There sure is a lot of passion discussing whether Multi-Level Marketing is a scam or not!
And so many people have their minds made up already about MLM companies. If so, that’s cool.
I am not here to convince you one way or another.
But do you know the difference between a MLM scam and legitimate company?
First of all, we need to be clear with the terminology. Multi-level marketing (MLM) is the same as network marketing. When I use the term multi-level marketing, I am also referring to network marketing. I see no need to split hairs.
Also, the Federal Trade Commission published guidance regarding multi level marketing. They makes no distinction between network marketing and MLM. To them it is all direct sales. But the FTC does make a big distinction between legitimate MLMs and pyramid schemes!
Multi-Level Marketing Introduction
Wikipedia describes MLM as a “strategy in which the sales force is compensated not only for sales they generate, but also for the sales of the people they recruit.”
MLM involves direct selling to consumers. And includes the opportunity to recruit and create a sales organization. The sales force or “downline” members make commissions on several levels (thus the reference to multi level marketing). Recruited “downlines” provide for many levels of compensation for the recruiter.
There has been lots of discussion over the years whether MLM is a legitimate business model. Forbes business magazine provides an argument for it being a legitimate business model. They reference Mary Kay, Tupperware, Advocare and Avon.
Multi-Level Marketing Business Model
A business model is a representation of an organization based on its underlying assumptions and statements. The model describes how the organization delivers value to a consumer.
“used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, business process, target customers, offerings, strategies, infrastructure, organizational structures, sourcing, trading practices, and operational processes and policies including culture.”
Harvard Business Review describes a business model as delivering value to a consumer. Within a business, value has two parts. The first part is the gathering of resources and converting the resources (production) into a product. The second part is the marketing of the product. Marketing is those activities related to selling and delivering the product to the consumer.
MLM companies use distributors to market and sell company products. Other names for distributors include independent business owners, associates, members, and other titles.
Companies that decide to use the MLM business model do so based on several factors.
First of all, this business model reduces cost and risks. Costs include salaries and benefits and selling, general and administrative (SGA) costs. As stated above, independent distributors are responsible for recruiting their own sales forces. The distributor then trains the sales force at his expense.
Employee salary and benefit costs
Obviously, employee costs include the salary and a bundle of benefits. Benefits range from free coffee to major benefits such as medical, life insurance, disability coverage, dental plans, tuition reimbursement… the list goes on.
The average employee replacement cost for a high turnover, low paying job is 16% of annual salary. (Those earning under $30,000 a year). For example, the cost to replace a $10/hour retail employee would be $3,328. 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year).Feb 4, 2016
To lower labor costs, companies use distributors paid on a commission basis. Independent distributors tend to be very money-motivated. There is no standard sales commission. Commission structures need to motivate and inspire them to sell products.
The size of the commission structure is dependent on several factors. The factors include:
- Price of the items. Expensive or high cost items may take more effort to sell. Commission rates tend to be low.
- Customer support. If the distributor provides after-sale support, then the commission rate may be higher.
- Customer training. If the sales representative provides customer training, then this impacts commission rates.
Independent distributors can be important part of many companies’ sales and marketing strategies. This enables them to extend their reach to markets far from the company location.
Companies also consider how fast they want to introduce their product line. It takes time to create a recruiting team, hire, and train a sales oganization. So the companies offer large incentives to recruit talented, experienced network marketing experts. These experts are willing to assume large risk in return for large rewards.
Publicly-owned multi level marketing companies
The list below shows some of the top publicly-owned multi level marketing companies. The Securities Exchange Commission would not give an illegal pyramid scheme a New York Stock Exchange listing!
Avon – beauty, household, and personal care
Nature’s Sunshine – Aromatherapy, Cookware, Health/Fitness/Wellness, Homeopathics, Nutritional Supplements, Oral Hygiene, Personal Care, Skincare, Water Treatment Systems, Weight Management
Herbalife – Health/Fitness/Wellness, Nutritional Supplements, Personal Care, Skincare, Weight Management
Primerica – Financial Services
Nu Skin – Cosmetics, Fragrances, Haircare/Hair Accessories, Health/Fitness/Wellness, Internet Services, Nutritional Supplements, Oral Hygiene, Personal Care, Photography/Photo Processing, Skincare, Telecommunications Services, Weight Management
USANA Health Sciences Inc – Haircare/Hair Accessories, Health/Fitness/Wellness, Nutritional Supplements, Oral Hygiene, Personal Care, Skincare, Weight Management
Pampered Chef (owned by Berkshire Hathaway Inc) – Cookware, House and Kitchenwares
How many people know billionaire Warren Buffet is in a multi-level marketing business?
