The Multi Level Marketing (MLM) business model, is a model in which the company has a contract with independent distributors to sell and promote the company’s products. The distributor at the same time has to recruit customers, and sign them up to also become distributors.
So how legitimate is MLM and what is MLM business Opportunity? We will look at MLM compensation models and can you make money with MLM companies. Read more about what are Multi Level Marketing companies and the differences between the types of marketing in this related post on What is Affiliate Marketing?
How Legitimate is MLM?
This is how Wikipedia describes Multi Level Marketing (MLM): “Multi Level Marketing, also called Network Marketing or pyramid selling, is a controversial marketing strategy for the sale of products or services, where the revenue of the MLM company is derived from a non-salaried workforce selling the company’s products or services, while the earnings of the participants are derived from a pyramid shaped or binary compensation commission system. A MLM strategy may be an illegal pyramid scheme”.
A compensation plan for a MLM company has the same pattern of being top-weighted and recruitment driven. This means MLM compensation models are driven by incentives to recruit, with most commissions being paid to founding members and a select few Top of the Pyramid Promoters (TOPPs).
This does not just apply to one MLM, but to the entire MLM industry. Are you tired of Multi Level Marketing that does not work? Then look at Affiliate Marketing.
The realistic income potential with MLM is very low, and most people do not realize that.
Out of Pocket
As with all MLM businesses, you have to buy a starter kit, to join what is MLM business opportunity. That means you are out-of-pocket even before you have started. This was clearly demonstrated when Amway was investigated in 1980 by the Wisconsin Office of the Attorney General for the State.
At the time, approximately 20,000 Amway distributors were operating in Wisconsin. The State tax returns for all the Amway “direct” distributors in Wisconsin were obtained, which were about 200. This represented the top 1% of distributors in Wisconsin.
The federal forms, which revealed a breakdown of revenue and expenses, were attached to the returns.
The average gross profit of these supposedly top distributors in Wisconsin, was $12,500. After subtracting the expenses, the average net income was a loss of about $900. So yes, minus $900.
So can you make money with MLM companies? Yes you can, but in reality, less than 1% of those that join a MLM, make money. Why is that? Let’s look at what is inherently wrong with a compensation plan for a MLM.
The Inherent Flaws in MLM Compensation Models
- A virgin market, and
- An infinite market.
Neither of these two exist in the real world. This makes what is MLM business opportunity inherently unfair, deceptive and flawed.
It is a misrepresentation to say MLM is a business opportunity or an income opportunity. More than 99% of people actually lose money by joining a MLM company, so ask yourself some serious questions when you evaluate the business opportunity:
- How much is the initial upfront investment?
- How much is the monthly commitment or requirement fee?
- What are the expected expenses? That includes keeping track of costs like party supplies, shipping etc.
- How long will it take you to recover your expenses and make a profit?
- How long do people stay with the company?
Many MLM companies claim that it is a perfect part-time job or opportunity to earn seasonal income. But in reality, you cannot build and maintain a business without full-time commitment and sustained effort over a long period of time.
If you don’t want the anxiety and uncertainty of working for a MLM – look at what Wealthy Affiliate offers you.
MLM is an outdated business model, especially with so many other online opportunities available these days. Operating a MLM business can be far more expensive and time-consuming than most people anticipate and realize.
Evidence shows that 99.6% of people who join a Multi Level Marketing company will lose money.
Affiliate Marketing gives one the flexibility to promote several brands and products from many different companies. With MLM you are limited to the products of that particular company. Most MLMs prohibit you from also selling products from another MLM, which limits your choices even more when it comes to can you make money with MLM companies.
Jon M. Taylor, Ph.D., founder of the Consumer Awareness Institute, has done extensive research and analysis of MLM compensation models and you can read more about his finding here.
Red Flags in Evaluating How Legitimate is MLM
Your chance of making a profit in Multi Level Marketing is less than 1 in a thousand, so less than a 0.1% chance.
