I will get straight to the point.
In studying network marketing, i.e. multi-level marketing (MLM) for two years, specifically by studying a scam that claims to be MLM, but also a lot of peripheral research, I have came to the conclusion that MLM business model is fundamentally flawed, and thus, can be a VERY DANGEROUS business to participate in, if you don't go in with all the facts.
Basically, if a MLM is selling a dream of "passive income", not selling products, that MLM is essentially encouraging the itself to turn into a pyramid scheme because of the five flaws in the system itself.
The five flaws are:
- Creating your own competitors
- Conflict of Passive vs. Active Income
- Questionable profitability of product
- Similarity to Pyramid Schemes
- Cult-like indoctrination of members and prospective members
Add to that problems like
- Pseudo-MLM scams
- Late Government Intervention
And you have a VERY dangerous business to be in.
Let us study the five flaws one at a time, and the two additional factors. We will later discuss what are the warning signs to look for, and whether any legislation or reform can be done about it.
Actual quote from a travel MLM compensation package, note the part about getting bonus if you "sponsor" more "associates":
Weekly Dual Leadership Bonuses
• Paid down to 3 Generations when Teammates Cycle
• Sponsor 4 Associates earn $75.00 for each Compass Cycles
• Sponsor 6 Associates earn $150.00 for each Horizon Cycles
• You can be paid $225 over and over again as Teammates Cycles
What about Real Estate? Don't they train agents who then become competitors?
There are non-competition clauses written into most training contracts. Furthermore, all real estate agents must work through a licensed broker, and real estate agents work better in groups where more needs and wants can be matched. Real estate agents work off large ticket items where commission split still results in significant pay. Real Estate agents are licensed and tested, and numbers are limited, unlike MLMs where there is no qualification (other than joining).
Flaw 1: Creating Your Own Competitors
In a multi-level marketing plan, you need to sell things, but you also need to recruit other people who also sell the EXACT SAME THINGS and get a split of what they sell as commission. Essentially, you are creating your own competitors. Is that a sane business practice? (What the "things" are will be discussed in Flaw 3)
Think about it: if you recruit someone from within your own social circle, you pretty much just creating an equal competitor, and that will decrease your own sales. Will what you gain from recruiting that person (i.e. the cut from his sales) be enough to offset the loss of your own sales, and thus, income?
Some of the MLMers are taught to recruit your best customers. That is even MORE insane. You just turned one of your best assets, a repeat customer, into a COMPETITOR!
Not only are you expected to create competitors, you are supposed to create lots and lots of them. Most so-called "matrix" plans asks you to create as many competitors as you can, all vying to sell the same product, and you are actually REWARDED for such behavior by "filling the matrix" or "cycle out of the board" and so on!
What sort of sane business rewards its sales people by encouraging them to create competitors, AND train them, all selling the same product? This only benefits the company, not you, but they lure you in with the promise of "creating passive income".
Remember, the company doesn't spend a penny on training and marketing. YOU, as a member, will be doing all the training and marketing, and PAYING FOR IT YOURSELF. (Also see flaw 3: questionable profitability)
Usually the business and upline explains this problem away by rationalizing it as "generating passive income" by training their downlines. However, that is the next flaw in the MLM system.
NOTE: Scenario presented is extremely simplified and thus only serves as theoretical illustration of general concepts involved. Most compensation plans are much much more complicated than this, using various terms like business volume, points, ladders, boards, matrices, and so on, with different commission at different levels. Furthermore, marketing costs, because they are borne by individual members, can only be estimated.
Flaw 2: Conflict between Active vs. Passive Income
One of the "draw" of MLM is the promise of passive income, in that if you recruit enough good people under you, they will make themselves, the company, AND you lots of money, without you doing anything else. However, this is inherently contradictory with the message that MLM is about marketing a particular product, because you basically must recruit a LOT of people in order to make that sort of passive income. So what are you supposed to concentrate on, recruiting, or sales?
Or stating it another way, if MLM is REALLY about selling products, why does its very business model rewards recruiting more people, with the promise of "let someone ELSE sell the products"? If everybody wants to "let someone else sell the products" (i.e. generate passive income), who will actually sell the products?
Are there any scenarios we can look at to see if passive income is viable? This question is very difficult to answer without using a lot of assumptions, as there are a lot of factors, such as profit margin if selling alone (which is heavily dependent on marketing costs), company sales requirements, market size and expansion when new people are introduced, and so on. However, we will construct a theoretical scenario: let us compare one guy, selling the stuff alone, vs. the same guy, living off only commission.
Let's say this guy is selling $10000 worth of stuff every month, and profit margin, after accounting for all marketing expenses, is 10%. So profit is $1000 per month.
If he recruits another sales people, who basically took over all his leads, so he just sits back and relaxes, how much can he make? This depends on what sort of commission he can get from the sales. However, let us assume... 5%, which is a decent number. We will assume a flat 1 level organization, as a multi-level commission structure is just too hard to calculate with the space available here.
So he simply makes $500 without doing anything. However, that's HALF of his income from before. So he needs to sell stuff to maintain his $1000 per month income.
But he won't be able to sell $10000 worth of stuff as before, since he no longer have the leads, as he just created his own competitor. Let us assume they each found 10% new customers somehow. So the total sales is now $12000. However, it's now split between two guys, so each makes $6000 sales, so each pockets $600, and the upline pockets additional $300 as commission (5%), so he has $900.
What if he recruits TWO people, sits back and do nothing? Sales is $12000 (assuming each new guy manage to expand the business by 10%) so this guy makes $600 doing nothing. Each of the downline makes 600 in direct profit.
The numbers don't improve much if you increase the number of downlines, assuming that every sales person increase market by 10% so recruiting 10 people doubles the market somehow. At that point, with $20000 in overall sales, he can sit back, do nothing, and still pocket $1000 a month. Unfortunately, each sales person now has only 2000 (20000 divided by 10) in sales, and they each make $200 (10% profit).
So the choice is pretty clear: he can work his *** off every month, and sell $10000 worth of stuff to make $1000, or he can recruit ten other people to sell the stuff, do nothing else, and still pocket $1000 every month.
After all, isn't that the dream? To be making money even when lounging on a beach somewhere? It is no surprise most MLMs sell you this particular dream: do no work, make money.
It teaches the guy on the top to recruit a lot of people, and let THEM do the sales, and get rich off THEIR efforts. That is the optimum result, and is what everybody strives for. Everybody will want to be on the top end, where they don't have to work, and people at the bottom "support" them. Nobody wants to be on the bottom. However, there must be a bottom somewhere... The end result is nobody want to do active income, everybody wants passive income, and to achieve that means to recruit. Nobody wants to sell anything.
That's a pyramid scheme by its very definition.
We are actually assuming that the product actually can be sold to generate profit. Sometimes, even that may not be true, which brings us to flaw 3...
Example 1: A certain coffee MLM wants to sell you individual packs to be resold at TWICE the cost of Starbucks VIA individual packs coffee. (Wholesale price is still above price of Starbucks VIA coffee) The coffee is of questionable quality (one comment claims they taste worse than supermarket stuff). They may have the profit margin at MSRP, but they are not marketable against known brands and are redundant, and there is no profit if there are no sales. This basically forces all members to recruit new members and have them sign up for monthly autoship (i.e. force members to buy bad coffee), thus artificially generating sales, by promising them great income... if they also recruit people to buy more bad coffee.
Example 2: A certain travel MLM wants to sell you trips to be resold to the public, and promise to split with you 50% of any commission they get. They keep mentioning that this industry is an 8 trillion dollar industry. Unfortunately, the airline and travel industry overall is in a slump due to high fuel prices and bad economy, so average profit is less than 3% (airlines are reporting profits of less than 1%) If you quarter that (industry gives half profit to the MLM, and MLM gives you half of that), you get virtually nothing. If you sold $1000 vacation to someone, lets say company gets 2%, so you get 1%... That's $10. How many trips do you think you can sell in this economy? The product may be viable, but it is redundant (there are a bazillion travel websites out there) and generates virtually no profit. This essentially forces all participants to turn to recruiting new members as the primary way to earn income through this MLM.
Flaw 3: Questionable Profitability
For a business to be successful, MLM or not, its products must be marketable with sufficient profit after marketing costs to enrich the company AND its sales people. Unfortunately, for many (most?) MLM businesses, they fail this test miserably. Most MLM products are redundant (already available in traditional channels), overpriced (when compared to known national brands), have zero reputation behind it (being brand new), have insufficient profit margin to cover the company, the individual members, AND pay commission, or various combination of factors listed.
