Also people say they ruin lives, how?
In: Economics
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.
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.
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.
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.
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
ELI5 answer (I hope)
MLM stands for multi level marketing. This means that instead of going to a job and getting paid by the big boss, the worker pays money to get the job in the first place and all the bosses above them get a cut of that money. The worker then tries to sell products, but there are a lot of other workers trying to sell the same products, so they are very hard to sell. The bosses above them take the majority of the money from the products, so the worker gets little or no money for themselves, and many actually lose money. Then the worker tries to be a big boss themselves and “hire” people under them so they can take a cut of their money too. But the problem is less than 1 in every 100 people will ever make enough money to support themselves like a real job. The workers do not get salaries.
You can spot a multi level marketing company by spiels such as “be your own boss” “work from your phone” “side hustle” “retire early” “bossbabe” and “I’ll PM you”.
MLM companies are bad because nearly >99% of people lose money and most of the rest do not earn a living wage.
Bonus round: some MLM companies promise perks like a brand new car which sounds pretty special. What this actually means though is the worker has to sell a LOT of products every single month and only if they sell that amount will they get a pay check for that car. If they don’t sell enough then they have to pay for the car all by themselves, which probably again means that they are losing money.
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
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.
Seriously, listen to season 1 of the dream podcast. Really fun and solid reporting on MLMs.
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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