If there are more than 4 red flags when you look at the specific what is MLM business opportunity, then you seriously need to reconsider if this is a program that you want to join.
- Constantly having to recruit new team members: unless you are aggressively recruiting new team members, you can not climb the ranks. At the same time, your recruits also have to recruit and so it goes on. I experienced this firsthand when working for Usborne Books at Home. The only way in which one could move up the ranks, was by recruiting and building a team. Travel incentives and rewards were purely based on recruitment and team building, not on actual sales.
- Promotion through recruitment: in order to advance in the ranks, you need to build a down line. Your success depends on you recruiting enough new team members, to qualify for each rank. This ongoing recruitment is one of the factors that questions how legitimate is MLM.
- Pay to Play: you need “active” consultants to be able to climb the ranks. Being “active” in a Multi Level Marketing (MLM) company, means placing monthly minimum orders on their products. You are told you are investing in yourself and that it is part of the formula for success, but at the end of the day you are being charged to be part of the business opportunity.
- Most of the rewards go to your upline: the only way for a new consultant or distributor to make money, is commission on their own sales. You earn more and more commission if you build a down line. Remember that every time you place an order and buy product, several people in your upline earn commission from you.
- More than 5 levels in the compensation plan: with Pampered Chef they pay on up to 3 generation in your down line There is then an additional level where other “director bonuses” are paid. Usborne Books at Home have several levels where overriding commission is being paid. So it appears that there are more than 5 levels.
Income Claims of MLMs
At the very center of the legitimacy of a Multi Level Marketing program, is the income claims touted by many MLM companies. The truth about average earnings must be disclosed, so that prospective recruits have the valid information on which to base their decisions, whether they are joining the program or not.
Studies of hundreds of MLMs have found that virtually all the compensation plans hide the odds of making almost zero profit. Once the cost of buying products to maintain your status and qualify for commissions have been subtracted, there is almost certainly a loss.
It is therefore no surprise that the Direct Selling Association (DSA) and MLMs, are vigorously opposed to any transparency with regard to income claims. Transparency about potential income is essential to protect consumers.
The Federal Trade Commission (FTC) has been asking the promoters of business opportunities, like MLMs, to disclose average earnings. The DSA and MLMs have fiercely resisted this. Therefore, it should be a red flag that indicates there is something seriously wrong with a compensation plan for a MLM business, and the surrounding industry, if they do not want to disclose the potential earnings of their distributors.
It appears that the few MLMs that have disclosed their average earnings data, have designed the date in such a way that it is misleading to prospects and regulators. But very few actually publish income disclosure statements which show the truth about how much reps are earning. And when they do, you can see why.
More information on the abysmal MLM figures are available here.
Steps to Establish if you can make a Profit with MLM
If you are wondering can you make money with MLM companies, follow these steps:
- Obtain average earnings statistics: find out the average amount of money in commissions and bonuses that have been paid to distributors by the MLM, at the various levels in the compensation plan. The person trying to recruit you, should have the average earnings statistics to give you. If the MLM you are examining would not provide you the stats for average earnings, it is a red flag, as they should give you that information.
- “Pay to Play” expenses: you need to determine from the compensation plan, how much you will be expected to purchase in products and services, to stay active. This is even if you can, or intend, to resell them. So check the minimum requirements to qualify for commission and bonuses and to advance to the various next levels in the compensation plan. This is also known as “incentivized” expenses. It includes the minimum monthly orders you have to place just to stay active. TOPPs for most MLMs expect their team members and down line to pay for training, attend conferences and other tools to help them becomes successful. When I was with Usborne Books at Home, this was a minimum of £120 per month, with Pampered Chef Expect at least $150 per month. And the minimum requirements often increase as you move up the ranks. We have seen a minimum of $750 per month that you need to spend with Pampered Chef in the higher ranks. So listen carefully to what the recruiter is saying, whether they are selling the product, or selling the business opportunity.
