Network Marketing
Call them Network Marketing, Multilevel Marketing, or MLM, these pyramid plans are proven not to work.
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| Skeptoid #176 October 20, 2009 Podcast transcript | Listen | Subscribe |
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Today we're going to point our skeptical eye at network marketing plans, formerly known as multilevel marketing or MLM (name changed to escape the stigma). They say that when there's a gold rush, the way to make money is to sell shovels. Network marketing companies sell shovels, along with dreams of gold: All you have to do is go out there and dig, dig, dig, and buy more shovels, and get your friends to buy shovels too. Levi Strauss and other suppliers became millionaires, and hundreds of thousands of miners went broke.
Network marketing plans are started by a company selling some product — fruit juice, soap, vitamin pills, water filters; anything, it doesn't matter — through a network of independent distributors who are promised exponential commissions by recruiting multiple levels of other distributors beneath them. The company is guaranteed sales because the distributors are required to make minimum purchases, on which commissions trickle upward. There's little need to actually go out and try to sell the product to anyone; money is made by building your network of distributors beneath you, and their distributors beneath them. Soon the commissions trickling up from all those monthly purchases combine into a raging torrent of cash. And if you just buy a few more shovels, you're sure to strike gold.
Network marketing plans differ from illegal pyramid schemes only by one subtle point: Commissions can only legally be paid on sales of a physical product. If commissions are offered upon recruitment of new distributors, then it's defined as an illegal pyramid scheme. Pyramids are illegal because they necessarily collapse when nobody else can be recruited. However the illegal plans are pretty rare; most companies are smart enough to stay on the right side of the law. But the problem of community saturation, and inevitable collapse, remains.
A tipoff that should clue you into the wisdom of network marketing is that the companies themselves, who manufacture and sell the product, don't even eat their own dog food. They are making money the old fashioned way, by selling an expensive product. It's you whom they recruit to start a network marketing business. When an existing distributor pitches you and gets you to become a distributor yourself, you are required to make your initial purchase of "inventory" of whatever the product is. You either consume that product yourself or sell it to others. Your principal sales tool is the pitch that if your customers become distributors beneath you, they can buy the product at a discounted wholesale price. In most plans, in order to retain your distributor status and qualify for the wholesale discount, regular monthly purchases have to be made.
But even this discounted wholesale price is usually far higher than the market value of comparable products available from the supermarket. Participants nearly always find themselves in the unenviable position of having invested a lot of money in their own required inventory purchases, and desperately trying to recruit new distributors in an effort to earn commissions on their inventory purchases, and hopefully recover their own investment. So this raises the question: How often does it work out that way? How many MLM participants ever recover their own investments?
- The Federal Trade Commission cautions "Most [network marketers] end up with nothing to show for their money except the expensive products or marketing materials they're pressured to buy."
- Consumer Reports advises "Stay away from multilevel marketing schemes that make earnings contingent on your ability to sign up an ever-growing pyramid of 'distributors' who are supposed to do the same and pass sales commissions up the line."
- The nonprofit Consumer Awareness Institute analyzed available data published by the MLM companies themselves. Of the companies surveyed, they reported the least successful was Amway/Quixtar where 99.99% of distributors lose money, and the most successful was Herbalife, where 99.42% of distributors lose money.
- They also surveyed 200 tax preparers in three counties in Idaho and Utah, where 6% of residents are active network marketing participants. From over 300,000 tax returns, not a single one reported significant profits from network marketing activities.
- In a Wisconsin lawsuit, the tax returns of the top 200 of 20,000 network marketing participants were examined by the Attorney General. The average income of this top 1% was -$900.
- Newsweek found that fewer than 1% of MonaVie distributors ever qualified for any commission at all, and less than 1 in 1,000 recovered the cost of their required monthly purchases.
So if network marketing plans don't work, why do people buy into them? Network marketing plans are easily sold by simply laying out some compelling mathematics on a whiteboard. A typical program sets five downline members as the goal for each participant: To be successful, you need only recruit enough people to end up with just five who actively participate. Below those five are their five apiece, totaling 25. This is your network. Each downline of five are qualified by participating at the minimum required level, so this model already excludes everyone who is flakey or only half-hearted, leaving only the five good ones in each downline. Your commissions based on those minimum participation levels — where all five below you dutifully make their minimum monthly inventory purchases — guarantees you an impressive income. The mathematics are black and white, and it's so simple that nothing can go wrong. You'd have to be stupid not to do it.
But here is the problem that these whiteboard presentations always manage to omit. Of all the thousands of network marketing plans available now or in the past, if only one of them had ever had even a single line active to only 14 levels deep, that alone would have required the participation of more human beings than exist. That math is black and white, too. Level 14 is populated by 514, or about 6.1 billion people, the entire population of the planet, in addition to level 13 with 1.2 billion, all the way up to you and your original five. You can answer "Oh sure, but a lot of the people don't get all five or they flake somehow," but you forget that the entire premise has already eliminated those who flake or who don't get all five. The unfortunate conclusion is that a fully invested network, upon which the whiteboard presentations are dependent, has never actually happened.
A fundamental reason that such networks fail is that they depend upon recruiting people to compete with you. If you own a shoe store, and you pitch every customer on opening their own shoe store instead of being your customer, very soon you're going to have a neighborhood full of shoe stores, with everybody trying to sell and nobody left to buy. It doesn't take an MBA to see that this is pretty much the polar opposite of a sound business strategy.