Whether a product is profitable to the seller or only can only be determined after ALL expenses have been accounted for. Network marketing presents itself as "low cost", but that's only because they did not tell you about the marketing and recruiting costs at all. You will be paying that out of your pocket. Most people barely break even and eke out a small profit after accounting for all expenses such as printing flyers, buying training material, pounding the pavement and calling prospects, and so on. The profit they generated mostly went into the expenses. Net profit is actually quite low, if any, despite what appears to be high profit margin.
Furthermore, the so-called "low startup cost" or "low investment", as touted by various MLM proponents as a "benefit" is actually quite deceptive, because
- You are spending "social capital", not real money, for your initial sales by exploiting your friends and family circle of influence. Once you spent your social capital, you must spend real money to acquire more customers.
- You are not told how much the marketing costs would be once you have exhausted your social capital. It was left entirely up to you. People are very bad in estimating marketing costs when it is not directly related to sales. Once you account for those, the "raw profit margin" you see on the individual products quickly melts away.
Thus, the initial "low startup cost" is an illusion, not reality. It is no different than giving away the razor and charge you for the blades, or in modern days, sell the printer at cost and make all the profit on the ink refills. The overall cost is disguised.
There are products with a lot of profit margin, such as nutritional / nutraceutical products, cosmetics, and so on, that can claim various differentiating factors (so redundancy is reduced, or at least perceived to be) and therefore the premium price is less of a factor.
You should always estimate the marketing costs (NOT counting the use of social capital, i.e. selling to close friends, family, and neighbors) BEFORE you join to determine if it is a viable business. If you based your cost/benefit analysis just on the few initial sales where you used social capital, you would have gotten a VERY DISTORTED picture of the business and its viability.
If the products don't generate profit, then where is the money coming from, other than membership fees? Which brings us to flaw 4: similarity to a pyramid scheme.
Flaw 4: Similarity to Pyramid Scheme
Fundamentally, multi-level marketing is VERY similar to pyramid scheme. In fact, when Amway first started, it was charged by the FTC as a pyramid scheme. Its lawyers eventually argued the FTC down to a compromise, which lead to the establishment of so-called "Amway rules". And this similarity has haunted the industry for the decades ever since.
One of the first things you learn about MLM is their loud exclamation that "we are not pyramid schemes! Those are illegal and we are legal!" MLM industry and their spokespeople, such as Direct Selling Association (DSA) generally do this through two tactics: a) emphasize the difference between a MLM and a pyramid scheme, and b) claiming other unrelated things are pyramid schemes.
Tactic B, claiming "normal corporate structure, US Social Security, insurance, and other legitimate business activities are pyramid schemes", is a red herring as it is not related to the MLM at all. We will ignore this argument. (In fact, you can see a MLM proponent use this very tactic below in the comments.)
Tactic A, thus, is what we will study, on whether is there actually a fundamental difference between pyramid scheme and multi-level marketing? Or is the so-called difference merely token and cosmetic?
Amway, the granddaddy of all MLM, offered this explanation as cited by HSW to be the difference between it and pyramid schemes:
- A1: Amway doesn't pay distributors for simply recruiting new salespeople.
- A2: The only way to make money through Amway is either by selling products directly to consumers or by managing a team of salespeople. Managers get a percentage of each of their recruits' sales.
- A3: Amway doesn't require its salespeople to buy starter kits or impose a minimum monthly order value to stay a member
A MLM lawyer highlighted the relevant points in the 1979 ruling between Amway and FTC as follows:
- B1: Amway required its representatives to engage in retail selling, under the "ten retail customer policy" which appeared in the agreement that representatives signed upon enrollment. This rule required that representatives make 10 sales to retail customers as a qualification for eligibility to receive commissions and bonuses on sales/purchases made by other representatives in their personal sales organization.
- B2: Amway required its representatives to sell a minimum of 70% of previously purchased product before placing a new order. (Amway’s rules recognize "personal use" for purposes of the 70% rule.)
- B3: Amway had an official "buy-back" policy for unsold, unopened inventory. This policy had some reasonable restrictions, including a specified maximum length of time since the item was originally purchased by the representative and that the item was still current in the company’s product offerings to consumers. The policy also included a minimal "restocking" fee. (Buy-back policies are significant especially for their protection of representatives who choose to terminate their affiliation with a company, and do not want to be "stuck" with unsold inventory.)
These became the "Amway Safeguard Rules", otherwise known as "Amway Rules", that has been used to govern the industry. However, this also lead to a lot of false interpretations and attempt to abuse these rules, through various hybrid schemes and workarounds.
- Disguise pay per recruit by creating "matrix", only pay when matrix is "filled" or "cycled" (Abusing A1 and A2)
- Disguise pay per recruit by mixing it with product sales: earn money by both selling products AND recruiting (Abusing A1 and A2, but Amway's B1 somewhat addresses this issue)
- Perpetuate a misunderstanding: "if there is a product, then it is legitimate and legal". (Misinterpretation of FTC criteria, see sidebar)
- No startup kit and/or no startup fee, but with caveat that to build a business you need to join at a higher level often with promise of better commission and such. (Abuse of A3)
- Making the scheme impossible to understand with various levels, different commission structures, multiple ways to get paid, different exceptions, and so on and so forth. (everything)
- Disguise the amount of "sales" by generating "internal consumption", i.e. product are bought by members, but never sold to the public, but instead, is consumed by the member, thus artificially generating sales. (Abuse of B2's "personal consumption" exception)
- Enforce "autoship", i.e. automatically shipping products to members every month, whether needed or not, to prop up sales numbers. New members are required to sign up for autoship, thus equating recruiting to sales. (Abuse of B1, by artificially generating sales)
These are just some examples of abusing the difference between MLM and pyramid scheme by attempting to "game the rules" by deception, redefinition, or outright misinterpretation. While MLMs are trying to distance themselves from pyramid schemes by claiming differences, MLMs are also blurring the line between it and pyramid scheme with autoship, internal consumption, and such abuses of the very safeguard they themselves have came up with.
Even MLM lawyers, such as Kevin Thompson, have acknowledged that in the past 20+ years, the legal gray area has vastly expanded and this had lead to a credibility problem for the entire MLM industry.
Yet the MLM members will defend the MLM industry, particular their "pet" MLM of the moment, with a ferver that approaches that of a cult member, even though they may have just fled from one MLM to another. Often MLM members defend scams that only have a veneer of legitimacy the same way.
Which brings us to the final flaw: cult-like indoctrination.
Flaw 5: Cult-like Indoctrination
MLM, or network marketing proponents, often tout the business as having great "support and training organization for personal growth." However, very often, these supposedly organizations are actually indoctrination centers using cult-style brain-washing techniques.
Before you deny this flaw, I will point out that so-called "team building exercises" use some of the very same techniques. However, the difference is in its ultimate purpose, and the degree the tactics are used... how far do they go.
Dr. Robert J. Lifton wrote a book in 1961 called "Thought Reform And The Psychology Of Totalism" which is a book that studied how the term "brainwashing" came about, and how it was used to "convert" people to a different cause. In Dr. Lifton's own words:
"[milieu control] tends to be maintained and expressed in several ways:group process, isolation from other people, psychological pressure, geographical distance or unavailability of transportation, and sometimes physical pressure."
Did you see the following happen at a MLM convention or meeting?
Group Process -- "We are a team!" the upline roared, " And together we will succeed! Nothing will stop us!"
Isolation from other people -- "avoid the naysayers", the coach droned. "Only your fellow participants and your upline, and I, understand you!"
Psychological pressure -- "You are not going to let the group down, are you?" the leader looked into your eyes, put both hands on your shoulders, and leaned in slightly. "You are not going to let us down, right?"
Geographical Distance -- It is no accident why MLM conventions and such are often held at isolated and distant locations such as resorts, cruise ships, and so on: so you cannot escape from the "motivational speeches". Some meetings are known to be held late at night and add sleep deprivation to its arsenal of control techniques.
MLM group meetings often resemble cult meetings. No disagreement with the leader is tolerated. All hail the leader and the company. All who believe the company are the anointed ones who will be on their way to "financial freedom and prosperity". All non-believers are damned to be "wage slaves" and "losers" for the rest of their miserable lives and must be converted or enlightened, and "opponents" attacked for their "heresy".
Steven Hassan, a cult expert, uses his BITE model to explain cult mind control. BITE stands for Behavior, Information, Thought, and Emotional, as they are the four types of control a cult exercises on its members.
- Behavior control -- your behavior is regulated by the group, not you personally. You are given permission by the group to associate with certain people and not others.
- Information Control -- your access to information is controlled by the group. You are discouraged from researching things on your own, and only allowed use approved info.
