Also people say they ruin lives, how?
In: Economics
I’ve spent years consulting some of the top MLMs on their technology stack. Here’s what I’ve observed:
– the “marketing” (or commission structure) budget is usually between 36%-40%. This is pretty consistent with most retail marketing and sales budgets.
– most MLMs sell their opportunity more than their product. You can tell by their gross receipts. In my opinion, commissions should only be paid on customer sales, but I’ve seen as much as 90% of revenue coming from sign up fees, renewal fees and distributor packs. That is a pyramid and is unsustainable as most people indicate. The best practice right now in the US is having less than 60% from selling the opportunity. I still think that’s way too high.
– MLMs are great for “high touch” products. A novel product with no market traction can gain traction through an MLM, but at some point it hits critical mass and really should transition to retail… But that’s not generally what happens. This explains the initial high price… But when I can buy Fijian noni at GNC for $10 why would I continue to buy *** noni for $30?
– most products from MLMs start out as great ideas and often with great materials, but at some point I see most companies adding fillers or sourcing sub-par suppliers. In other words…a knife from an MLM is not necessarily any better than a knife from Target.
In the end, I see MLM as a legitimate “go-to-market” strategy, but I haven’t really seen any company do it right yet… They either don’t understand product lifecycles, competitive landscapes, or they incentivize bad behaviors with opportunity-leaning comp plans, or at some point don’t deliver the value they claim.
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For anyone looking to know more about MLMs, their history, consequences and how the get away with this shit, listen to season 1 of The Dream:
https://podcasts.apple.com/us/podcast/the-dream/id1435743296
20+ year veteran of the hospitality industry, I have been back stage at hundreds of MLM seminars at local hotels. The founders/ organizers of MLMs think of the attendees as “sheeple” who will blindly follow anything they say. They are out to milk you for every dollar. I even watched the charismatic founder of one MLM financial advice seminar tell a group “sell my book of money-making secrets, then get your friends to sell…” . As soon as he was finished speaking , he was rushed to a waiting limo, then to a private jet going overseas. Three hours later the FBI / U.S. Marshals came looking for him.
Just a scam to get people to think there going to get rich quickly, witch usually makes you invest in there product first.
Imagine a 400 dollar internet cable box these people try to sell you. Well you get say 20 bucks for everyone you sell. Then anyone you recruit you get 5$ for every sale they make and same goes for them. There’s a very SMALL window to make money cause after 30 people start selling them you have to pay 30 people 5$ and the one who sold it 20$. Eventually the guy running the scam will run out of options and can’t make any more profit off of you and his minions not pay you enough so they will shut it down once there pockets are full.
You literally need to be the first few people to start the whole scam for you to actually make money.
Don’t let anyone try to make it seem better then this cause it’s actually worse.
MLMs that turn a profit based on recruiting more than selling product are indeed pyramid schemes. In the US there’s a law banning this. There are MLMs that don’t require you to hold inventory, instead just ordering through a website, thus reducing the risk.
Every MLM has a card they have to give to every new recruit with stats on how much most people make in that company.
There are many challenges trying to run a profitable MLM business, even when it’s focused on sales.
First, most people are bad at sales. REALLY bad. Turnover in sales positions in any industry is horrific, and that’s with a company handing them leads or phone numbers to call.
Second, most people are REALLY bad at lead generation, so they just hit up their “circle” of family and friends, which inevitably hits a ceiling and fizzles out. Lots of MLMs encourage them to hit up their circle knowing they’ll burn out because churning through burnouts makes the company more than hoping they figure out sales and lead gen. But not all companies do this.
That said, there exist companies who focus on sales, offer free training on sales, lead gen, leadership development, coaching, etc. With zero up front investment from the seller. They’re rare, but they do exist. I’m good with those.
We participated in an MLM that had a consumable nutrition product. We liked the results of the product and started our business. We worked hard.
Set up a good way of communicating with clients. Worked hard. Treated it like a business. Worked hard.
1st year $30K. 2nd year $60K. 3rd year $100K. Then two things happened: the crash of 2008 in which disposable income dried up and the company changed the product. Expanded it and reworked the formula. NOT a good idea.
It was great for tax benefits and we controlled our time which is amazing if you have been a 9 to 5 person. We worked HARD. Good while it lasted.
What we learned: Work hard. Have a consumable product. Work hard.
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
No explanation here, just an anecdote:
I had a “friend” try and sell me on the idea of an “unfranchise” model. They thought I’d like the opportunity to be part of their business model, since I was already independently operating a business.
The trap is they sell you on “it’s easy money, but you have to work hard”, but also that they rely in marks not to do their independent research. The offer was essentially to be another link down the chain.
“Just like a shopping mall” you had your website, you sold stuff off your website, and you could “give” your friends and family discounts for buying directly through you, except you don’t pay franchise fees. And you could increase your earning power by bringing on more people.
I presented the following, all of which were refuted with “but my mentor said it’s ok”:
Franchises at least give you notoriety via existing brand power: None of what I saw that they sold existed in any media I had consumed. Where were their advertising stats? Consumer target markets etc? Oh, you’re supposed to advertise word of mouth, because that “still works”.
Franchises give you actual purchasing power: I looked around, and if I look up the price of that product online, it’s exactly the same price everywhere else, and cheaper if I buy elsewhere in bulk. What’s your 5% discount compared to that?
Franchises have regulated training – your mentor taught you everything to be successful? Sure. What’s the difference between your product and the cheaper competitor? It works? So does the competitor’s. It’s scientifically tested? So is the competitor’s. Try again.
Having your own business means that you could actually have power over your inventory, but in this model you’re forced to purchase, and keep purchasing to a minimum spend to earn your commission.
You have access to their exclusive warehouse? Why not just use their website to sell your own stuff? I brought up that they could have made a killing sourcing and selling toilet paper for 3 months instead of “vitamin C supplements” and that they still had sold a few and insisted it was worth it, they just hadn’t sold much because they “decided to take a break and focus on other things”.
Just UGH. It’s definitely cult like.
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