You're Too Good for MLM
The Napkin Calculation
A few years ago I was attending a conference with a colleague of mine. Unbeknownst to us, the city where our conference was being held was besieged by tens of thousands of participants in a very popular MLM program. The airport was packed full of these people. We couldn't go to a restaurant without seeing them everywhere. It wasn't long before we got to talking to a handful of them. They all told us how successful they were, how the program changed their lives and how we should join too (using their referral ID).
Not a chance.
For two experienced business analysts, it didn't take long for us to realize that certain things just weren't adding up. Setting aside the fact that we didn't believe that all of these people were nearly as successful as they claimed to be, we were sitting at a restaurant when we decided to just sketch out the financials of why MLM's math just doesn't work for any serious entrepreneur.
We began taking the numbers we had been given and writing out some rough calculations on the back of a napkin. The results were not good.
We focused on three very basic, and very business oriented, topics. We didn't even need to touch the ethics of MLM programs. These three reasons alone showed us definitive proof of why MLM isn't a sound business venture for anyone besides the person starting the program.
My colleague had the good fortune of being on the airport shuttle filled with MLM convention goers. One of them gave him a free sample of their product along with a business card hoping to hook him into buying more. He didn't. Though we did examine this product, an article of clothing, carefully once we made it to the hotel.
Our initial assessment was that the product could be produced for approximately $2 if one sourced manufacturing in China directly. This product was made in China but was distributed through an MLM program. From our conversations we learned it took $4,000 to buy into the program and at least $2,000 per month in required purchases.
The item was priced to retail at $25 and was sold to the MLM participants for $15.
If we assume that you really have the hustle and are able to sell these products and turn a profit on a monthly basis we would still say that you succeeded despite the MLM program rather than because of it.
The program boasts that you can make a 60% margin while buying the product at $15. For the untrained participants, this sounds pretty good! But it's also largely false. The 60% margin assumes that the total cost to marketplace is $15. However, the $15 is only the total cost to YOU.
You would still have to sell the item. That might mean maintaining a website or setting up a booth at a festival or organizing parties where you sell these to your core customers. Either time or money, and time is money, will be spent taking this $15 item and getting it to the customer.
Considering that the neither the $2,000 monthly expense nor the $4,000 upfront cost actually did anything to defray your ongoing overhead expenses, that means that is all coming out of your pocket and eating up what you're being told is "profit."
2. Advertising and Brand Recognition
It isn't uncommon for MLM programs to scoff at the idea that you could source the same product at a much lower price and secure margins that would actually enable you to turn a profit. They, after all, have a vested interest in having you buy into their system rather than striking out on your own.
One of the things they will claim to offer you is brand recognition. They spend tons of money on advertising and that trickles down to you, right? They like to paint the picture as being a bit like how national brands with franchisees benefit from that national marketing.
There are many problems with this argument. I'm going to focus on two:
- Brands like McDonalds or Toyota have massive marketing campaigns to promote their products. You will see a commercial for the newest car or the newest burger. You then know that the place you need to buy that car or burger is at a local dealership or a local McDonalds. Both are locally owned. In the case of the McDonalds, it's a formal franchise. In the case of the Toyota Dealership, it's a fully independent business with a licensing agreement to display the company logo and sell the company's products. With MLM companies, however, most marketing efforts are focused not on promoting the product to drive business to you. They are focused on getting more people like you to sign on as "independent consultants" or whatever they like to call the people they lure in.
- Because the advertising is focused on getting people to sell their product rather than the product itself it means that the brand recognition isn't positive. Rather than a customer saying "Wow, that's the company that makes those awesome products!" people instead say "Wow, that's the thing my mother/co-worker/friend/roommate keeps trying to get me to sign up for!"
Brand recognition can be very useful. It's the reason why legitimate franchise opportunities are so tempting especially for serious investors. Franchises, however, don't just come with a demand for payment. They come with ongoing support and training.
If you buy into most food franchises you won't just get permission to display a sign. You'll get a business process that has been tested in the market and guidance about how to implement it yourself to replicate that success.
3. You recruit your own competitors
Let's say you're one of the few who manage to make, not just a few bucks, but an actual living with MLM. Often, this is accomplished not through selling the most product or being the best brand ambassador you can be. This is accomplished through recruiting other people who go out and sell.
It's the whole "multi-level" aspect of multi-level marketing. The people who tend to make the most money aren't selling the product at all. They're selling the MLM "opportunity" to people. By recruiting as many people as possible they are able to get a bonus or a piece of the commissions earned by those people. Their job, in turn, shifts from hawking products to family and friends to recruitment.
For the average MLM participant, however, they aren't going to set up a full time recruitment operation. They'll sell a few products and hope to supercharge their earnings by bringing in a few others. So they'll recruit family, friends, co-workers, neighbors and people from their place of worship to get in on this "amazing opportunity."
In doing so, however, they then recruit their own competitors and cut off pieces of their natural market.
Your natural market is your social circle. They're the people most likely to buy from you if you have something they want. MLM doesn't care about you carefully cultivating a long term career through starting with a natural market and then branching out. They would be just as happy to recruit you and all your family.
Because, in many cases, they get paid whether you sell any of their products or not.
With a $2,000 monthly commitment it doesn't matter if you sell your inventory. The company is functioning as a supplier with an oppressive fulfillment contract rather than your partner for success.
There is no short cut to starting a business
I get it. Starting a business looks hard. That's because it absolutely can be. So the idea of a turnkey operation where you avoid all of the unpleasantness by writing a check is tempting. Add to that a pitch by your salesperson about how the company made all of the mistakes in the beginning so you won't have to and it's clear why many people are convinced to part with their hard earned cash to sign onto these programs.
Going at it alone is certainly no guarantee for success. Going at it with a "partner" who hobbles you with unnecessary expense and liabilities, however, is almost a certain guarantee of failure.
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.