- Thought Control -- your thoughts must be group-approved. Non-group thoughts such as dissent are forbidden and suppressed through use of buzzwords
- Emotional Control -- your emotions must be group approved. Anything problems you have must be your own, not the group or leader. Fear and Phobia increase your dependence on the group.
Did you observe some of these controls at your MLM meetings, if you attended one?
One of the most often encountered "information control" by MLM members is "avoid negativity". Apparently, MLMers must avoid "negativity" and "dream stealers" to be successful. This is complete psychobabble, because if you avoid both rational and irrational fear, you end up being reckless. (Learn more about why avoiding negativity is a serious problem.)
Amway, being the granddaddy of all MLMs, has separate "Amway Motivation Organizations" (AMOs) , which are ran by various "leaders" who publishes various motivational tapes, training materials, and whatnot for the member consumption as "self-improvement". It was charged by many that these AMOs actually are Amway indoctrination centers with a veneer of plausible deniability. In fact, Dateline NBC did a special on Amway in 2004, calling it a cult and get-rich-quick scheme outright. Other MLMs, being based on the MLM model Amway pioneered, are not that different. Steven Hassan, an expert on cults, wrote on the Huffingtonpost that Amway and other MLMs, even if they are legal, are basically commercial cults.
The cult behavior can go to extremes. In 2008, some followers of DMG Grupo Holdings of Colombia have undertaken hunger strikes, and chanted "Believe in God and David Murcia", leader of DMG group, after his arrest and breakup of DMG Grupo as a pyramid scheme. ()
Pseudo-MLM Scams Troll the Muddy Waters for victims
The problem with the gray area of MLM, and the slowness of authorities to react (see next section), esp. when there are multiple jurisdictions, means a scam that pretends to be an MLM can often survive for a few years, suck in over a million members and hundreds of millions of dollars, even if it is an obviously illegal pyramid scheme, even by today's laws and regulations.
One such obvious pyramid scheme advertised "you don't have to sell any products" in its own FAQ for TWO YEARS, yet it proud proclaimed to be using 'network marketing' as its business model. It was heavily pushed by various MLM "coaches" and reviewers for over a year in US and Europe even though it had been kicked out of China in 2009. People in the US finally gave up when state of Georgia issued a cease and desist against this scam in 2010, essentially kicking it out of the US. it then moved on the various Asian and African countries, such as Indonesia, Philippines, South Africa, and so on. It is in the process of being evicted from those countries as well, yet many members still defending it. Is this due to cult indoctrination? The "leaders" in this scam also claimed "agenda by consumer groups". ()
Such problems are not limited to US and Western countries alone. A scam, claiming to be a public opinion survey company, signed up millions of members in India, promising each good income if they recruit more people, and quite a bit of the money received was transferred to Singapore, where the company was allegedly headquartered. When a TV station did an investigative report on it, all hell broke loose. Various government agencies got involved, and found they can't really do anything about a company that is not even based in India. They tried freezing the money, but the company's lawyers convinced a lower court judge and got the freeze lifted, allowing 600 crore Rupiahs (roughly 130 million USD) to be transferred to Singapore during the 2 week when the injunction was in place. The freeze was finally reinstated when a 3-judge panel countermanded the lower court judge.
What is really amazing is the the amount of zeal the scam victims are spending to defend the company, including protests in the streets, petitioning the government to leave the company alone, so they can get paid, and so on. They accuse everybody, from the government to the media to critics of a conspiracy to bring down this company and ruin their livelihood. The scam is SpeakAsia, whose COO was already arrested, and its CEO is a fugitive outside of India.
Such obvious pyramid schemes live on because there are legitimate MLMs to lend it a modicum of credibility. They point to legitimate MLMs, claim "we are like that, we are legal", when they are certainly NOT legal, even upon cursory examination. People believe them because they don't know any better. Plenty of people defend these pseudo-MLM scams as they failed to distinguish the difference between it and legitimate MLM.
The Government Will Not Save You From Yourself
The US Federal Trade Commission, which has broad regulating powers over all forms of commerce within the United States, used to be the primary prosecuting body against multi-state pyramid schemes. However, since being fought to a standstill by Amway in 1979, the body seem to have lost much of its appetite going after shady MLMs.
In fact, after 2000, many of FTC's leaders used to be MLM lobbyists and attorneys. MLM industry also hired many FTC ex-staffers for their own lobbying efforts, resulting in many 'exemptions' given to MLM industry when new laws are passed. Is there something fishy going on? I don't know. Does something start to smell? Definitely.
Individual states seem to have taken up the mantle in prosecuting various suspect MLMs that have stepped over the line and essentially became pyramid schemes and/or Ponzi schemes. YTBI (Your Travel Biz), i.e. Zamzuu, was kicked out of California by then attorney general Brown (now Governor Brown). Illinois also sued YTB and only settled in May 2011, essentially forcing the company almost out of business. However, prosecution of such schemes takes years (then attorney general Brown started to suit in 2008, and completed the plea deal in 2010). In Canada, a similar scam called Business in Motion was shut down by RCMP after investigation by noted pyramid scheme expert Dr. Robert Fitzpatrick. However, this took several years as well. CBC TV did an expose on BIM in 2009, but charges were not filed by RCMP until 2011.
What's worse, the new breed of international pseudo-MLM scams are often based on a completely different continent (often Asia or Eastern Europe), and legally in some island off in the Caribbean or the Mediterranean Sea (Cyprus, British Virgin Islands, etc.) making international prosecution almost impossible. They usually have no license to operate in your location, but that doesn't stop them from promising big money if you pay them.
TVI Express, a notable pseudo-MLM scam, was kicked out of China and most of Europe in 2009 with several arrested in China. However, no US authorities acted until State of Georgia hit its North American member group "TVI North America" with a cease and desist in 2010. It doesn't stop TVI Express from recruiting more people in Africa, Southeast Asia, and former Soviet block countries. Now TVI Express face prosecution in South Africa, Namibia, Indonesia, even in India.
The government will not save you from yourself if you do no "due diligence" and join a scam that pretends to be a legitimate business. By the time the government decides to intervene, you're probably in too deep.
Fatal Flaws Unless Corrected
We have listed five flaws in the fundamental MLM business model itself, and they are endemic to the system. The additional factors such as relative lack of government oversight, and rise of international pseudo-MLM scams, makes the entire industry indeed extremely dangerous for any one to contemplate joining without thorough study of the situation.
Critics of MLM, Dr. Robert Fitzpatrick, and Dr. Jon Taylor, who studied available information on the largest MLMs, found that 99% of participants in an MLM actually LOST money. That's right, 99%. Why? The five flaws we had mentioned before are why, and they form a system that reinforces each other.
- The profitability of the product was often misrepresented in recruitment drives, because the marketing costs were never mentioned. You are only told "you pay this, you can sell it for that". The "before expenses" profit margin looks impressive, but without any numbers on the expenses most people completely forgot about it altogether.
- The initial few sales are easy because you are using your SOCIAL capital, not actual money and time, to pay for marketing costs. However, your social circle is limited and thus soon you ran out of social capital and must spend real money and time to acquire more clients.
- Once the member realizes the products are not actually profitable when expenses are counted, beyond the few initial sales, the cult like indoctrination makes members blame themselves for not generating a profit, rather than contemplating the possibility that the system itself may be flawed
- Often, the members are then pushed into buying more motivational lessons and marketing techniques and training, adding to their expenses instead of helping their bottom line
- Sales figures are propped up through autoship, self-consumption, and so on so sales commission are enriching the uplines while downlines remain unprofitable
- The downlines then seek to make themselves uplines by recruiting more downlines, with the rationalization of 'generating passive income' to get away from the unprofitable "self-consumption" and retailing... or quit altogether.
- When enough people quit, the MLM goes under as it no longer have enough sales to sustain itself.
Basically, many Network Marketing, or MLM are selling the dream of "passive income", instead of actually selling the products like it is supposed to, and that is the root of all fatal flaws. The passive income should be incidental and the reward of great salesmanship, not the ultimate "endgame".
Can the Flaws Be Fixed?
Here are a few ideas, though the chances of any of these getting implemented is minimal:
Require "managers" (uplines) to sell things before they can qualify for commission
The idea of creating your own competitor by justifying it as generating passive income is a fundamental feature of MLM, It can be partially addressed by requiring the "managers" (upline) to fill a sales quota before qualifying for bonuses generated by downlines to ensure the emphasis is on SALES, not recruiting, or perhaps by maintaining a sales quota system for the downlines, that they need to sell a certain amount for their uplines to earn anything. However, such systems are quite complicated, and only adds to the confusing compensation rules of an MLM.
