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Why MLM is NOT a Business

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Multi-level Marketing (MLM) is not a business. Many MLMers say it is a business and act like it is one, but it simply isn't. It is a wolf in sheep's clothing.

It's a tall order for me to prove this. I'm a firm believer that big claims require big support.

To start, MLM often attempts to disguise it itself under other names in hopes that its bad reputation is not detected. That's why you see it called "Network Marketing", "Direct Sales", or even "Community Commerce." There's more on this topic here: MLM vs. Network Marketing vs. Direct Selling. For now, let's agree to call it MLM, because that's the only term that explicly states the "levels" that is indicative of every MLM.

The naming deception is not one of the reasons it is not a business. I simply needed to address it before we can move forward.

With that out of the way, here are just some of the reasons why MLM distributors are not businesses.

  1. Businesses obey the Commandment of Control

    This is something that I first read from author MJ DeMarco which I wrong about previously: The Business of MLM (or What Gives Freddy Krueger Nightmares). MLM Distributors do not have control of their business. DeMarco explains:

    "I was involved in four MLM companies. Not once do I remember dictating product decisions, research and marketing, marketing restriction, rules, cost analysis or any other activity fundamental to owning a business."

    If you aren't participating in fundamental activities related to owning a business... you can't call it a business, right?

  2. Business 101 Excludes MLM
    Tom said

    "Business 101 teaches that in order for you to be considered a business owner there are three 'musts.' You must have control of the product, you must have control of the distribution, and you must have control of the pricing. These people are not business owners, they are recruiters/sales people."

    In every MLM that I've looked at, none of these are true. MLMs claim that you can set your pricing, but they set the excessively high pricing you pay for the product. If MLM salespeople tried to charge less, they'll lose money. They can't charge more because it is already excessively high priced, people can get it at distributor cost, and they have to compete with other salespeople.

  3. Businesses obey the Commandment of Entry

    This also comes from DeMarco above. You have to be able to build a moat around your business and prevent others from competing with you. DeMarco again explains:

    "Network marketing, or multi-level marketing (MLM), always fails the Commandment of Entry—unless you own and create the MLM company yourself. If you’re in a room with 2,000 other people who do exactly what you do, you’re fighting stiff probabilities."

    One thing to keep in mind is that each of those 2,000 people are taught to recruit more people to compete with your business. There is no moat to protect your business. It is the exact opposite, where they are encouraging more people to compete against you.

    I'll get to it in a few more bullet points, but this competition is part of the reason why 99% of MLM distributors lose money.

  4. MLM Doesn't Obey the Laws of Supply and Demand

    McDonalds won't let franchise owners open up multiple ones on the same street unless there is sufficient demand. Otherwise, they would compete for few customers and go out of business.

    MLM has no problem with creating millions of distributors even if there is no one interested in buying the product. They don't ensure that there's enough demand for product for the distributor to make money. Much of the product demand can be met with a simple Ebay search.

    If you put ten McDonalds on the same block, you'd expect them to lose money and go out of business. You wouldn't blame the individual owners of the McDonalds franchise. When 99% of MLM distributors lose money, they are the ones that are blamed for the failure.

  5. More than 99% of people LOSE money
    Some MLM companies produce what is called an income disclosure statement so that their distributors can talk about the MLM as if it were a business opportunity. Analysis of these statements show that more than 99% of people lose money in MLM. Need examples? See this, this, and this. It becomes easy to see once you learn to read the fine print in the income disclosure statement. I cover how to do that in my Beachbody article.

    There are a lot of people in MLM bragging about making money. Many of them are "faking it until they make it". Some of the people at the top might actually be making money. However, we know that lottery winner is not the typical representative of what happens when you play the lottery, right?

  6. MLM is Not like Any Other Small Business
    Some MLMers claim that small businesses in general have a high failure rate. "High" is a relative term... and it doesn't come close to comparing with MLM.

    The U.S. Small Business Administration has this handy PDF of information. It seems that "7 of 10 survive the first two years" (30% failure rate over two years), "half at least 5 years", "a third at least 10 years", and "a quarter stay in business 15 years or more."

    Let's compare this to an MLM where 90% are failing every year. I'm being very generous given the proof above that 99% of them lose money. If we start with a 100,000 people and 90% fail each year, you have 10,000 people after the first year and 1000 people after two years. That's a 99% failure in MLM vs. 30% in traditional small businesses. After 5 years, you are left with a single person in MLM. In traditional small businesses you'd have 50,000.

