profits and advance in the scheme.
With a dwindling market of willing buyers and a pay plan that rewards the recruitment, there is almost no incentive to sell directly to consumers, and the primary consumers become the recruits.
Multi-level Marketing Compensation Plans Are Defective
In a typical sales setting, it would be entirely possible for a salesperson to earn more than their sales managers. The scenario is true because the salesperson is entitled to a commission of every successful sale.
However, in MLM, the case is different. The top of the pyramid promoters will always make more than the actual salesperson with the latter getting just a fraction of the percentage of commissions.
Mostly, the people above you will take a generous share of commission from downline sales. In effect, distributors at the bottom of the pyramid will be forced to recruit more people.
Recruiting is necessary so that you can make a substantial income with the commissions from a large downline. Either way, participants in lower levels and recruits are doomed to failure with huge losses while the uplines profit immensely, strengthening their leverage.
MLM Legal Issues
One of the most significant issues with MLM is about its legitimacy. It’s a problem that can be traced to general confusion about what Multi-level Marketing is.
Is it an adequately disguised pyramid scheme? A Ponzi Scheme? A form of gambling? A franchise? Buyers’ club?
In reality, it is difficult for the law to apply to Multi-level Marketing when it doesn’t belong to any defined class of business activity.
Although the FTC does not outrightly address Multi-level marketing, Section 5 of the FTC Act states that; “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.”
There are certain distinctions between MLMs and the typical Ponzi and pyramid schemes. These systems generally involve the transfer of money between participants.
Often these so-called “income opportunities” offers no legitimate investments. Also, there is no sale of real products or services to non-participants outside the program.
While MLM companies may want you to believe that Multi-level marketing is where it is at, it isn’t. There have been many criticisms of this business model, and the Federal Trade Commission (FTC) of the United States cautions against dealing with companies engaged in these illegal “pyramiding” schemes.
Marketers are also warned against being pressurized to join MLM companies. Like with any business venture, the FTC recommends that any individual looking to join carries out due diligence before going into business with an MLM company.
Can You Make Money With MLM?
The success rates of MLM are so low that they are almost non-significant. On the other hand, while successful structures are rare, recruitment-driven MLM programs have a shocking loss rate estimated of over 99%.
Only the founders and top of the pyramid promoters are making money in MLM. These people belong to less than 1% according to a study published on the FTC website.
Essentially, over 99 percent of participants in this program lose money after subtracting the expenses and cost of participation. No legitimate business can survive on such terrible returns.
In an average business structure, investing more time and money may increase one’s chances of success. However, in Multi-level Marketing, except for the founders and the participants at the top, distributors investing more and selling more is not a guarantee of success.
The fortunate participants in a Multi-level Marketing program are those who invest very little. Still, the most fortunate of all are those who do not invest at all.
Actual Investments in MLMs
Multi-level marketing programs are not free to join. To become a participant in such a program, you are often required to pay a nominal fee.
After that, you become a registered and licensed distributor of the MLM company. Usually, the nominal fee is often fixed at a reasonably low price to avoid scaring away participants or raising the suspicions of law enforcement officials.
Nevertheless, the initial “registration fees” is often just a small fraction of the total investment for an MLM business. Associates are often encouraged and spurred to keep purchasing the products to attain higher levels on the hierarchy to qualify for higher commissions rates.
This practice often results in a hyper-consumption of products by the participants to progress in the organization. If you do the math, it could amount to thousands of dollars at the end of the year.
Overall, the cost of participating in the scheme (taking into consideration the registration fees, purchases, training, expenses of recruiting new participants) is substantially larger and not even remotely comparable to what is profited. In all, Multi-level Marketing is neither worth the effort nor the financial commitment.
In an MLM, your financial loss is the company’s (and top of the pyramid promoters) gain.
Interestingly, Multi-level Marketing satisfies most statutory definitions of a pyramid scheme. With an emphasis on recruitment as the primary source of income, the result is often de-facto saturation of the market with a chain of downlines all doomed to fail.
Despite the many criticisms of the business model, several people still join such programs with little to no knowledge about how the business works. Recruits into the program are usually misled by deceitful uplines in the pyramid of participants who sell the idea of MLM as an “easy and quick money” business opportunity.
However, with this article, prospective recruits in the business can get an accurate and research-based review that shows multi-level marketing for what it is so you can make better choices in businesses.
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