Timotheus Update: This post was originally published on 9 May 2018 on this website – Passive Online Revenue. Due to rebranding and consolidation of the two sites, the post is now on this website – https://timotheuslee.com/business/what-is-mlm-multi-level-marketing/
I have had my fair share of experience with MLM, also known as Multi Level Marketing. I was with Young Living, Unity, encountered Amway plus many more. In this article I will explain What Is MLM, how they work, and most importantly – can people really make lots of money from this?
What Is MLM (Multi-Level Marketing)?
The first time I heard about MLM was back in the 1980s. There was buzz about something called network marketing.
That sounded good to me because I thought it was about networking for my then fledgling career.
I was so young and naïve.
I soon learned that it was actually Multi Level Marketing. Other names were pyramid selling, referral marketing, etc.
I also learned that there is no real job. Although titles such as distributors, salespeople, independent business owners are given to those who joined the company.
Nice titles. Especially the title of business owner. I was attracted to the idea of owning my own business. Who doesn’t want to be a business owner? Who doesn’t like the idea of making lots of money?
I know I did. But I soon found out otherwise.
How Does the MLM Business Model work?
An MLM business sells products or services. But unlike other businesses, there is hardly any form of marketing in the sense of advertising by the company itself. Most of the marketing and selling is done by independent non-salaried participants who join the business as distributors (also called associates, independent business owners, independent agents, etc).
From my experience, how they work is like this. A participant joins the MLM business. In order to join, they have to purchase the products or services. The common sales pitch to convince them to buy is such as – After all, if you are going to sell something, you have to try it yourself, right?
After the participant is a member of the MLM, they are encouraged to ‘introduce’ others to join the MLM company, just like them. Of course, if they like, they can simply sell the products to consumers. But the prices will be higher.
MLM companies like to proudly declare that their products are cheaper than similar products in the market because they do not spend money on marketing or advertising. But then again, strangely, the prices are higher if you are not a member of the MLM company.
When participants sell products direct to consumers, they get retail profit plus commission from the company. But, when they ‘introduce’ people to the business, and these people join, they become this participant’s downline. And after that, any product or service sold by the participant’s downline will result in commission for the downline as well as the participant.
This means that the participant gets commission from sales done by their downline. This is the pyramid in MLM’s multiple level structure of compensation.
Another thing to note is that anyone that the participant’s downline recruits will also be in the participant’s pyramid. How far down it goes defers in different MLM organizations.
When selling the idea of this revenue stream, participants often pitch is as being a business owner. Also, the idea of growing their own downline is another attractive carrot. Unfortunately, this revenue stream, is also the least statistically probable source of remuneration to a salesperson. So is the probability of direct sales of the participant’s own personal sales.
How do participants of MLM earn?
As a distributor, salesperson or whatever title they give you, know that there is no salary paid.
Then how do participants make money?
First, they join the MLM company. They usually will need to buy some of the products to qualify as a member and be allowed to sell the products.
They sell directly to end user retail consumers. This is through relationship referrals or word of mouth marketing. I know of some who conduct events that are free to attend or free talks to educate people on the products.
During either of these, there will be promotion of the products and people are encouraged to join the MLM company. The latter is more important as those who join will become their down line distributors.
There usually is a strong incentive to recruit others to join the MLM.business, and become their down line. This is because besides the sales commissions from direct retail customers, they also get commissions from sales made by their down line.
Can You Make Money with MLM?
A study by the Federal Trade Commission reported that at least 99% of people who join MLM companies lose money.
So why do people still join MLM?
This is because people are led to believe that they can make lots of money from selling the products. During the introduction, such as a preview seminar or one to one discussion, MLM companIes focus on the potential earnings one can achieve. They use participants who made millions as examples. And they tell you that you can do it too.
What they don’t tell you is the statistical improbability of that happening. That many have tried. And many have lost money.
I was one of those who lost money in MLM ventures.
Here are some reports on whether people make money with MLM:
The Times reported that “The Government investigation claims to have revealed that just 10% of Amway’s agents in Britain make any profit, with less than one in ten selling a single item of the group’s products.”
“UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] population of 33,000, ‘only about 90 made sufficient incomes to cover the costs of actively building their business.’ That’s a 99.7 percent loss rate for investors.” – Eric Scheibeler, high level “Emerald” member, Amway
Newsweek reported that based on Mona Vie’s own 2007 income disclosure statement “fewer than 1 percent qualified for commissions and of those, only 10 percent made more than $100 a week.”
In an October 15, 2010 article in USA Today, it was revealed that 30% of MLM company – Fortune Hi-Tech Marketing participants make absolutely nothing. 54% of the rest of the 70% make only $93 a month!
“You’d be hard-pressed to find anyone making over $1.50 an hour, the primary product is opportunity. The strongest, most powerful motivational force today is false hope.” – Roland Whitsell, research professor
As you can see from above, an overwhelming majority of MLM participants end up with either a significant loss or nil net profit. This is after expenses are deducted.
It is only the few individuals at the uppermost level of the MLM pyramid that makes an obscene amount of money. And these are the people that the MLM company will focus on. They will quote these cases to convince people to join their organization, telling them that if these people can, so can they. The reality is it will never happen.
While many MLM companies are generating billions of dollars in annual revenue, and hundreds of millions of dollars in annual profit, 90% or more of their participants are operating at a loss.
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