Multilevel Marketing

Multilevel Marketing: How NOT to get rich

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Many people have had the experience of being approached by a friend or invited to an event only to find out that they were going to be sold a product or service, which they may or may not need or want. As the conversation continues, they are informed that in addition to the product that they are going to buy, if they manage to recruit other people to join the company, they will receive a commission anytime those new recruits buy the same product. In fact, the recruiting of new members is often emphasized above the purchase of the actual product. Finding new members is often implied to be easy and supposedly allows the individual to generate “passive income”. People at these events are informed that Multilevel Marketing (MLM) is different from “Pyramid schemes”, which are illegal, due to the fact that MLM companies sell an actual product. When someone brings up the pyramid-like structure of the MLM in question, their promoters will often point out that most companies are also formed in the shape of a pyramid, with the CEO at the top and everyone else below him or her. (What they fail to mention is that money in an MLM goes from the bottom up, whereas in a traditional company the money flows down to each employee.) New recruits are often skeptical of MLM’s but they are assured that “this one is different”. In addition, MLM is presented as a way to become an “entrepreneur” or business-owner, which is a questionable claim.

John Oliver exposes MLM companies

Last week, John Oliver exposed Multilevel Marketing companies for the harm that they are causing many people. According to Investopedia, there are 90 million members of multilevel marketing companies worldwide but “relatively few earn meaningful income from their efforts”. Looking at the Annual Income Disclosure Statement of several MLM companies, this appears to be an understatement. It is not unusual for anywhere from 70% to 90% of all members of an MLM to not earn a single commission in any given year. The Federal Trade Commission (FTC) goes even further, stating in a research paper published on their website that “the vast majority of commissions paid by MLM companies go to a tiny percentage of TOPPs (top-of-the-pyramid promoters) at the expense of a revolving door of recruits, 99% of whom lose money.” This fact alone should give anyone considering joining an MLM some pause.

MLM companies often paint a picture of financial freedom, driving nice cars, traveling to exotic locations, and enjoying passive income, rather than working at a 9 to 5 job and saving money in a traditional retirement account. Even if MLM marketing worked (which it does, mainly for the people at the top of the “pyramid”) and someone could retire through one, it would become what software companies refer to as a “Single Point of Failure”. That is, if something happens to the MLM, such as a bankruptcy or an investigation by the FTC with a negative outcome, the distributor’s only source of income could disappear overnight. This is why diversification is so important.

Probably the strongest argument against MLM’s is exponential growth. Unlike in traditional investing where exponential growth is desirable, each time a distributor recruits a new set of members, the numbers quickly become astronomical. As John Oliver mentioned in his video, if each member recruits five new members, and each of those members recruits five additional members, the entire world population would be part of the MLM within only 14 cycles! The reason this doesn’t happen in practice is because recruiting new members is very difficult. Even the product itself is often difficult to sell and many members end up accumulating it in their homes and garages. As they “invest” more and more money into the MLM’s product each month, it becomes harder to admit that they are losing money so many distributors will remain members until the loss becomes unacceptable or until they run out of money. Once a member leaves an MLM, they are often blamed by remaining members for not having tried hard enough or for being negative. In fact, a common thread of many MLM’s is an emphasis on positivity and avoiding “negative people” (i.e. people who are skeptical of the MLM in question). This can lead to a cult-like mindset within the MLM and can cause personal issues for members, as their well-meaning friends and family members try to convince them to leave the MLM.

For anyone still considering to join an MLM, we recommend reading Jon M. Taylor’s excellent analysis, as well as the SEC’s guide to differentiate MLM companies from pyramid schemes.



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