Amway has this "10 retail customer sales" rule, which partially address the problem.
Restrict the number of new recruits through space / time / upline constraints
Restrict the number of new members a particular upline can sign up for only a few (absolute numbers total), or only a few per month, unless the recruit is at least X miles away. While this will restrict growth of the company, this should minimize the "creating your own competitor" problem. Combined with the need to make SOME sales to qualify for commission should decrease the need to do ONLY recruiting.
The geographical exception is to allow for competitors that are NOT in the same social circle.
Another possibility is to restrict the number of members in a particular zipcode to prevent "local saturation".
Minimizing self-consumption, autoship, and other fake sales
Minimizing or banning autoship and self-consumption (other than a "reasonable amount" to be determined) may be needed to prevent padding the sales numbers through these fake sales. This would also cut down on the people who try to "game" the system by recruiting for the bonuses instead of sales.
More Disclosure and Warning on these opportunities
Requiring certain legal warnings (similar to warning labels on cigarettes) at meetings and on company literature, both official and unofficial ones may be enough to loosen the "information control" and break the cult-like behaviors.
Mandatory Cooling Off Period
Another idea is to have a mandatory 72-hour cooling off period to join such programs, with warning to seek out government and anti-scam information and such. This is to prevent the recruitment drives sign up people through euphoria of group-speak.
Fundamentally, if a MLM is selling the dream of passive income, it is already in danger, because the only way to generate this passive income is to recruit, and that makes it vulnerable to turn into a pyramid scheme. The five flaws of the system only reinforce this fundamental attitude problem allowing it to slip closer and closer to the abyss.
What's worse, it is almost impossible to recover once the slippage started to occur, because the system involves thinking in a circle due to the cult-ish behavior of the members. You are told to ignore reality and concentrate on the group's version of events instead. Furthermore, the cultish behavior of many MLMers is disturbing to friends and family.
Add to that the documented stats that most participants (99%) in MLM lose money, and you have a business system that is dangerous to participants.
if you want to consider MLM as a side job or even a full-time job, you may want to reconsider. I would not wish you luck, as you don't need luck. I wish you wisdom instead, to learn and properly evaluate the situation and determine whether it will benefit you... or not.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Tansen on November 03, 2019:
You only study, come to practical then you will know the Beauty of Network Marketing
B. Wati on October 29, 2019:
My is doing the same business. I too was thinking and comparing her earnings and her expenditures on searching and educating her downlines. It really is a killing business.
Biswajit on October 29, 2019:
I suggest you to become a story writer. Tell me one thing, which profession is noble ? Have you ever meet a free doctor / lawyer / teacher etc. Everyone work for money. Because this is essential. You blame all MLM companies. What you are doing is a cult.
A person want to play cricket, if he/she fails then is that a cult or fault of coach ?
A student completed his/her graduation from a reputed University, fails to get a job, then it's the fault of University.
What and why do you want to defend all these things? Because you failed in network marketing.
Listen Network Marketing is a noble profession & I can prove it. Don't dare to post these kind of article because you don't have the right to spread negative feedback.
Kwame Binta on October 29, 2019:
MLM is not perfect but it's still a better way for the average person to start a home base business without spending thousands or millions of dollars on a traditional franchise. Your article is full of lies!
Sam on October 29, 2019:
you don't know anything about Multi level marketing. You are a cheap thinker too
Tamara Gorman on January 24, 2019:
Great article. Thank you. I would add statistics - the actual numbers and percentages of people enrolled in MLMs and what they make over time. I would venture to say most not only make less than $100 in a year but actually lose money.
Donald Brown on January 11, 2019:
Basically in a nutshell, it is all based off of nothing more than pure greed both from the one in the MLM itself and the one that they're trying to get to join the MLM opportunity. That's because the MLM business model is based off of trying to get rich through the company, and so you have so many people in the downline pining their way to the top to get rich.
Janka on November 23, 2017:
And why do you think that "2/3 in Melaleuca are making peanuts?". Because very few are willing to do the work. Is much easier to work for someone else and complain than go out and work your butt off for yourself.
@mandi I'm sorry for your father. Many people in NZ are making a very good income through Melaleuca. They probably didn't listen to their negative daughters :)
Mark Young on September 24, 2017:
How do you expect people to take you serous with the amount of typos and broken sentences?
JLHR on September 15, 2017:
Apparently you were a network marketer and couldn't make the grade--because there is literally nothing you said in this article that is true. It's called a TEAM not competition. You want to help your team as you make money when they do. Whoever said that you sit back and let your team create passive income for you while you do nothing is full of complete Sh**@ Making a good living with network marketing, of course has to do with the company you work with. Most of us do exceptionally well--because we work. You are lazy, negative, and frankly uniformed.
Jrea007 on March 22, 2017:
I think in my opinion I agree with this article %100. I actually was in ACN and started to make money and said to myself, "Wait, I made them this much money and all I get is what?"
I think if it primarily a company that taught you how to do the business effectively so that you could make a good profit with selling the products alone, then once you meet some selling standards, then have the authority to sign up only three people to help them make certain profit margins before helping others then it would be a perfect system. But they should not encourage anyone to sit back and let the people under you do all the work.
For example: John Signs me up, helps Jim sell the products until I make up to 3k a month in sales after expenses and all. Then once the company see that Jim has been making 3k in sales, the then give him the ability to sell the licence to train others to do sales.
Rham Dhel from India on February 23, 2017:
USANA promises great returns. I was recruited by some friends but denied. The one thing that struck me during one of their orientations was that they claimed they have products that cure cancer. I mean, a pill that kills cancer? Whoa! That's incredible claim, right? But shouldn't the government or the medical fields be the ones promoting the pill instead of an MLM business and shouldn't be doctors prescribing these pill to their cancer patients? If this pill works, we would have already got rid of the type of cancer that their pill promised to cure.
kschang (author) from San Francisco, CA, USA on December 04, 2016:
@Mandi -- Melaleuca's stats are a bit difficult to come by, but it's pretty obvious that 2/3 of all income seekers in melaleuca are making peanuts (less than 2000 a year as of 2014)
@Kimberly -- I am saying MLM is a DANGEROUS business to jump into without a THOROUGH investigation, because MLM is always in danger of becoming a pyramid scheme (or already is) and those in the scheme will not realize it. Those so-called code of ethics will not protect you. Vemma had it, and was even awarded "Ethos Award" by DSA two years ago. Didn't stop FTC from suing them to a standstill. Make sure you are making money by selling products, not be recruiting people.
@NickB -- your assumption shows how arrogant you are in not reading the article for the truth, just what you want to insult. You may MAKE 6 figures in MLM, but how much did you spend right back in? How much do you spend on travel and training and such? Did IRS audit you for your "business" deductions? As for your comment "for everything there's only perspective and perception"... You sound like Trump support that truth is malleable.
I much prefer the Robert Evans version:
"There are three sides to every story: yours, mine, and the truth"
kschang (author) from San Francisco, CA, USA on December 04, 2016:
@sidney -- glad you found a company that you think actually sells stuff that you believe in. But your "friends" are your competitors: fellow MLMers. You compete in the same market for the same market segment. At best you are frenemies. Denial of flaw #1 doesn't make it go away. Your "team" will be the first one to shame you when you don't meet your sales goals, maybe not directly, but to celebrate all others who did.
You are welcome to rely on the mental rah-rah about "motivation", but motivation doesn't put money in your wallet, actual sales do. And unless you are in a company with actual retail, rather than a SCAM (that actually encourages to buy stuff instead of selling them) no matter how motivated you are the game had been rigged against you from the start.
@Jeff -- a lot of money was made to "feed" such training material to the new recruits and thus making money off of the noobs separate ways. This was often known as "Tool Scam", or "Amway Tool Scam" as Amway was the first to pioneer them. It had been outlawed by Amway itself so it's less prevalent now, but it's still out there.
@Jim -- your potty mouth is there for all to see. Thanks for your demonstration. Have a nice day.
NickB on December 02, 2016:
Sounds like someone has had a bad experience in this industry which is unfortunate. Leaders of our world speak very highly about MLM and NM. I have made a 6 figure income on 100% of my own efforts, and I would have never traded it if I didn't see that there is a better way out there. Besides, how does anyone make money by discouraging people to participate in this industry? You are probably a great guy, but you could have developed something else in the time it took to write this elaborate article that was purpose-driven and helps people. Again that's just my perspective.
For everything is only perspective and perception...
