“Let me tell you about an incredible ground-level business opportunity,” and you are invited to a house or to lunch for “a discussion.” Funny enough, you feel sick in your gut that there is some hidden agenda or deception. “Probably a multi-level marketing (MLM) organization,” you think. Suppose it is? Should you trust your instincts? Is there anything wrong with MLM?
While this is the most difficult point to make, it is perhaps the most important. Anyone who has any experience with an MLM has strong feelings, either for or against, and this is the problem. Polarization runs deep.
Such a transparent appeal should make people suspicious. “Why the bait?” “Are they trying to ‘get my juices going’ so that my brain turns off?” “Couldn’t they show people doing more wholesome things with the money they make?” “If this is really a legitimate opportunity, why not focus on the market, product, or service instead of people reveling in lavish materialism?”
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For a portion of independent retailers, LuLaRoe is to economic opportunity as Goop is to wellness: It’s for ladies who already have it all. The ability to throw down $12,000 to start a LuLaRoe business and work 30 hours a week sometimes comes from a place of privilege, not desperation. Some mothers who are just looking for a hobby have husbands whose salaries are already high enough to support their families. “I felt like I was trying to keep up with the Joneses to stay in business against these other consultants who can afford to drop a $500 order every few days,” Ashley says.
What if I recruit more distributors – then can I stop selling? Assume each new guy manages to expand the business by 10% – again, EXTREMELY generous. With two sellers, total sales are $12,000 so I make $600 doing nothing, and each distributor in my downline makes $600 in direct profit. Even if each distributor increases sales by 10%, I’d still have to recruit at least 10 people and DOUBLE my total sales in order to profit least as much as before while doing nothing. With ten distributors and me at the top, total sales are $20,000. I make my $1,000, and they each make $200 (10% profit).
Vulnerable women are duped into believing that they too can become business owners, all in their spare time, while bouncing babies on their hips, taking care of a home, and working another part time job. They are given nothing but a promise and a golden carrot to chase, and then sent out to go sell.”
Scheibeler, a high level “Emerald” Amway member: “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.”
Even in the digital age, the brick-and-mortar retail experience is preferable to MLM: it’s more convenient and does not open people up to accusations of conning their friends with substandard products or high prices. Internet and catalog shopping and reliable shipping services have long since obviated the need for a tightly-knit distributor network serving remote areas; in urban areas, where retail shopping has always been fairly available, MLMs were never important to begin with.
“As of the end of first quarter 2017, approximately 90% of all retailers who started an independent fashion retailer business since the time LuLaRoe was founded still maintain their businesses today,” says a LuLaRoe spokesperson. “We are very proud of this figure.” In part due to this high retention rate, the market is becoming saturated, both online and off. Multiple retailers now often live within a few blocks of each other—and how many pairs of leggings does one neighbor really need? “They’ve flooded the market with so many consultants, nobody is making money, and everyone is so stressed out,” Sophie says. “Now it’s like, ‘Oh, there’s another consultant down the street.’”
Any business must carefully consider supply and demand. For example, if the ReVo Corporation thinks that it will have a full-fledged fad on their ovoid sunglasses next summer, perhaps they should plan to build and distribute, say, 10M units. This involves gearing up factories, setting up distribution and dealer networks, and carefully managing the inventories at each level so that ReVo will still have credibility with their distributors, retail outlets, and the public the following year.
MLM companies have been trying to find ways around China’s prohibitions, or have been developing other methods, such as direct sales, to take their products to China through retail operations. The Direct Sales Regulations limit direct selling to cosmetics, health food, sanitary products, bodybuilding equipment and kitchen utensils. And the Regulations require Chinese or foreign companies (“FIEs”) who intend to engage into direct sale business in mainland China to apply for and obtain direct selling license from the Ministry of Commerce (“MOFCOM”). In 2016, there are 73 companies, including domestic and foreign companies, have obtained the direct selling license. Some multi-level marketing sellers have circumvented this ban by establishing addresses and bank accounts in Hong Kong, where the practice is legal, while selling and recruiting on the mainland.
Thus, there is reason for the “bad taste” most people have for MLMs. By instinct if not experience or insight, we wince at the thought of what we know will follow in the wake of an MLM. Relationships strained, factions formed, deception, manipulation, greed, loss, a closet full of videotapes, brochures, and useless inventory that “everybody wants.”