- Find out the average total amount that participants in the MLM, have paid to the company: This should be the average of the total amount for products and services that was purchased at each level. Most MLMs are reluctant to provide this information, but it is crucial information for you to decide if the MLM is right for you or not. Also determine what other costs, like website hosting, training, etc. is involved. Do not fall for the claims that the products have magical properties or are exclusively available from MLM distributors. Shop around for similar products to compare prices and make sure they are not inflated.
- Find out the number of distributors that stay with the company: What is the percentage of recruits that drop out within 12 months? Also, find out the percentage over a longer period of time, of 5 or 10 years. If the MLM won’t give you the information, research has indicated that it is at least 50% per year that drop out. Typically, 95% have left over a 5-year period, and usually after 10 years, almost everybody near the top, or at the top of their pyramid, would have dropped out. As a minimum, 90% would leave within 5 years and 95% within 10 years. When MLMs do publish average earnings reports, they will often include the top-level earners, without including the dropouts. Statistically this is not valid as all participants should be included for a year, including those that dropped out during the year. MLMs often only include the “active” distributors. To calculate success rates, everybody that signed up, should be included. So find out the lifespan of the recruits. With Usborne Books at Home it is 18 months.
- Estimate, or obtain, the minimum expenses to conduct a successful recruiting campaign: Most MLM participants find recruiting very tough and quit before spending much money on recruiting. But you will need an aggressive recruitment campaign if you want to move up the ranks and make a profit. So you have to keep that in mind, together with incentivized purchases. Recruitment is essential if you have any hopes of being successful in a MLM, where typically, the main focus is on recruitment. It is normally the few that are near or at the top of their pyramids, who make a lot of money from commissions on orders that new recruits place.
- Calculate the profit/loss rate: to calculate profit, add up all the successful participants, together with the all the new distributors that signed up during a period. Then deduct all the expenses as discussed above. Any distributors that did not earn anything, needs to be included.
Deception with What is MLM Business Opportunity
Many “income opportunities” with a MLM should be relabeled “loss certainty“. One of the biggest deceptions of the DSA and MLMs is that people join to work part-time or earn seasonal income to pay for a holiday or Christmas presents. It takes time to build up a customer base, so those people lose out.
Yes, I worked for a multi level marketing company for nearly ten years, before switching to affiliate marketing. With MLM I was encouraged asking family and friends to host a party, and then the neighbor and the lady living down the road. And it was not long before my mentor started telling me that I needed to recruit and build a team if I wanted to earn more.
It turned out that ALL the incentives are based on recruiting, and your recruits need to be recruiting and their recruits and so forth. There was not a single incentive that was based on actually selling the product. And you have to place monthly minimum orders to qualify for overriding commission. This really made me question how legitimate is MLM as it resembles a pyramid in disguise.
When MLMs talk about the income opportunity, they will happily lie and deceive to recruit. They share the examples of the top 1% of their earners, which is not realistic to a new recruit. My experience with Usborne Books at Home was that the top earners had all been there for at least 10 years, and many of them for more than 20 years.
With a down line of much more that 500 team members, it is simply not realistic for a new recruit, but this information is not shared in a compensation plan for a MLM.
Thus, escape the MLM Rat Race! Network Marketers are switching from MLM to Affiliate Marketing. This is the platform they are switching to.
A Better Alternative to MLM
MLM is not the only way of making money from home, so don’t be limited by only looking at MLM. With any MLM business, you are limited to selling the range of products that the company produce and offer.
Multi-Level marketing and face-to sales are old-school and inefficient marketing. So stop wasting your time chasing MLM, they are not worth the effort. This is my #1 Recommendation
How legitimate is MLM boils down to the technicality that consultants are required to have personal sales. If you have any questions about what is MLM business opportunity or experience with MLM compensation models, then please leave your comments below and I will get back to you.