Multi-Level Marketing Criticism
MLM companies and distributors have earned the criticism they have received. In fact, they have been subject to lawsuits. Much of the criticism is related to the similarity to pyramid schemes as well as pricing, recruiting methods, and training.
The hierarchical organization of companies is often misidentified as illegal pyramid schemes. People think if it looks like a pyramid, then it is a pyramid scheme. The idea is that only the top few people make money. But, distributors assuming the most risk make the most.
The Federal Trade Commission provides information on pyramid schemes. But the FTC regulations are not federal law. Congress attempted to codify pyramid schemes in federal law.
But H.R. 5230 – 114th Congress: Anti-Pyramid Promotional Scheme Act of 2016 was not enacted by the end of a Congress.
It was a bipartisan sponsored bill that would finally define a pyramid scheme. The most important part of this legislation was to define internal consumption. This means customers who are also distributors or members are “consumers.”
MLM products are over-priced. This is an assumption parading as a fact. Critics say MLM products are high-priced to pay downline distributor commissions. In a courtroom, a lawyer would state an objection based on assumption of facts not in evidence.
Business models include a revenue model. The revenue model defines the pricing model and customer acquisition and retention model. The pricing model consists of price details and structure. The SGA and training costs are not part of this model since they pass to the distributors. So the assumption is the pricing is less than it would be otherwise.
This difference should cover compensation paid for downline sales performance.
Consumers determine what they are willing to pay for a product. So they determine product value in terms other than cost. Prestige and quality are important considerations.
Fashions are a great example. In “Trump: Think Like a Billionaire” Donald Trump wrote “I wear Brioni suits, which I buy off the rack.”
Brioni suits off the rack start at $2,000.
Needless to say, but handmade suits are expensive.
The bottom line is that there are many product price points from which consumers may choose.
Recruiting and relationship marketing
People criticize MLM because recruiters place more emphasis on recruiting than selling products. Recruiters “sell” potential distributors on the potential to earn commissions from downline sales. And may exceed the amount of commissions from selling products.
As stated above, independent distributors market and sell MLM company products and services. So companies have difficulty supervising and disciplining distributors. Herbalife is a case in point. After years of negotiating, Herbalife and the FTC agreed to a settlement. Herbalife will restructure its operation and pay a $200 million fine.
Critics of MLM often comment that distributors “drink the Kool-aid.”
The original connotation involved a mass suicide at Jim Jones’ Peoples Temple. Now, the phrase reflects dedication to a cause, obedience to a group, or great passion. Examples include Tony Robbins followers, corporation employees, political parties, and MLM business meetings.
The fervor at a Tony Robbins event can resembles the passion of a revival meeting. Like-minded people gathered together to have a positive experience. Associating with like-minded people to achieve success lessens the influence of negative thinking.
As Napolean Hill points out in his book, “Think & Grow Rich”
People who do not succeed have one distinguishing trait in common. They know all the reasons for failure. They have what they believe to be air-tight alibis to explain away their own lack of achievement.
Quality MLM training varies from company to company. Much of the criticism results from poor training and unethical distributors. Because distributors tend to be very money-motivated, recruiters focus on wealth and luxury. And there is too much emphasis on instant gratification.
So we see many ads or hear hyped business opportunities describing get-rich-quick schemes. Or there is no work required. You can do it in your spare time.
Complex compensation plans
Compensation plans are the bane of MLM companies. Companies use all kinds of formulas to reward downline member sales performance. So, the multi-level marketing compensation plans use unique names like matrix, binary, or unilevel. Companies use incentives in the compensation plans as a means to compensate achievers. The Mary Kay “pink cadillac” is a prime example. Here is an example of a compensation plan.
Advantages/Disadvantages of Multi-Level Marketing
Analyzing multi-level marketing depends on your perspective. One person’s advantage may be another’s disadvantage. For example, it is an advantage that an MLM business has a low cost of entry. Because starting a franchise like McDonald’s fast food restaurant is expensive. Furthermore, low cost of entry can be a disadvantage because anyone could join.
Because someone can join does not mean they should.
The last person that should start a home business is a broke person. Yet, MLM recruiters target people who need money. A broke person needs to assess their living expenses and find ways to save money.
- Risk – There is typically low cost of entry to start an MLM business. Costs may include fees, material costs, and other costs associated with starting a business. There may be costs for samples and inventory. Yet, it still costs less than opening a McDonald’s franchise. There are major costs before selling the first hamburger. Costs include labor, rent/lease, food costs, equipment costs among others.