Kimberly on November 28, 2016:
So what your saying is MLM no matter what company is a scheme? Even if your friend shows you their checks, and some others in the business shows you their it's still.a scheme? I'm curious bc a friend brought me to Kyani and wants me to opt in but I'm on sure what network marketing is. Isn't network marketing about promoting the business like you would a good pizza place to eat at?
Mandi Guerrero on November 22, 2016:
Thank you soooo much for this article. My father has been roped into one of the MLM-Melaleuca to be exact. Anyways I called him out on facebook about it not being that great of a company and he and all his cult like friends (other marketing executives) jumped down my throat. I hate seeing my dad taken advantage of by such a scam. These points are great for talking to him in the future. Unfortunately I don't think they will ever see past their blinders though. :(
Jim on August 10, 2016:
Your ignorance is universal!
Jeff on June 26, 2016:
@kschang - I think the real profits in MLM are in selling direct - common items sold direct are training materials (books, tapes, videos), tools (software, organizers), events (conferences, parties, concerts). I believe it would be duplicitous for MLM leaders to advocate network based marketing while making the real profits from direct sells, but I feel this is precisely what happens often.
sidneyurielle on December 08, 2015:
I totally disagree with the entire article. I have been in Network Marketing for only 17 months now with absolutely NO previous experience. I make more money in my "pyramid scheme" than I did as a Pharmacy Technician.
I 100% agree with the people that said everything is a pyramid scheme. Everywhere. I was never going to make more money than the Pharmacist I worked with. I was a peon to those people.
Yes, there ARE Network Marketing companies that are not in compliance and those are the ones that fail. You just have to do your research before you decide to join. My company does not have a physical product but we sell travel. I make commission (and GREAT commission) just by booking a cruise for someone. I don't even have to build a team if I don't want to and can still make a comfortable living.
What I don't appreciate, are the people who give MLM a bad name. We are not all the same.
Also, it's not always about the money you make. It's about the friendships you build. I have made more friends in Network Marketing than I have in my 27 years on Earth. It's also about your personal development. I used to be such a follower. I considered myself unpopular, doubted myself, had really crappy self-esteem, etc, but NM has made me leader, someone that people look up to. I couldn't do that filling prescriptions at CVS. "Oh, wow, I hope I can count pills as fast as Sidney one day!" Really? No.
And by the way, most people fail in network marketing because their lack of motivation. You can be given every tool you need to succeed, but if you do not apply yourself, you fail. Just like a regular job. If you do not do the job you are supposed to, you're fired.
I never let ANY negative article about MLM discourage me because I know it works. No, I am not a millionaire and I probably never will be, but I know that one day soon, I'll be making more money than most of the people I know who went to college for 4 years and never even got a job using their degree.
kschang (author) from San Francisco, CA, USA on November 02, 2015:
@Anna, having better tools does NOT address ANY of the five flaws. The flaws are inherent in the nature of network marketing.
kschang (author) from San Francisco, CA, USA on November 02, 2015:
You've nothing but bad arguments that you're being unreal.
You're conflating pyramid-shaped organization with pyramid scheme.
You're insinuating the author instead of addressing the issue.
You're conflating banks and social security with pyramid schemes.
You're inventing a myth that "95% of all attempts fail, not just MLM".
If you want to debate, cite facts or studies, not your imagination or feelings.
Ana Sabaduquia on August 23, 2015:
Good list. I like your five flaws of MLM that may cause harm to the system itself. But it looks outdated as there more new strategies and tactics to be successful in network marketing. Also, the problem that one struggles to find the right tool does not get much relief in this list. You could do away with a lot of tools in the list by choosing proper tools.
And there’s a good alternative I can suggest and hope will also help you in any means, “How To Sell More Network Marketing Products Online” (http://networkingwithkelsey.com/how-to-sell-more-n... that combines functionality and solutions which will surely address to the problems on network marketing. Not trying to belittle your list but giving you new perspectives about the topic. Good luck to all of us!
Vineet Gupta from New Delhi, India on July 18, 2015:
I am not very sure how you say that people who we recruit are our competitors ?
Vineet Gupta from New Delhi, India on July 03, 2015:
You have written hell lot of article, thanks for sharing the wonderful information.
MLM like any other industry has positives & negatives. We should focus on the things that are within our control rather than cribbing.
Its straight for anyone, if he / she like & understands the MLM business, they should do it, or else leave it. Why to crib?
Anyways, even I write on MLM on my blog, and I have found good inspiration from the article to learn something about writing as well.
And I hope people start doing the actual MLM business, rather than surfing online all time ;)
Vineet Gupta from New Delhi, India on June 26, 2015:
I think 1 of the flaw is you spend too much money in MLM while trying to build the business. Hence even if you make some money, the expenses will be more, unless you don't do it smartly.
Nick on June 18, 2015:
Kschang, you are so far off the mark it is unreal.
Did you fail at MLM yourself ? You seem to have absolutely no idea but sound like someone who tried it and failed.
Everything in life is in the shape of a pyramid and that is a very uneducated statement to say that MLM is a pyramid.
Schools have pyramids lets start from the top: headmaster, deputy head, teachers, teaching assistants, cooks, cleaners.
Ok so then there's banks, governments etc everything these are the REAL pyramid schemes.
I will point out something though. Just like 95% of people fail at EVERYTHING whether its learning a craft or a new instrument or being a professional footballer - yes that correct, MLM is the same. 95% of people fail because they do not want to invest in themselves to learn how to do it properly, or just not interested enough.
Also I would like to mention that like every other profession, there is some good and some bad. There are some good doctors, some bad - some good police officers, some bad - you get the point.
So please do not try to paint all companies with the same brush because Network Marketing is just a profession, just like anything else, the only thing is it pays a lot more which is why we have doctors, hollistic therapists and all sorts joining our team.
kschang (author) from San Francisco, CA, USA on May 30, 2015:
@coachniquenya -- You wrote "It's not network marketing that sucks. It's the people because they fail to understand the meaning of network marketing. "
So you blame the victim... except the upline was supposed to be TRAINING them, and ultimately, to the company itself for failure to train.
In fact, victim blaming is often done in MLM... "the system worked for me, so you must be doing it wrong". Why can't it be the system that's wrong? MLM is clearly not universal, as some people are good at sales, and some aren't. Why can't MLM be cognizant of people's talents and not waste their money and effort?
@Lawrence -- homebased business is NOT necessarily MLM.
anonymo on April 03, 2015:
I lost my husband due to a mlm he left mr and our baby because he wants to focus on his "business" he makes no income but it was an argument between us because i told him that they are brainwashing people and him and he told me im a dream stealer he pays money to go to trainings and big trainings that he has to pay alot of money and get flight and hotel. He pays a monthly due if people under him quit. He spends all his time on it and we still had no income i got sick of it and told him if he can get a real part time job instead because we are broke! That caused us to fight and he left me and is telling everyone he wants to focus on his business he doesn't even take a time in his day to see his son.
BS33 on January 16, 2015:
nicely written by the way. thumbs up.
sam knowles from florida on December 24, 2014:
incredible hub! as a former mlmer turned affiliate marketer i agree with a few things on your hub. The mlm business model is highly unstable and as someone who has explored the "social niches" of multi level marketers and can clearly see the cult like behavior of it's members. I was outed for being an affiliate marketer! However there is such a thing as passive income. I'm an affiliate blogger and own websites optimized for search engines and believe me you can generate passive income with an email list and a good blog site. mlm is still a booming industry, i just hope people look through the veil of ignorance and don't make that mistake.
oh, another thing mlmers do that actually keeps an income is that they cycle from one business opportunity to another for as long as they need to. they do it often (bad thing)
kschang (author) from San Francisco, CA, USA on September 30, 2014:
@David -- nothing wrong with just making a few hundred dollars... as long as you're not spending more than that to make it. Yet many, hoping to make it big, spent thousands to make hundreds per month (not necessarily Amway, but MLM in general) Maybe they're not made out for this business... Or maybe the business had done a poor job of rejecting them as unsuitable...
@Edison -- so you will accept a company lying to you (being dishonest, I think was your words) and take your money under false pretenses? Are you as forgiving in other aspects of your life? Turn the other cheek and all that?
@Pocono -- I'd skip #6, as well as huge pinches of salt on #3, #5, and #8.
Anti-6) Alexa rankings can be faked through botnets.
Anti-3) Paid to recruit can be easily disguised by claiming you're paid for "their purchases" when in fact there are quasi-mandatory intro kits.
Anti-5) "Real income" can be faked (Burnlounge presentations repeatedly gave false income claims) and even "sales" can actually be Ponzi scheme "purchase of ad packs", haha.
Anti-8) Such info can also be faked. You can get a registration in most tax havens in 24 hours. Sometimes, mere hours if you go for Nevada or Delaware registration. Some scammers have even gone as far as create fake owner or fake execs to look more legitimate than it is.