    Do you want a 1 in 100,000 chance of being successful or a 50% chance? If you have to think about this question, please have the self-awareness to realize you are not intelligent enough to be that 1 in 100,000.

  7. It Doesn't Matter How Hard You Work

    As this article reads: "MLM supporters will claim that those who lose money just didn’t work hard enough. That’s not true. It’s simple mathematics that guarantee almost everyone will lose money. You can only make money if large numbers of people are recruited below you. That necessarily precludes almost everyone from making money, because they can’t recruit into infinity. As the pyramid below you gets wider, the new participants added have an even smaller chance of making money because there aren’t enough people in the world for everyone to make money."

    It's like telling someone that they can hit ten holes-in-one consecutively in golf. Anyone can work hard on your golf game day and night, but the circumstances of hitting ten holes-in-one are extremely difficult. If someone fails to hit ten holes-in-one, we don't tell them that they didn't work hard enough... we simply say that the goal was unattainable to start with.

    MLMers might counter that another person in the MLM attained it. It's always because they didn't have to work their way up there competing against everyone else. They were people who started at the top or brought their pyramid scheme from another MLM with them.

I hope you made it through all the above (or at least enough of them to realize that MLM is not a business).

Typically, when people understand that MLM isn't a business they ask me, "What's better?" I like to counter with "What's worse?" A minimum wage job at McDonalds is much, much better than spending your time to lose money. You might not like to take a job picking up dog poop, but it is profitable in the first hour.

While those are true, they aren't very inspiring. A McDonalds employee has a job... he isn't running a business either. A dog poop service is a business, but that might not be one you are interested.

So why not start a business on your own? Follow your passion... and see if you can find profitable ideas in that area of interest. Here's an extremely well-reviewed book to get you started: The Lean Startup

Personally, I think that every business needs a website. My business IS a website. It may sound difficult to create a website, but it is really very, very easy. I worked out a deal with Bluehost to get you started for as little as $3.49 a month. They walk you through the process very well and you get started in minutes.

Posted on January 15, 2016.

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9 Responses to “Why MLM is NOT a Business”

  1. Joel says:

    Well said. I have some friends I’d like to direct to this post.

  2. Jay says:

    Well said! All of these are great points! I wish everyone in an mlm could read this article.

  3. Thank you for your contribution. We will translated into Spanish and to share in

  4. Mommy-Brained says:

    Wouldn’t the type of tax form filed by MLM-ers also be telling? It’s my understanding that the 1099 tax form provided by MLM corporations to their independent sales representatives is an employee/independent contractor tax form, and NOT the form filed by small businesses. Would you mind looking into this and perhaps elaborating on why this could be important to distinguish between an unpaid employ…er… independent sales representative and a small business owner (assuming my thinking is even valid/relevant)?

    • Lazy Man says:

      I’m far from a tax expert. I know that MLM distributors can create their own small businesses. Any small business can receive income via 1099.

      For example, I know many bloggers who have incorporated their blogs as small businesses (I have done this myself). Many advertisers 1099 me payments. It’s up to the small business owner to file their business taxes appropriately. Since I’m not a tax expert, I hire one to my taxes.

  5. Mommy-Brained says:

    Thank you, that makes sense.

    I do agree with your main article points. The way I see it, MLMers are independent contractors on a commission-only compensation plan with loads of strings attached. I know MLM American Income Life Insurance Company was sued for treating their independent agents as unpaid employees, mandating in-office hours, training hours, meetings and how weeknight evenings and weekends hours were spent. I got out when I realized I was making less than $5 an hour. I barely recovered the cost of my licensing with my first insurance sales. I was glad for the payout from the lawsuit, as it covered the balance of the cost of my license. Not a wonderful experience, to say the least.

  6. Drake says:

    Although I would argue that many of these points actually lead to the problems we have in our flawed economic system (such as building moats aka rigging the system so that competition is impossible aka bad banking practices and business trusts)they definitely show that MLM is just another even sillier form of retail. Also, though, consider that most of these business “experts” are con men that take your money. They do not follow supply vs demand either. Look at cars or at healthcare and how easy it is to have and do all these things that used to be actual markets. There are 16 cars per person or more now in the U.S.A. and yet they are still $xx,xxx?? Retail business in general is dying with the world becoming one mind and organism, the constant ripping off of and profiting off of others is a dying way.

  7. jd says:

    Comparing MLMs to the auto world, can one imagine, if say, a company like VW was able to cheat on fuel efficiency claims, and get away with it, year after year?

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