Also people say they ruin lives, how?
In: Economics
Trying for the ELI5…
Bad MLMs are companies that don’t really make money without preying on their employees (fees, pay for advancement, conventions, etc) or constantly expanding and getting new membership payments. The product is almost not important to the company.
There might be good ones out there, but don’t ask me which ones.
They are pyramid schemes. They make money in two ways and this is how it ruins lives. Upon joining the team at a MLM you will usually be asked to go out of pocket to buy a set of products that you sell. You make whatever you sell, but people bankrupt themselves on the initial purchase before realizing their products dont sell.
The better way to make money is to get a new member to join, bc then they will buy a whole starting kit from you (just like you did at first).
What happens most of the time is that people start trying to work over their friends to make sales. And it gets personal.
In some cases, the products are snake oil – for example, an expensive medical device that claims circulation benefits. Another is an expensive filter that “enhances” your ordinary tap water, promising benefits from consuming it, post-treatment.
In other cases, the products are legit, like Amway cleaning products, but way more expensive, even at wholesale, than they should be.
One of the problems with MLM schemes is that after your “buy in” they often coerce you into buying “motivational” products – books, courses, etc and threaten to “cut you off” if you don’t purchase them. Attending expensive “conferences” and “seminars” which you pay for, all out of pocket, is often pushed, too.
Then there’s the social cost – it simply “makes sense” to hit up family and friends first and hopefully get referrals from them, but more often than not you just annoy them, and even push them away completely. I know someone who is so desperate to sell that medical device that she attempted to do some lead generation at a wake. I’m in a legitimate business for myself, and I know she wants my client list because most of them are affluent and well-connected. But if I ever made this person privy to these hard won contacts, I’d probably never hear from those people again. Their time is too valuable to be bothered with MLM poison.
There are LOTS of anti-MLM sites out there (although supposedly some have been bought out by MLM companies or some of the few successful distributors and had their message subtly re-crafted), but it might be worthwhile to check out the docu, “Betting On Zero” – originally on Netflix, it can be rented for about two bucks on Amazon.
MLM stands for Multi-Level Marketing, which is a fancy way of saying ‘Pyramid Scheme’.
Essentially, as someone working for an MLM brand you have two means of income: Sell products yourself, or recruit people and get a cut of what they sell.
The problem with MLMs is that in the first option, generally you are a “re-seller”, that is you buy a bunch of products at wholesale cost, then sell them for a higher price. That can be difficult, especially if you are not at the top of the pyramid and you have to pay a percentage of your commission in the form of higher wholesale costs. Another downfall is that every person you recruit is now also selling the product, and now you are going to have a tougher time selling because they are direct competition. On top of that, *you* are making the financial investment, so if you can’t sell your product, well you just bought a lifetime of charcoal face cream.
Lastly, MLMs depend on exponential growth. Let’s say you recruit 5 of your friends, and each of them recruits 5 of their friends, and so on. Because of the nature of exponential growth, after the 14th iteration you would have more than 6 billion people trying to sell this product – and that’s only if you can get effectively everyone in the world on board. At only 9 iterations, you’d have ~200,000 people selling this product which is more employees than multi-billion dollar companies (Apple, Google, Microsoft etc.) employ. It is very unlikely that a special kind of herb is going to be more sustainable than some of the world’s largest companies (marijuana excluded for obvious reasons). This means the selling market gets saturated very quickly, so if you’re not at the top you’re likely not going to find people to recruit yourself that haven’t already been propositioned. Another pitfall of being too far down on the pyramid is that those above you can sell for cheaper because they don’t have the mark-up you do, so as someone that has been recruited you are already at a disadvantage. Not *everyone* will want the product, so it will quickly reach all of the potential buyers and quickly fizzle out. To boot, everyone trying to sell the product does not want to buy the product, and generally people who love the product want to show the world how great it is, and so the high-volume buyers will likely not be buying from you, but from themselves.
The MLM business model is beneficial for those at the top, and incredibly poor for those on the bottom, and even bad for those in the middle. They sell you on the idea that “if you can hustle, you can make lots of money”, but the caveat there is that it only applies if only a *few* people are hustling. Instead, it preys on people not understanding this concept and investing their life into a model that is doomed from the get-go.
They should be illegal, I’m not exactly sure why they are not.
Seriously, listen to season 1 of the dream podcast. Really fun and solid reporting on MLMs.
I sell you an item for $40, you turn around and sell it for $65, next person sells it for $80, etc. The people on your “chain” get a percentage of sales all the way up.
Any “brand” where they don’t have a physical store and have people selling the ideas to others. Those people then buy product and try to sell it.
If there is no physical store and you have to attend a meeting in a hotel, then it’s MLM
Your friends and family will most likely be your customer base and from that base you will be constantly trying to recruit new dealers…..who else is there?….and also making a pitch to buy your product. It gets tiresome and those friends and family will start to disengage you from their lives
There are other good explanations elsewhere so I’m going to focus on one key part of the answer – the issue of MLMs lack of real customers.
There is nothing wrong with a system where you sign up to become a reseller of a product, so long as that product has sufficient genuine end-users who you can sell to. By ‘genuine end-users’ I mean people who use the product, think it is broadly worth the price, will pay for it, and do not need to be pressured into becoming resellers themselves.
In MLMs, there are no genuine end-users, or so few that they cannot possibly sustain all the resellers. Pretty much everybody buying the product is doing so to help sustain their own ‘business’, or because they are pressured to do so to support friends or people higher in the network. No one would be buying that product at that price, if it weren’t for being an MLM, especially as they tend to be low-end products at high-end prices.
Others have done a great job answering the mechanics of how an MLM functions and compares to a pyramid scheme, so I’ll try to answer your second question: how they ruin lives.
MLMs and their close cousin, Network Marketing companies, rely on a member’s social connections to sell product. The problem with this is that these companies KNOW they are running scams that will be unprofitable for the vast majority of participants, so they work hard to brainwash the participants into believing in the company at all costs.
Since the whole point of an MLM is recruiting new sellers beneath you, these companies force earnest sellers to spam their friends, family and acquaintances with unwanted sales pitches and “great business opportunities.” This can ruin friendships fast, especially when the recipient knows the truth and tries to explain it to the victim (I really think it’s appropriate to call most sellers victims).
Take it from someone whose wife’s best friend from high school has pitched 3 different MLMs in the last year – that friendship is toast. The financial devastation that comes from investing your life in a scam doesn’t help either
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