Updated: Sep 27, 2020
Time Was: When the MLM wasn’t a dirty word
There was a time when the business model worked, and it worked well. But, like time did to the horse and buggy, those times passed and the usefulness of the MLM passed with them.
There’s a reason I bring up that analogy—that’s exactly when the MLM was created and when it worked. The business model’s use persisted well into the 1950’s and even into the 1970’s. It only started to wane, and its uglier and illegal cousin the pyramid scheme slid into its place, in the 1980’s with the advent of the fax machine, the mall, and then the final nail in its coffin was the internet and Amazon.
What they actually sell
The ugly truth behind the MLM is in what they truly sell—and it isn’t what they claim to sell.
Most, if not all, MLMs claim to sell a product or service. They will even claim the quality of the product is far better than anywhere you will ever find anywhere else or have properties that no other product like it has.
Anything to justify the bloated price of the grossly overpriced product or service.
However, once you’ve allowed them in the door—literally, in most cases, as the MLM model very rarely has a storefront or an office you can visit—the real point of their company comes quite clear.
They want to recruit you.
Look into any brochure from any direct sales company and you will see a happily smiling face of a successful salesperson and underneath that are the words, “Join us! Experience financial freedom!”
Not what’s in the catalog.
The real product is you—and anyone else you can pull in with you.
The term they call this is the “downline”. This is where they tell you that you can be your own boss and own your own business, and—of course—what you’re selling is their product. However, dig a little deeper and you will discover that the real promise of income comes from how many others you can pull in underneath you to become your own downline.
What they don’t tell you is how far down the pipe you are. Just where you fall in someone else’s downline.
Here is where things get fuzzy.
There is nothing intrinsically wrong with a downline. Most of the time you even see this hierarchy of organization in any company. Someone must be the manager, and someone else must be managed by that manager otherwise an organization ceases to be very coherent. However, when a normal company hires, they very rarely hire more than the market, and by extension the company, can support to pay. The more you hire and the more you saturate the market with the same product the harder it is to make any money.
We call this “Market Saturation”.
The problem with MLMs is that they don’t pull back from market saturation. They just keep jamming more people in. The reason for this is that they aren’t making any money from the product per se, but from the downline.
The product they’ve oversaturated the market with isn’t what they’re after.
It’s more downline.
If you’re at the bottom of that downline, the chances of you making any money are slim to none. Not only is there no market space for you to break into with selling product that no one wants or needs anymore, but you have no way to create your own downline.
A long time ago, the business model wasn’t a bad thing. It was the only way for a company to get word out and advertise that they existed. Everything changed with modern advertising and the telephone. While travelling sales wasn’t completely dead, it had undergone a complete overhaul. One sales representative could do what ten used to.
But another change was coming.
The Internet, and—with it—Social Media with turned advertising on its head.
It’s targeted—more so than even television and newspaper marketing because it’s directly based on a person’s (yours, actually) patterns and individual likes and dislikes.
It’s direct—those ads constantly bombard the user with ads and suggestions to websites and filter out those it believes the user isn’t interested in.
With social media targeted ads, direct sales reached the point of obsoletion.
You don’t pay a company to work for them—they pay you
The other issue with an MLM is they usually require an initial investment. This could seem very innocent. In most cases, what you’re buying is a kit of product to use for demonstrations so that people see what they’re buying before they buy it. It sounds very reasonable—after all, what store doesn’t have product in it for people to browse and, hopefully, eventually buy?
This is a benign ask—perhaps even a fair one. Once you’ve bought it, it is yours to keep. If that happens to be Tupperware, then you have your own personal Tupperware that will be useful for years to come even if you never manage to sell Tupperware to anyone else.
Where it goes from benign and fair to outright dishonest is when they also ask for an “administration fee” on top of this. Before this became illegal, many MLM-based insurance agencies asked for not only a budding agent to invest in their license (and any licensing fees) but also another large fee to be paid to the company. Some companies still hide this practice under other fees or other charges and will tell the new mark that it’s part of their starter kit.
As a note, paying for your education is different.
Even an insurance license is transferable to another company or even transferable to you as an independent agency (Completely independent and not part of a larger firm) after a time of being sponsored by a legitimate agency or brokerage. A college diploma or university degree is equally, most often more so, transferable throughout your entire life.
A fee paid to a company to ‘work for them’ is not transferable.
If this comes up—run in the other direction.
No legitimate company will ever ask you to pay to work with them.
You don’t own a thing—They Do!
When it comes to an MLM their promise of financial freedom by being your own boss and with having your own business their gigantic lie.
You don’t own a damn thing.
When you buy the starter kit or pay an administration fee to join these companies, the items are not considered assets in your own name. They are still part of the parent company’s (check the fine print on the contract) and you are an independent contractor selling their assets for them at a very low commission rate.
Long story short—you still don’t own your own business. You’re a commission only worker without any of the protections of a regular employee.
This makes working for them a very sour deal.
All of the risk ends up on you, but none of it actually rests with the company. Your hard work makes them money. Your money is spent to spread their financial cult. If it fails, you’re out your investment… and they are not.
If you are at the end of the downline, keep in mind the risk is even higher because of market saturation. Your income—despite their claim of limitless income potential—ends up being capped before you even start.
Thankfully, thanks to the Federal Trading Commission in the US and the Competition Bureau here in Canada, you can recoup some of the losses if you have already invested into an MLM. By law, these companies must ‘buy back’ any product that isn’t transferable to another business—but you’re only going to get eighty percent of your investment. Not one hundred percent.
It’s better than nothing but why throw away a fifth of what you could invest elsewhere?
Invest in your own dream—not someone’s dead horse
If your dream is to own your own business, why not do that instead? Invest the money that the obsolete MLM wants for your own brand. Even if your product is similar the fact that you’re choosing to be different and unique will make you stand out from that crowd.
That way you’re not only taking on all the risk—you’re also taking on all the gains.
An interesting article on MLM and social media: https://www.theatlantic.com/business/archive/2018/04/multilevel-marketing-yoga-pants-facebook/558296/
3 Obsolete Marketing Techniques (slightly biased, but so far everything I’ve used has worked): http://www.webinsight.co/site/blog/2017/12/11/3-obsolete-marketing-technologies-that-hurt-businesses
A Thesis by an MBA: https://www.internetworldstats.com/articles/art100.htm
A Quora discussion on it. I tend to approach these carefully as sometimes statements aren’t well supported: https://www.quora.com/What-do-you-think-about-network-marketing-Is-it-the-business-of-the-21st-century
US Federal Trade Commission: https://www.ftc.gov/tips-advice/business-center/guidance/multilevel-marketing
An interesting look at how celebrities, even smart ones, can be unwittingly yanked into an MLM hole: https://www.thedailybeast.com/george-w-bush-kobe-bryant-jordan-peterson-promote-shady-multilevel-marketing-company-php-agency
Beauty products are a primary target: https://www.theguardian.com/fashion/2019/jun/01/online-beauty-schemes-selling-social-media-younique-arbonne
Dave Ramsey Show: https://www.youtube.com/watch?v=m3YCpEKAmnE
Last Week Tonight: https://www.youtube.com/watch?v=s6MwGeOm8iI
Government of Canada—Competition Bureau chooses to take a milder look, but still has some valid warnings about the MLM’s closest sibling, the Pyramid Scheme: https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/02777.html
Another choosing to make a difference between an MLM and a pyramid, but the warnings are legitimate: https://www.thebalancesmb.com/is-it-multilevel-marketing-or-a-pyramid-scheme-2947159
MLM or Pyramid: https://money.howstuffworks.com/pyramid-scheme2.htm