- Quality of Products – The quality of products vary widely as they do with any business (non-MLM). Each consumer makes a personal decision about quality of a product. Why buy a Smashbox (brand owned by Estee Lauder) Smashbox Studio Skin 15 Hour Foundation costmetic, 1 ounce, for $42.00 when the Maybelline Super Stay Better Skin Foundation is available for $8.98 at Walmart? The question is would I still buy the MLM product if there were no opportunity associated with it. Also, are there other benefits to using the product besides making money.
- Income Potential – Starting any business assumes potential for success. Whether it is a franchise, affiliate marketing, or MLM, the goal is to create a successful business. A typical income disclosure statement will show percentages of distributors making money. The MLM business model gives a distributor a chance of making more money than the sponsor. Fact is a Walmart door greeter will never make more money than the Walmart CEO.
- Residual Income – There is residual income potential with MLM. After you have stopped being an active distributor, you may still earn commissions. The residual income is dependent on the sales volume of the distributor’s recruited sales force.
- Low Overhead – A home based business has low overhead unlike a brick-and-mortar business. There are tax advantages associated with a home business as well.
Reputation – MLM is mistaken for pyramid schemes. Bad business practices and distributors cause MLM association with the word “scheme.” Too many unscrupulous people promote multi-level marketing as a way to “get-rich-quick.” They also promote “the dream” of life-changing income appealing to the baser instincts. When the focus becomes recruiting new members and not sales, the businesses become pyramid schemes.
Recruiting – The MLM business model makes distributors responsible for hiring their own sales force. The time, effort and cost of recruiting belongs to the distributor. It is fair to say that most people becoming an MLM distributor do not have the training or experience to recruit new members. “Old school” sponsors tell new members to make a list and contact all your family and friends. If a sponsor says this, it is a sign they are either poorly trained or lack confidence in your ability to succeed.
Marketing – MLM companies have gotten into serious legal trouble because of how distributors have marketed the products and business opportunities. The U.S. Government sued and fined Herbalife millions of dollars for fraudulent claims made by distributors. Because of the risk, companies mandate distributors follow a corporate “system” to promote the products and opportunity. So much for distributor independence!
Lack of Sales Training – Business is about selling. Plain and simple. People exchange cash for a solution to a problem they have or a unfulfilled want. Yet, people do not like to sell. Unscrupulous distributors disguise the sales process as “sharing” or some other disingenuous words. Given the state of communications today, there are a number of mass media methods for building a business. Some are email marketing, social media networking, advertising, blogging, and paid advertising.
Evaluating a Multi-Level Marketing Business Opportunity
Here are some factors to help you decide to join a multi-level marketing business.
The following criteria are not listed in any particular order. Before starting, define your goals for having a business. The goals should be both financial and non-financial. This will give you a basis whether the business would meet those goals.
You also need to assess your current financial situation. You cannot fix it if you do not know where you are.
So the first thing that you should do is figure out where and how much money you are spending.
Track your spending!
So sit down and list your money coming in and going out. Track the last three months. Tracking the last six months is even better.
The aim is to determine your cash flow. What’s flowing in and what’s flowing out.
If you are broke, the last thing you need to do is join an MLM company or business opportunity!
Having goals will lessen the affect marketing pitches and hype will have.
Products and services – The products and services must have a demand. Does the product or service fill a need in the marketplace? Or does it solve a problem?
Profitable – Can everyone make a profit in a reasonable amount of time? Does the company provide an income disclosure statement?
Training – You will want to see the quality of training and support. Training should include videos as well as text lessons. Live webinars are even better.
Company reputation – Is the company leadership and management experienced? Do they have a successful track record? Does the company have a good public image and known for quality?
Support – Check any support provided by the company and upline distributors. They should have a responsive support system in place. Distributors should be able to interact and receive guidance via live chat, tutorials, blogs and private mail. The company should provide sufficient “back office”administration and information.
Established System – The company and upline distributors should have a proven marketing system.
Tools and resources – There should be tools available to help create a successful business. If distributors must buy the tools, the prices should be reasonable. Often, tools and materials are profit centers for the company or leaders.
Use these criteria to check potential business opportunities. Do your homework and due diligence. Make a chart and list multi-level marketing companies you find. Focus on the MLM products and services you would be happy to use and proud to sell.
Hopefully, you will be able to distinguish legitimate companies from the MLM schemes with the information and links provided above.
If you decide that a multi level-marketing company is not for you, there are other business opportunities.
If you have any questions or comments about multi-level marketing or have experiences with MLM that you would like to share, please fill in and submit the form below. I love feedback!