Let's say you tried to make it sound, and said "Forget the multilevel recruiting, I'm going to focus on selling the product." Is anyone doing that successfully? It would not appear so. During yet another lawsuit in the UK, the government found that less than one in ten participants ever sold even a single product to another person. Since the company has its distributors as a captive audience required to make regular purchases, the products are typically grossly overpriced compared to similar products available in supermarkets. This makes their sale a dubious prospect for those few distributors who ever do attempt retail sales to customers. Surveys show that nearly all products purchased by network marketers are consumed by the distributors themselves.
This fact is rarely mentioned in the sales pitches. Instead, they typically promote the merchandise (referred to as "lotions & potions" by MLM critics) as wonderous super products that will be in high demand. But, you should always beware of success stories coming from MLM distributors. Most MLM companies pay shills who lie about having had multimillion dollar success with the scheme. These are typically the ones who travel around giving seminars, pitching motivational materials, and putting on recruiting extravaganzas that have been criticized by the Federal Trade Commission for promoting an almost cult-like religious mania as a substitute for sound business practices.
I've spoken with enough friends and other people who are into network marketing to know that the default response to this is "Oh, but this plan is different." Sure, every plan has different tweaks and details, but fundamentally they are all the same. The company is going to make tons of money selling an outrageously overpriced product every month to their captive audience buyers: You, and any friends you recruit. Not one of you has any realistic hope of coming out ahead. My advice to everyone involved in network marketing: Simply stop now. Stop convincing yourself that profits are just around the corner if you just buy a few more cases of expensive product. Just stop now, walk away, consider it a lesson well learned, and don't give them another dollar.
One final tidbit I'll leave you with. On average, 99.95% of network marketers lose money. However, only 97.14% of Las Vegas gamblers lose money by placing everything on a single number at roulette. So if you're thinking about joining a network marketing plan, and aren't dissuaded by the facts I've presented, consider instead going to Vegas and placing all your money in a single pile on number 13. Sooner or later you're going to have to take my advice and just stop now.
You should follow me on twitter here.
References
© 2009 Skeptoid.com
Discuss!
5 most recent comments | Show all 48 comments
Remember, you should always read with skepticism the comments of anyone too lame to put their real name & city.
Why was my comment, which supplied supporting links to the issues raised, not posted?
David, Stockholm Sweden
November 05, 2009 12:52pm
I have been listening to Skeptoid for over 2 years now since learning about it from "Skeptics Guide to the Universe" podcast when they had Brian Dunning on. I am proud to have donated to skeptoid in the past because I believe in critical thinking.
The problem with this episode though is Brain tries a "One Size Fits All" approach to MLM. Yes there are a lot of bad MLMs out there and there are a lot of good ones like others have already listed. I have people that buy our product every month and have no interest in doing the business because they like the product.
I have made my living as a distributor in a MLM company for over 10 years. It has not been easy but the rewards have been worth it.
The quote from the podcast "99.95% of MLM victims loss money." is very misleading because it makes it sound like these people put their entire efforts and savings into the business when in reality 90% of the people that have joined my organization over the years do not do any work at all. Some may do some work but treat it as a casual business. Of course they are going to fail. Most of them don't take it serious and like to magically think that it will just work on its own and don't have to do the work.
Brandon - People that try and start a restaurant are very dedicated. Working 60+ hours, dumping a ton of money into their establishment, and still half of them fail. 90%+ of the people that join MLM, don't even spend 1 hour a week working the business. That is why most don't succeed.
Richard, Utah
November 11, 2009 10:38am
Richard, this is called a special pleading, or rationalization. You believe that all or most people who start restaurants work very hard, try very hard, and still mostly fail. You then attribute the failure of people on MLM to their laziness.
Even if 90% of people who join an MLM don't work hard at it, as you claim, that's still 99% of that remaining ten percent who don't make any money, let alone enough to justify doing it full time.
Even the people that do make money at MLM make less than if they had just worked a traditional job.
Brandon, Falconer NY
November 15, 2009 4:45pm
Hi All,
I've been reading loads of articles which are Anti-Network Marketing since the day i myself got into the Industry 2 Yrs back. It is so much evident in every post that either the person who wrote the article, his family or friends have lost money or have been cheated and hence the aggression.
It is also very evident that they did not understand the industry before they got into it. Here are some tips that I found during my so far successful journey in NM.
1. Understand the Industry. As on today its a $115+ Billion Industry World Wide with over 8% of world population into it.
2. Understand why the co. is into NM ? To sell product and make money or to make people wealthy. If you Choose a Co. who wants to sell products you'll be a sales man all your life.
3. What is the co. giving you apart from a product or a service. Hint - Education ?
4. Compensation plan. Is the co. a multi level commission ? Today there are Co. with pay $41 for direct or indirect ref's.
5. Why is your friend asking you to join ? Is it b'coz he get some money ? or is it b'coz he wants your help to build the biz ?
Last but not least....... Why do you want to do NM ? If you don't have an answer to this question PLEASE DO NOT GET INTO THIS INDUSTRY. I WILL ASSURE YOU FAILURE.
I've also written a small blog on my experience in this industry. Feel free to read and comment.
Guys, no industry is bad. Its a Co. which can be bad or an Individual. Its never an INDUSTRY
Cheers,
C.Rowe
Chakradhari. Rowe, Bangalore, India
November 16, 2009 8:41pm
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There's also the fact that in real estate, the agent doesn't expect you to become a real estate agent under them when you buy the house. They simply sell you the house. Not so with MLM. That's the real difference--MLMs rest on the premise of selling stuff to your own competitors. A regular business sells stuff to consumers.
Gregory, Alabama
November 04, 2009 8:38am