“It’s a Pyramid Scheme…”

Written by, Samuel K. Burlum, Investigative Reporter and author of The Green Lane, a syndicated column, Published on 8/2/2018, a SamBurlum.com Exclusive

Tags: American Free Enterprise, Business, Direct Marketing, Multi-Level Marketing, Network Marketing, Opportunity, Small Business,

Source: Multi-level marketing has received a great deal of criticism throughout the years, being accused of scamming people out of their money while coaxing them with grand visions of financial independence and lavish lifestyles. Though the odds have not always been in favor of the average network marketer, we uncover the myths versus facts of network marketing business opportunities.

So why does multi-level marketing receive such negative press and opinion? Chances are, the majority of negative opinions were developed by individuals that tried to make a go at becoming successful in a multi-level marketing business venture, and failed to achieve the success that was originally advertised. The statistics are not pretty, however when you compare them to how many people start a traditional business and fail, or how many people try to become professional athletes and fall short of their desired success, the statistics are relative to other career aspirations that are not achieved.

According to a Report authored by Robert FitzPatrick in 2005, over ninety-nine percent of individuals that got involved with multi-level marketing business opportunities ended up losing all of their investment. Studies performed by third party consumer watchdog groups have proven that between 990 and 999 people out of 1000 that have signed up as network marketers have lost their entire financial investments; and for some, because they had dedicated so much time to their multi-level marketing businesses, were let go from their day jobs or lost out on other career opportunities. It will be interesting to see if these numbers change as the industry transforms.

It is difficult to decipher the true number of MLM profits, losses and sales revenue from retail customers versus the network marketer participant’s product purchases because most MLM companies historically have not disclosed the data that makes a clear distinction between sales revenue from their consumer-only audience versus sales revenue from their own network marketer participant audiences.  Because there has been little incentive to solely focus on consumer retail sales, and much of the focus in the industry’s business training has been directed to recruiting a “downline”, few network marketers have focused their sales efforts on establishing retail sales only.

The fact that most MLM parent companies’ total gross revenue is not in direct relationship to what each independent distributor earns creates a blur between the numbers, a truth often skewed when a MLM company is presenting an opportunity. If the math and the probability of success is not in favor of the network marketer, why do people still sign up to participate?

Some individuals join the networking side of the business because they enjoy the parent company’s products so much that they continue to purchase them, but desire to continue making their purchase commitments at a significant discount. In some cases, the consumer then becomes their own network marketer and tends to save enough on product discounts that their fee for joining is covered over time.

Some individuals are drawn to the social lifestyle and travel, the added value of education and training, and networking with other like-minded individuals; thus treating their distributorship more like education and/or a social club membership. In some cases, this training, networking and the connections made also benefit their other businesses or day jobs. Some individuals just enjoy the flexibility that the MLM opportunity provides, and want complete control over their own schedules. Sometimes these individuals might be involved with more than one MLM opportunity, where they may profit from cross pollination of their networks from one organization to the other (though most often frowned upon and against company policies).

Some individuals become network marketers because they believe that they (and their team) will defy the odds and strike it rich, hoping to find themselves at the top of the pyramid after the masses of other people quit. For some, the idea of “owning a business” or being “in the business” is attractive, and they will leverage that representation to recruit others into their organization.

In the legal sense, a network marketer does not own their own business (unless they have their own corporation or limited liability company that is in contract with the MLM parent); because the network marketer does not own any hard assets owned by the MLM parent organization. The Network marketer does not own the patents, intellectual property, physical property, inventory (in most cases), or other intangible business assets such as a website or domain name; nor can the distributor’s “business” be sold or acquired for a profit (in most cases).

Multi-level marketing companies have had their fair share of legal bouts. In the 1980’s, the Amway Company was met with much criticism and negative press. As of most recent, HerbaLife faced the wrath of the Federal Trade Commission. Yet network marketers that remain committed to multi-level marketing claim they have benefited from their involvement and have seen a return of investment after three to five years of dedicated efforts.

Skeptics, media, and government agencies focused on consumer protection argue that a multi-level marketing agency crosses over to a pyramid scheme when it pays more focus and monetary benefit for new network marketer recruitment than on product sales commissions, where the participant (the network marketer) can only make sales commissions on consumer retail sales if their downline is meeting mandated personal consumption inventory buys; and in order to earn either bonuses from recruitment or sales commissions, one is most often required to maintain an automatic shipment purchase of company products themselves that also may include a number of pre-requisite items such as tools, marketing materials, and training materials.

There are some multi-level marketing companies that do focus more on the products and services offered than on network marketing recruitment of new participants. Companies like Primerica and Pre-paid Legal focus on the sales of services, and encourage their network marketing representatives to be successful at selling these services before recruiting new people into their downline. These companies also have no required auto-ship.

Some companies have changed their business model to adapt business practices acceptable to watchdog groups and government agencies. Some have also eliminated the requirement for auto ship purchasing, and have increased compensation benefits to allow individuals who only desire to earn commissions on sales of products, to do so and see a return on investment within a reasonable time period.

The perspective of ‘being a product of the product” holds true in successful product promotion, and most people are drawn to specific MLM companies because they see the value and benefits of the products that the company offers. However, many folks who are introduced to these companies have limited financial resources and are already struggling to get by. Though they may like nothing more than to be able to personally enjoy the benefits of the company’s product lines every day, they may not initially have the means to purchase them monthly while doling out the expenses of building their business – such as tools, training and fuel. It is also important to keep in mind that it takes time and training to build the knowledge, skill sets and relationships necessary for success; and most often, little (if any) monetary earnings will be recognized for the first several months, especially for those who are new to the industry.

If you’re still intrigued and contemplating whether or not the MLM industry might be for you, your next step may be to research a few multi-level marketing companies, along with their products, culture, and compensation plans with a fine eye focused on detail and the fine print. Before joining a MLM organization, you have the right to research and ask for reports on the average payouts per year to new recruits, statistical and historical analysis on success/failure rates of network marketers within that organization, and for a review of consumer complaints related to the MLM parent company’s product offerings. Once you have found the MLM opportunity you are comfortable in working with, continue to move on with your new business opportunity with cautious optimism.

Samuel K. Burlum is an Investigative Reporter who authors articles related to economic development, innovation, green technology, business strategy, and public policy concerns. Samuel K. Burlum is also a career entrepreneur, who currently lends his expertise as a Consultant to start-up companies, small businesses, and mid-size enterprises, providing advisement in several areas including strategic business planning, business development, supply chain management, and systems integration. He is also the author of “The Race to Protect Our Most Important Natural Resource, Water;” and “Main Street Survival Guide for Small Businesses.” 

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