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↑ Jump up to: 1.0 1.1 Carroll, Robert Todd (2003). The Skeptic’s Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0-471-27242-6. Archived from the original on June 26, 2009. http://www.skepdic.com/mlm.html. Retrieved June 29, 2009.
There is an undeniable camaraderie among MLMers. But for everyone else, “there goes the neighborhood.” It is saddening to see people being encouraged against all instinct and common sense to chase after an illusory “pot of gold,” but what can be done?
First, we will analyze the “driving mechanism” of MLMs. We will detail how they are intrinsically unstable, guaranteed by design to oversaturate the market with no one noticing. We will look at why MLMs can never equalize into profitability the way companies in the real world can, so that the result will be that the organization as a whole cannot, even in theory, be profitable. When this inevitable destiny occurs, the only money to be made is not from the product or service but from the losses of people lower down in the organization.
Business Students Focus on Ethics: “In the USA, the average annual income from MLM for 90% MLM members is no more than US $5,000, which is far from being a sufficient means of making a living (San Lian Life Weekly 1998)”
All products and services have partial market penetration. For example, only so many people wish to use a discount broker, as evidenced by the very successful but only partial market penetration of Charles Schwab. Not everyone wishes to join a particular discount club, or buy gold, or drink filtered water, or wear a particular style of shoe, or use any product or service. No one in the real world of business would seriously consider the thin arguments of the MLMers when they flippantly mention the infinite market need for their product or services.
There are many diverse opinions when it comes to Network Marketing. Some people will swear by Network Marketing, whereas others will swear Network Marketing is a scheme where only a few make money and the ones on the bottom of the tier make little to no money.
^ Jump up to: a b c d e f Carroll, Robert Todd (2003). The Skeptic’s Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0-471-27242-6. Archived from the original on June 26, 2009. Retrieved June 29, 2009.
So why are MLM promoters obscuring this? Who is in control of the supply “knob,” carefully and skillfully managing the size of the distribution channels, number of salespeople, inventory, etc., to insure the success of all involved in the business? The truth is chilling: nobody.
Some people don’t want to give out their SS# to become a rep. The companies need these to file taxes with the IRS. I understand concerns about keeping your SS# private. One alternative is to get a Tax ID # from your state. (Update: One reader shared there is a way to get a discount from doTERRA without your SS#.)
“There was a point in time where I had $8,000 worth of inventory sitting in my home while I was running up to food banks to feed my family.” Sales started to decline in the third month. Her consultant group told her it was because she didn’t have enough inventory, so Ashley followed their advice and bought even more. As sales continued to decline, she used her income-tax rebate to buy more, but it didn’t keep her sales from bottoming out at $500 a month. “There was a point in time where I had $8,000 worth of inventory sitting in my home while I was running up to food banks to feed my family,” she says. “I really feel like I failed my family.”
The minimum order is 30 pieces at a time, and LuLaRoe requires sellers to buy a minimum of 33 pieces a month ($346 in wholesale leggings, for example) to maintain active status. This means that if a retailer sold 30 pairs of leggings a week, it would take them just under three months to make back their initial $5,000. As they also need to use their revenue to restock an additional 33 pieces a month ($1,038 worth of leggings over 11.5 weeks), it would therefore take another month or so of selling 30 pairs of leggings a week to start turning a small profit. (There is a more detailed mathematical breakdown of different business models here.) “Just like anyone starting a new business, there is risk involved and not everyone is guaranteed success,” LuLaRoe CMO Lyon says.
Jump up ↑ News, A. B. C. (December 16, 2017). “Former NXIVM member says she was invited into a secret sorority, then branded”. http://abcnews.go.com/US/nxivm-member-invited-secret-sorority-branded/story?id=51617201. Retrieved February 10, 2018.
Jump up ^ Pratt, Michael G.; Rosa, José Antonio (2003). “Transforming work-family conflict into commitment in network marketing organizations”. The Academy of Management Journal. 46 (4): 395–418. doi:10.2307/30040635.