John Fisher from Easton, Pennsylvania on July 29, 2014:
The things you really need to know are:
1. How long has the company been in business? There have been some 60,000 MLM companies that have come and gone in the last 40 years, and only 30 of them have been in business for more than 5 years.
2. Is there a fee or monthly membership fee to start? (If there is, jump off the ship before you get on it)
3. Do you get paid to recruit new people? (Another red-flag that says get off this boat quick)
4. Are there real products that are getting sold to real consumers that offer a genuine benefit to the consumer. (If not, get off the wagon now)
5. Are there real people that are producing real income results, not just getting paid by the company to promote the business opportunity.
6. Where is the company ranked on Google and Alexa? If it doesn't rank on the first page, it probably doesn't have what it takes to endure for the long haul.
7. What kind of guarantee does the company offer on it's products? (No guarantee-get out before you get started)
8. Is the company debt-free and privately owned, or is it owned by investors? (Investors are bad news, unless you are one of them.)
Edison Keong on July 09, 2014:
First, I am feel thankful to kschang MLM article and Sterling Carter comments. I am Amway distributor who joined one year ago. I'm live in Malaysia and 29years old.
Generally,we need to let go something for gain something. We all would like to pursue dream and peace which won't feel uneasy for future life when aging. I understand that nothing is perfect too. Everything has its own flaw. But, is it we must stop pursue dream because of its own flaw? Is it disability person will not success in their life? Why Amway want choose MLM way? If Amway don't choose MLM, how the good products can be known world wide? How disability person has opportunity to find a new path. Maybe we think disability person won't do Amway, but how we sure about it? The world is vast. For many decades, many scams are happened but we should review the good sides of Amway. Without it, we might not have chance to learn something important. Regardless profit or not, there is certain thing which more important than profit, exist in Amway environment. No matter why Amway choose MLM, the important is why we choose Amway. Money is power for someone mislead/scam everyone. This is unchanged fact in reality. However dream is power for someone lead everyone. If MLM dishonest with me, I'm accept it because I know "There is no free lunch in life"; you have work hard to get what you want. My 2 cents.
David on June 04, 2014:
MLM isn't perfect. No system is perfect. But here is what I realized though, not everyone is willing to do business when we offer them the opportunity. We don't pressure them to join or convince them if they choose not to. If they say no, then we just tell them about our products and hopefully they'll be willing to check it out and we do our sales from there. We offer them the opportunity first because they might be looking to make extra $200 a month. Why not? I am sure everyone wants to make an extra income. I can just pay my phone bills with that or my kids diapers. Now if I want this to get big then I expand and look for people who are entrepreneur-minded and share the concept. Now if you don't like taking risks then don't do business period. Just be an employee and retire at the age of 65.
In my opinion, there will always be the few making the most money and the majority making an average of $200-$300 in the MLM. Actually, not just in MLM, it's in a traditional business as well. The few has to be unique and isn't the same as everyone else. Not everyone will be rich, living in a mansion and drive prestigious, fancy cars, etc.
kschang (author) from San Francisco, CA, USA on May 04, 2014:
@DPac -- it's more like "there are those that want to make money, and there are those actually making money". in MLM, vast majority are in the former, and very few are in the latter. Go read some income disclosure statements.
kschang (author) from San Francisco, CA, USA on May 04, 2014:
Amway's based in Ada, Michigan. They did not "move" to Canada. Other than that, good observations.
kkemper1 from az on April 27, 2014:
•A3: Amway doesn't require its salespeople to buy starter kits or impose a minimum monthly order value to stay a member
in 1972, they sure did.
And as of 10+ yrs ago, the fed offered Amway a choice, close down or
move to Canada. [HUH???] They moved to Canada so that they
BS would not be disturbed.
It was the oddest [?] interview in "60 Minutes" history when the
two founders were interviewed and after 15 min, the interview
was over; the two owners said "we don't know, that is up to the
distributors" when ask any question.
I become an expert at analyzing MLM which changed to be called
MLD, for multi Level Distribution.
I dated a 5th level D 25 yrs ago and she was happy with Amway.
I perused her home and asked if she wanted a free audit of her company.
She was glad to have it. I found her bankrupt --as she had never
hired an acct. When she called her 6th level D, he recanted every thing
he had told her. She filed the next month.
----This is also why, in 26 nations, MLM is outlawed and the
founder will be jailed immediately; no court hearing.
I have found that MLM ONLY works as long as the creators/founders
are vague, smile hugely and have the temporary use of
luxury cars and houses.
MLM is used ONLY by con artists since NO MLM on earth
can compete with similar product or sales companies.
IT is sad that MLM still exists on earth when those same people
can run companies that do their communities good.
When I first sought to become a rep.......as a small biz expert in
the earth 70's, the highest level sup in my community said
NO, you may not buy our product and put it into a store. That would
put you at an unfair advantage over other distributors. Hah!
That is what I had told others for months.
---I also was walking by a Distributors meeting at a hotel
2 decades ago and the leader begged me to leave quickly, knowing that
95% of those at the meeting would disown their relationship with
their MLM op if they knew the truth.
D-pac-choca on April 16, 2014:
"There are people who study money, and people who make money."
kschang (author) from San Francisco, CA, USA on January 17, 2014:
*sigh*... Everybody thinks their own MLM is the next best thing since sliced bread. Ever heard of the "self-serving bias"?
As for the "turned down buyout"... Heard that before... From Vemma. No truth to it. That's from Boreyko himself.
Andrew Murray from Hawthorne, California on January 17, 2014:
Kschang you crazy but I understand where you are coming from, there is a reason MLM companies have a lifespan of 5 years! But in defense of the few and I mean like less than 3 maybe 4 MLM companies that actually do have value in peoples lives, MLM does work! I am in the MLM game and I would of never thought of doing that in my wildest dreams, I mean people petitioning me outside stores bug the crap out of me and im doing this now, get outta here. Im an IPC for doTERRA and let me tell you people like Deepak chopra and oprah have inquired about purchasing this company thinking its just another MLM company and they were sadly mistaken when they were turned down. You have to understand the dynamics of making money and you cant make money from home with this beautiful product. You have to get out and get in touch with people.
For all the evil in the world there are still people with good intentions you have to look past the mlm stigmata to find it
kschang (author) from San Francisco, CA, USA on January 04, 2014:
Sounds like you're more direct sales than MLM. I have no problem with direct sales. Cult sales is something else. :) You know, the sort that have you chant "psych up" songs every morning, etc. :D
Tim on January 03, 2014:
Kschang, I agree. Most mlm companies are bad. A bad product won't last. But this is where we differ. I'm in a network marketing that sells insurance. I had to take a state exam like every person has to to work for real insurance companies like Met Life, State Farm, etc. The only difference with my company is that it is based on a mlm system where we only make money from sales and downlines sales. We don't have our own office. We have to go to the clients house to sell and/or recruit.
What I'm trying to get at is I firmly believe my company is one of the few mlm companies that sell a real product that people need(everyone needs insurance). We don't do anything online. Also, the only fees we have to pay is to renew our insurance license every two years, which only costs $180 and to take 24 credit hours of continuing education. What we do is sell insurance policies from multiple companies to clients and they pay us. So in other words, my company didn't create the policies. We just sell a companies policy. You can say we're a distributive company.
I want to know your thoughts after reading this. Thank you.
kschang (author) from San Francisco, CA, USA on November 27, 2013:
kschang (author) from San Francisco, CA, USA on October 01, 2013:
I think you misunderstood. In MLM, you often turn your best customers (who buys things from you) into a competitor (who sells things in YOUR market, IN your social circle) by recruiting them into the system. Not even real estate does that.
You're talking about a POTENTIAL return in the future, which is a RISK that you're sacrificing a bird in hand (current sales) for potential commission split (future sales... if any). Where do you draw the balance?
Also, selling products to people is a VERY different proposition than selling a business opportunity to people. People good in one is not necessarily good in the other. The latter can often be facilitated by appeal to greed and envy, among other sins. You're assuming "sales is sales".
I have different viewpoint than most MLMers. Doesn't make me right or wrong. Some people appreciate the alternative perspective, as it's a view they won't get from MLMers.
Jewing613 on September 30, 2013:
Interesting! I appreciate that your stated purpose is to Point out the Flaws in the "MLM Sales Model" As when these MLM companies generally present the opportunity they only Point out the Advantages! I Will make the distinction from Any Specific Company as I believe its the General Model you are addressing.
Straight to it.Your perspective on " The point is you recruit your best customers and make them into your competitors" , is a misnomer.
