[Today we’re continuing to celebrate National Consumer Protection Week with more MLM scam awareness. The FTC has some good advice on MLMs from its recent consumer warnings, “Most people who join MLMs make little or no money. And, if promoters emphasize recruiting as the real way to make money, walk away.”]
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. I don’t believe it is that big of a claim, just the big lie told by the MLM industry. It’s not a coincidence that the average person likely can’t distinguish them from a pyramid scheme.
MLM’s Deceptive Doublespeak
To start, MLM often attempts to disguise itself under other names in hopes that its terrible reputation is not detected. That’s why you see it called “Network Marketing”, “Direct Sales”, or even “Community Commerce.” For now, let’s agree to call it MLM because that’s the only term that explicitly states the “levels” that are the defining characteristic of every MLM. Direct selling could be hosting a yard sale or putting an object on eBay. That is clearly not MLM. Network marketing could refer to an advertisement that you see on ABC/NBC/CBS etc. which is also not 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. If someone tries to recruit you into “network marketing” or “direct sales” it is best to run away from their deception.
Why MLM is Not a Business
With that out of the way, here are just some of the reasons why MLM distributors are not businesses:
- Businesses obey the Commandment of Control
This is something that I first read in The Millionaire Fastlane by MJ DeMarco. (I highly recommend this book.) MLM Distributors do not have control. DeMarco explains:
I was involved in four MLM companies. Not once do I remember dictating product decisions, research & 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?
- Business 101 Excludes MLM
One of my brilliant readers noted:
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/salespeople.
Every MLM that I’ve looked at fails these three principles. MLMs claim that distributors set their own pricing, but MLMs set the pricing to their
victimsexcessively high because that’s where they make the money. MLM salespeople can’t charge less or they’ll lose money. They can’t charge more for three reasons:
1. The products are already excessively high priced from the MLM company.
2. People can get the products at distributor cost (usually by signing up to be a preferred customer themselves)
3. The MLM distributor can’t compete on pricing with the other salespeople. They can’t charge more, because they don’t add any value to the consumer.
- 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 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.
- MLM Doesn’t Obey the Laws of Supply and Demand
McDonald’s 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 no one is interested in buying the product. They don’t ensure that there’s enough product demand for the distributor to make money. I often find that plenty of product is available with a simple eBay search.
If you put ten McDonald’s 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 McDonald’s franchise. When 99% of MLM distributors lose money, they are the ones that are blamed for the failure.
- 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 or this. I did the analysis for MonaVie a few years long ago. It’s 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”. As the FTC says, “blockquotMost people who join MLMs make little or no money.” Some of the people at the top might actually be making money. However, we know that a lottery winner is not the typical representative of what happens when you play the lottery, right? And if those people at the top are making that money from a recruited “downline” it is a pyramid scheme.
- MLM is Not like Any Other Small Business
Some MLMers claim that small businesses generally 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 100,000 people and 90% fail each year, there are 10,000 people after the first year. In the second year, another 90% fail, and we are left with 1,000 people. That’s a 99% failure in MLM vs. 30% in traditional small businesses in just two years. After 5 years, there is just a single person in MLM. In traditional small businesses, you still have 50,000 of the initial 100,000.
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.
- It Doesn’t Matter How Hard You Work
MLM supporters will claim that those who lose money just didn’t work hard enough. That’s not true. It’s simple mathematics that guarantees 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 so extremely difficult, that’s hard to say whether it has ever been done. 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 counter with “What’s worse?” A minimum wage job at McDonald’s 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 McDonald’s employee has a job… he isn’t running a business either. A dog poop service is a business, but you might not be interested in that business.
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
This article was originally published on January 15th, 2016. Some of the links in this article may go to books or products where I would earn a commission if you buy it.