Another common practice is “channel stuffing” – requiring distributors to buy large minimums of company product, ostensibly for retail sale or for “personal use,” which serves to inflate sales numbers to give the appearance that an MLM is more sales-driven than it really is. However, the only support materials usually provided by their recruiter(s) are ones that promote the signing on of more new distributors. As a result, many a person out there has a closet full of Mary Kay cosmetics that they don’t need, and can’t sell. Type the name of any well-known MLM into eBay or Craigslist and you’ll see evidence of what becomes of that “investment” of “just a few hundred dollars” made in order to achieve new wealth and prosperity in ten hours a week from home.
Jump up ↑ Cohan, William D. (November 18, 2014). “How a Strange, Secretive, Cult-like Company Is Waging Legal War Against Journalists”. The Nation. http://www.thenation.com/article/190881/how-strange-secretive-cult-company-waging-legal-war-against-journalists.
Buying products from a network marketing company isn’t cheaper, faster, or more pleasant than buying them on the open market, and it’s often considerably worse in all three of these categories. That’s because unlike normal retail business, where the supply chain is direct and logical (from manufacturer, to wholesaler, to retailer, to customer), in MLMs the supply chain follows the customer’s upline, accumulating markups and compounding inefficiencies at each level of the pyramid. The result is higher prices, frequent unexplained delays, and products that are constantly “on back-order.” MLMs will often try to artificially suppress competition by claiming their product is unique or superior to all others – even claiming that their competitors’ products are poisonous or even Satanic – but equivalent products are always available from normal retail outlets, often at a fraction of the cost.
With the company’s rules shifting and no small-business training offered to consultants, it’s easy to let enthusiasm blindside reality—and if you’re drowning, you’re fighting against a riptide of consultants to save yourself.
These are only a couple of examples of people who went from struggling with their finances to being financially secure, and continuing to make a fortune. There are hundreds of more examples of people who have literally gone from rags to riches through Network Marketing. However, it should be emphasized that these people did not just sit back and collect money, they had to put in the hard work and dedication necessary to grow their network of sales, as well as doing the work required to get the word out and represent their companies.
It is important to distinguish between the MLM company itself versus the so-called “independent businesses” run by the MLM participants. Many MLM companies generate billions of dollars in annual revenue and hundreds of millions of dollars in annual profit, however, an MLM company’s overall profitability does not correlate to the profitability experience of their participants.
Where is the “switch” that can be flipped in an MLM when enough sales people are hired? In a normal company a manager says, “We have enough, let’s stop hiring people at this point.” But in an MLM, there is no way to do this. An MLM is a human “churning” machine with no “off button.” Out of control by design, its gears will grind up the money, time, credibility, and entrepreneurial energy of well-meaning people who joined merely to supplement their income. Better to just steer clear of this monster to begin with.
Independent non-salaried participants, referred to as distributors (variously called “associates”, “independent business owners”, “independent agents”, etc.), are authorized to distribute the company’s products or services. They are awarded their own immediate retail profit from customers plus commission from the company, not downlines, through a multi-level marketing compensation plan, which is based upon the volume of products sold through their own sales efforts as well as that of their downline organization.
The MLMers of the new millennium are starting to sound a lot like the gangsters of yesteryear. In an era where management science and the law generally condemn MLM, they’ve “got their own experts,” from academia or law, who are “on the payroll.” Confidence, remember, is key.
One of the arguments MLM reps make in defending their ‘business’ is that it’s just the same as any other small business. You need to invest to get started, you need to sell, and some people just aren’t cut out to make it in business, so will fail.
Walter J. Carl stated in a 2004 Western Journal of Communication article that “MLM organizations have been described by some as cults (Butterfield, 1985), pyramid schemes (Fitzpatrick & Reynolds, 1997), or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999), such as the questionable use of evangelical discourse to promote the business (Höpfl & Maddrell, 1996), and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)”. In China, volunteers working to rescue people from the schemes have been physically attacked.
There is some stigma attached to networking marketing, especially with regard to multi-tier and multilevel structures, which attract pyramid schemes. Still, the appeal of network marketing is that an individual with little skill but a lot of energy can create a profitable business for themselves with little monetary investment. A good rule of thumb, according to the Federal Trade Commission, is that single-tier network marketing operations tend to be more reputable, but multi-tier schemes in which people make money based on the number of distributors they recruit — rather than self-generated sales — can be problematic. Some reputable examples of single-tier network marketing operations are Avon, Mary Kay and Excel Communications.