Name me a traditional company that their competitor pays them a commission their sales. unless Proprietary / Patents etc. are involved.The practical principle you are really addressing is return on time. In a traditional Sales Model , if you are one of the Top sales professionals. and are very efficient and effective. You will reach a point where 1 of 2 things will happen with in the company. You will be maxed out in income servicing your very large accounts as your goal is to maximize and retain the largest volume/customer sales. Or You will be promoted to Sales manager keeping all of your Commissions but now taking a portion of your Teams Gross sales Also. Taking a Large customer and Making them a distributor , Expands your gross sales and Incentivizes them increase your overall sales volume. They also will be v versed on your product as they are a large consumer. They already are a natural proponent. You now have a Team working for you reaching more customers from their leads and and leveraging your Time to Sales Volume to income.
My Point is this. The Flaws you point out In The MLM model also apply to the Traditional sales Business Model. As I have worked and been a Top Money earner in Both. There are as many unsuccessful sales staff in both. Their are as many Bad Products, Management Teams, CEO's , Promises of success in their Company, and Ill submit Top ten percent income earners in both. Also a new sales person in both will have to work Diligently in both for at least 2 years to get there! unless they have Great connections/Leads from prior experience, Again applicable in both. Also have found That the difference in the top 10% verses the rest is Attitude,Effective Action, And Maximizing return on Time (ROT ). The other 90% are Either working toward the same following the habits of the top 10% or will remain and an average outcome/Income as they are unwilling to implement the changes to achieve Monitory success.
Again no Difference in models. other than in if they limit my return on investment and time I will always find a way to leverage my Time which leverages my income. The difference in the 2 models on a personal level is this . In the traditional business I Made more as the top sales person on commissions then the Sales Manager as I had More time for more personal accts. His Administrative duties took 67% of his time so guess who got his accts! It's about leveraging Time! Actually ,in the MLM, Yes I spend more time in Promoting Training The Team, But there are no limitations on #of Sales people I can make a smaller commission on but leveraging their Time to my advantage. And the more I teach those that are willing To Work for it to do the same? It's a Win Win. But in both Models , Yes 90% are not as successful. In traditional business they quit or get fired. in MLM they Quit But they Probably Made me money. The Top Sales people outsell the Average sales person 57 to 1. What's the difference ? The Company? The Sales Model? The Product? Maybe. The Main difference tho? The Sales Person! Attitude,Skills,Time Invested in Communication and Studying Their Profession.
By the way Everyone sells! In relationships, etc its called communicating,! Get Better at it and increase your influence! Get what you want , whether it's money ,the girl ,or your time back.
I also observed that you tend to make a point By Changing the Aspect of the Point, Flaw or Argument. Hmmmmm.
Facts without Practicality tend to be exercises in futility.
Alexander Kozlowski on September 07, 2013:
Hi. I've been to where you've been before. Hearing the same speal from ACN and Vemma. I feel like I was the only one who had this opinion but because of your article, I no longer feel alone. Thanks for exposing the truth. Keep up with the good work.
kschang (author) from San Francisco, CA, USA on May 25, 2013:
Not all MLMs are legal. Furthermore, some are legal, but not necessarily beneficial to the majority of participants. Specific cases requires detailed study. You can find "income disclosure" statements for all MLM companies as they are required to publish one every year. THEN you can see whether it's good for the participants or not.
I don't promote any specific business model. I point out FLAWS in the MLM model that people don't talk about.
As for "crooks in corporate America"... that's a pretty general sweeping statement. Perhaps you mean a more specific case, like Enron or Madoff? Or do you have something else in mind?
charis on May 25, 2013:
So billion dollar companies like Amway and Mary-Kay are scams and should be prosecuted?
What business model do you promote?
How is MLM different than the crooks in corporate America?
kschang (author) from San Francisco, CA, USA on March 07, 2013:
There are "good" MLM companies out there... "good" being a very relative term. They've been around for a long time, but did they make all of their affiliates rich, or merely a few at the top?
Yes, some products that are NOT suited for traditional retail may be better promoted through MLM, but that doesn't make MLM something that ANYBODY can do, despite marketing claims.
So why get into a field where *most* participants "fail"?
ralph on March 07, 2013:
The people who disagree with network marketing just don't get it. They are either misinformed or they been slighted by a bad experience with someone who doesn't understand network marketing . We all don't get super rich but we supplement our income by recommending good products that work.I as an individual can make up my mind if a product works or doesn't work and if it does and I see benefits to myself or my family I will use them. I will also decide if the company is on sound ground and ethical.If all this is good l will tell other people. They in turn will make up their own mind the same as I have and it this will go on and on and on. There are good MLM companies out there and they have been around for alot of years and continue to thrive. Remember when we use products, we also employ people who make them and transport them, etc. Its a very important part of a thriving economy and there is no harm.
For those of you that have doubts find a company that fits and and really look at the true worth of network marketing for anyone who desires to add extra income to their household or who would like to make a profession career out of it.
Just relax and enjoy the opportunity.
talfonso from Tampa Bay, FL on February 23, 2013:
Well, though I disagree on the Hub, I do agree with you on one thing - MLM's are not for everyone. I happen to work at a legit and sound network marketing biz myself, and I'm aware of people accusing them of cult-like behaviors. But I'm continuing what I'm doing nevertheless.
kschang (author) from San Francisco, CA, USA on February 08, 2013:
But does the residual income compare to the retail income that you have lost? Or are you hoping that this downline will grow his/her sales so that'll eventually grow the residual into bigger income than the lost retail? How do you choose the right person to groom? And why do so many MLMers claim that the system works on EVERYBODY, even though it's clear that not all people are salespeople?
Triston on February 08, 2013:
You raise many great points in this post. I'm currently involved in an mlm company myself, however I'm quite aware of the cult-like behaviors.
I also don't turn my best customers into my downline, because that goes against the network I am trying to build.
It is definitely a great way to build residual income though!
Rodric Anthony Johnson from Surprise, Arizona on November 26, 2012:
Sorry, my mistake. kschang. I did miss your point. This is a good hub especially when I read it more carefully, wink wink. I am still mourning the number I played on those people. I wish I could find a way to undo all of that. They have forgiven me though and four of us have become facebook friends.
kschang (author) from San Francisco, CA, USA on November 20, 2012:
I think you sort of missed my point. The point is you recruit your best customers and make them into your competitors. This doesn't have anything to do with lead generation and how many you give to your upline/downline.
I personally haven't heard of any sort of MLM where the downline is required to hand over part of their leads to the upline. It goes against the whole idea where you develop your own customers (or leads).
Rodric Anthony Johnson from Surprise, Arizona on November 19, 2012:
This is an interesting article though I find a flaw in the multi-level marketing example you gave.
You never give all of your leads to the same one person. You give them a portion of the leads so that you can have many people working for you who will in turn generate more leads of which you will get a percentage of.
Also, you will still get a percentage of the lead you had in the beginning. You are not creating competitors because each new person gives you a percent of leads whether they are directly recruited by you or ten levels down.
It works and you make money, I just don't like how it works on the personal level. Companies do this all the time, but when an individual does it to another individual it seems sinister. At least the company exists off the labor of its employees and compensates them accordingly.
kschang (author) from San Francisco, CA, USA on August 14, 2012:
That is the problem in most risk assessments: taking things "personally". It creates a conflict of interest. Are you against it because it is logical, or are you just EMOTIONAL about it?
Many of the people who defend MLM feel insulted, so they felt obligated to "defend" their beliefs, instead of reading the article through and examine the points individually.
AdelRefai from Saint Petersburg, FL USA on August 13, 2012:
kschang, great post and thanks again. I think the people that were immediately offended by some of what you said could benefit by just taking a deep breath and considering a different point of view! kschang is not saying stop what you're doing or change your mind, just understand that not everyone shares your point of view. It shouldn't be taken personally.
monicamelendez from Salt Lake City on August 01, 2012:
I've considered doing a bunch of different MLMs. I could never really see a path for me to achieve my goals that way.
kschang (author) from San Francisco, CA, USA on July 27, 2012:
ZR Article is temporarily offline pending someone pretending to be a lawyer. In the meanwhile visit Behindmlm.com for Zeek updates.
kschang (author) from San Francisco, CA, USA on July 17, 2012:
... And we need to help them pick legal and viable MLMs... if there is such a thing. :)
charis007 on July 17, 2012:
I believe people are looking to get rich quick and think they can use mlm to do so. Like any business they need to have a plan and work.
kschang (author) from San Francisco, CA, USA on January 16, 2012:
It is my opinion that most founders of new MLMs didn't even bother consulting a MLM attorney to determine what is legal and what isn't. In fact, most of them just slap a new name on something like EzyGold MLM Webscript and claim it's a new MLM when it's nothing of the sort.
