Also people say they ruin lives, how?
In: Economics
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.
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.
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.
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.
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
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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