100ktrainer from Michigan on January 16, 2012:
I have found flaws with individual MLM companies versus MLM companies as a whole. Such as some MLM companies founders have no real business knowledge or they don't have the interest of their distributors at heart. This destroys the integrity of the entire business.
I see this more on an individual basis, as I have ran across some MLM companies that were decent and do-able. This holds true for Corporate America as well.
kschang (author) from San Francisco, CA, USA on December 21, 2011:
So are you selling products, or hoping for "passive income"?
kschang (author) from San Francisco, CA, USA on December 09, 2011:
@Kenneth -- I am glad to have contributed to your... research. :)
Kenneth on December 09, 2011:
Ive been researching about MLM since I wan invited by my friend to a seminar that lasted 4 hours. After reading your article, I become more curious and eager to expand my research. I never join any MLM company.
kschang (author) from San Francisco, CA, USA on August 29, 2011:
@Melbel -- thanks for confirming some of the flaws. I have to admit I cited Dr. Robert Fitzpatrick quite a bit. He was the one that came up with the overall analysis.
@Marisa Wright -- had a thick hide for YEARS, ever since I started busting a fake MLM called TVI Express (have multiple hubs busting that scam since 2009-2010)
Kate Swanson from Sydney on August 29, 2011:
The trouble with writing Hubs like this is that you'll inevitably get hounded by the MLM practitioners, for two reasons: either they're still blinded by their indoctrination, or they have too much invested in the business to admit its flaws.
I hope you have a thick hide!
Melanie Palen from Midwest, USA on August 29, 2011:
Don't forget disguising the club membership fees (where they make the money) with something like, "We only want people who are serious."
Melanie Palen from Midwest, USA on August 29, 2011:
Voted up and useful. I agree with your points. Furthermore, I have trouble believing people who state their income. "I have a yacht and three cars with my $3000 a week income and you can too." Doctors and lawyers make great income, but you don't hear them touting to the public: "Idea! Become a doctor and become rich!" It's because there is no money in telling people to become a doctor, people know that becoming a doctor requires years of hard work. If you package it up in an MLM, tell people that "it can happen to them" and show pictures of all the neat stuff they can buy when they become rich, it's a real pulling point. Not to mention some of the frightening psychology MLMs use. One person stated that the people under you aren't your competition, but are your passive income -- if you recruit so many people, who is buying all this junk?
And it's worth mentioning that more than half of the "great products" I see MLMs selling are complete garbage -- stuff I wouldn't buy if it were in the discount bin at the local Shop n' Save. Another way MLMs get ya' though is that you're a "bad person" if you don't buy these healthy vitamins or use this environmentally safe detergent... I'm sorry, but if a friend started touting this mindless banter at me, trying to "convert" me, I'd question their sanity! I can live healthfully MY way. And I choose not to pay X per month to be in the local brainwash club in order to do so.
kschang (author) from San Francisco, CA, USA on August 27, 2011:
Revised version is up. More comments welcome, but I don't need your anecdotes. If you can cite counter-examples, or refute my points with evidence, please do so.
kschang (author) from San Francisco, CA, USA on August 24, 2011:
@sterling carter -- hardly disinformation. You're simply providing view from the other side. However, let's consider your retorts:
RE: Creating one's own competition -- except real estate agents usually have to sign non-competitive clauses for X years upon joining and getting trained, and MUST work through a "broker" who gets half the commission, right? Hardly comparable to MLM, where there is NO training, NO qualification, NO non-competition period, and runs in the SAME social circles. Real estate agent may run in the same local area, but they usually work on the SAME listings and split the rewards if they share sales. RE is far more cooperative than competitive.
Let's put it this way: do you recruit your best customers as your downline? If so, did you not just sacrifice that customers in order to have a downline?
RE: Passive income -- I think you missed the point. I was pointing out the conflicting interest of the participant, how to balance recruiting vs. selling. I did not say the passive income is a myth. The MLMer have to learn how to sell, and is supposed to TEACH how to sell, but have to recruit by claiming passive income. There is an inherent CONFLICT OF INTEREST. How much to sell, and how much to recruit?
RE: Profitability -- I am glad you were able to pick products that are sufficiently profitable to you even AFTER marketing costs have been deducted. However, not all businesses have products that are so profitable. I cited two examples in the sidebar. Both are real MLMs (real names withheld, but you may recognize the clues)
RE: Pyramid scheme -- there you go, trying to use the red herring "tactic B". Clearly you did not read my article at all.
RE: Cult tactics -- cult is not always bad, but most cults are indeed destructive. I believe I did cite Steven Hassan, noted cult expert about his professional opinion about MLMs, and there is quite a lot in common with "team building". It all depends on the degree such tactics are taken.
RE: Isolation from other people -- you took that out of context. I was referring to the group meetings being held elsewhere often at odd hours. MLM is about marketing, of course sales must be done with people. Yet this leads to a different problem: high-pressure sales tactics, which was not discussed in this hub.
RE: Psychological pressure -- military indoctrination is about team building, performing under stress of combat, and do the mission even when every logic in your brain is screaming for survival instead of the mission. I don't think that's comparable to "marketing".
I don't disagree with you for the most part, but I somehow think you did not actually read my words, but skimmed over it and responded to what you *thought* you read. Consider this a "contrarian" view to MLM.
@kamchai -- I never was in a MLM, and I stated that right up front. I dislike your implied tone about "you're doing everything wrong". You have added nothing to the conversation except offer your own testimonial.
@both -- I think i need to retitle flaw 2.
kamchai on August 24, 2011:
To kschang I do strongly disagree about this hub sorry to say, I am a living proof of passive income, I am living a good life, because of passive income that I made and make every month online. Networking Marketing is one of those I am doing online, I am sure that your doing everything in a wrong way, I reckon that you should look back at what your doing so you can make it right and start earning.
Sterling Carter from Indian Mound, Tennessee on August 24, 2011:
The we might should call you the King of Misinformation.
1 Creating your own competitors?
What, that is how Realty firms work. They train people on the laws and teach them how to sell houses for them for 1/2 of the commissions. Then once the "new" guy gets his/her license they become direct competition.
In MLM you should train people how to sell the products and help them develop new business builders. This is where the residual income is found, or as you put it your number 2 flaw.
2. Myth of Passive income.... are you kidding me?
There is no myth... I am living proof and I have helped other achieve the same results. I can go for weeks at a time and not work... Though I chose not too because I have another plan that I am about to implement that will make 1000's of people have better lives. Yes I am talking about them making passive income. Just like I do. BY the way there is over a million in sale each month in my downline and yes it took me a while to get there.
3. Questionable Profitability?
I am not really sure what you mean there. Yes we make a small amount for each individual sale we make. If you plan to make a living and have passive income doing it all by yourself,... It ain't going to happen. You must recruit people and teach them to sell the products as well. That is where the money is, at least that is the case with the companies I am involved with. The more people you help the higher your percentage of payment is plus you make a commission for the sales of your downline.
4 Pyramid Scheme.....
The Corporate World is the Pyramid scheme. You can not make more money than the president or CEO of the company in a traditional business setting. I have people who make why more than I do who are "below" me in this so called pyramid scheme. In MLM everyone has the exact same opportunity. No matte your back ground.
5 Cult like Indoctrination?
Group Process.... Yep it takes a group... Think of it like an assembly. It takes many people doing different things to make a product that is ready for sale. It also takes many people learning how to sell, promote and recruit to have residual or passive income.
Isolation from other people?
If you were told that I would say run and hide. you can't build a business avoiding other people. Most people will respond negatively, that's a fact. But you should not let those negative people get in your way nor hold you back.... Just don't let them steal your dream away... Because you truly never fail at anything until you quit. The old saying "If you fall off a horse you get right back on" isn't just for horse back riding... It's a metaphor for life.
If you ever had a job or been in the military I think you understand this one... Don't do your job you get fired.... In MLM you just wont make any money. Some people need motivation, some are followers and others are natural born leaders.... But anyone can learn to be a leader if they want too... many chose never to lead and will only follow... Plain and simple.
If no product physical is being bought or sold.... Run like hell.... In this world every person is a sales person whether they know it or not.... You will either sell your time for money, much like a prostitute, or you will sell something of value like, knowledge (lawyers) and they charge for their time. Surgeons, charge for the knowledge and expertise, software / apps for computers and phone or hard goods like hammers and table and chairs.
Of course people will always buy and sell food.... That should be a given.