Archive for April, 2012

MLM Mind Game: Pretending Everything is Black and White

Time after time I’ve seen MLM proponents make a silly argument that everything has to be black and white – either good or evil. For example, they’ll stuff like, “Not everyone fails at MLM.” and “MLM isn’t for everyone.” These statements, and similar ones are largely meaningless and only expose the person saying them as either ignorant of logic or openly trying to scam others. Let’s take them in order:

“Not everyone fails at MLM.”

The first place to start is at the use of the word “fail.” That word alone requires a lot of defining in the world of MLM, since no one seems to agree on what it means. Also, in any pyramid scheme, whether it be an MLM or not, there are people who success. This statement does nothing to defend MLM, when it also applies to illegal pyramid schemes.

“MLM isn’t for everyone.”

I could easily say that “Robbing banks isn’t for everyone.” or “Picking pockets isn’t for everyone.” Both statements are true. It doesn’t help advances the cause for MLM at all.

Bottom Line: The MLM proponent tries to make a case that if it is okay for some people, it is should be okay for all. This is a huge logical fallacy. Let’s me give an extreme example. “Crashing airplanes into skyscrapers is not for everyone.” Clearly the act is for terrorists. We can’t justify the act simply because it is okay for some people. We have to look at it objectively and say, “Hey there were thousands of innocent people killed! This is not a good thing!” When it comes to MLM, don’t let such arguments influence you from looking at it objectively. Remember the business of MLM, is a terrible one indeed.

(Note: The extreme example was given to prove the point about the lack of logic, it does not serve as a comparison. Please refrain from any comments saying that I compared MLM to terrorism. I did not.)

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MLM Mind Games

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How An MLM Can Show It Isn’t an Illegal Pyramid Scheme

It seems like many MLMs are actually illegal pyramid schemes. As a consumer and/or a potential distributor, you want to be sure that the company you get involved with is legal. It isn’t much fun to build a team only to have them shut down by the FTC. So what can you look for to ensure that an MLM is a legal one and not a pyramid scheme? Let’s dig an find out:

In previous articles we found out: MLMs with required minimum purchases to earn commissions are pyramid schemes. We also found that the FTC says MLMs must focus on sales to outside participants.

So if you are evaluating an MLM company and trying to figure out if it is legal, look for two things in the compensation plan:

  • No minimum purchases to qualify for commissions – An MLM distributor will likely claim that you must be familiar with the product to recommend them. This makes sense. However, there’s a difference to being familiar with a product and being required to buy as a fee to participate in the business. The later is a sign of a pyramid scheme.
  • Commissions are not paid on products ordered by other distributors – This gives each distributor an incentive to make sales to people outside the system, which the FTC says is necessary for a legit MLM.

Let’s look at how this works in practice. If I recruit Dave, John, and Sam, I get a percentage of the sales that each of them made to people who are not distributors. There’s still a reward for recruiting, but there is also a strong incentive to make actual sales to people outside the system. Even better it rewards people for finding and training good salespeople, not just someone who is a seller of a “business opportunity” in recruiting others.

If the MLM company is reputable, you’ll find both of these to be true. If the MLM doesn’t have both of these in place, it is best to avoid it.

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MLMs vs. Pyramid Schemes

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FTC: MLMs Must Focus on Sales to Outside Participants / Pyramid Schemes Recruit

I see many MLM distributors confused about the very industry they are in. I’ve read one distributor claim, “MLM is not a sales business, its a training, coaching and mentoring business.” A distributor holding this view seems to be confused about what the FTC has to say on the subject.

The FTC has a great guide of MLM vs. Pyramid Schemes:

“Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products.”

“Avoid any plan where the reward for recruiting new distributors is more than it is for selling products to the public. That’s a time tested tip-off to a pyramid scheme.”

“Another sign of a pyramid scheme is if the money you make depends more on recruiting — getting new distributors to pay for the right to participate in the plan — than on sales to the public.”

Here’s a letter from when the FTC went after JewelWay for being a illegal pyramid scheme:

“Legitimate multi-level marketing plans are a way of making retail sales of products or services to consumers through a network of representatives. However, in an illegal pyramid scheme the main focus is not on sales, but on recruiting new representatives into the program. Typically, each new representative must buy a certain amount of products and must recruit a specified number of new participants in order to earn money in the program. In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program.

I’ve added some emphasis to particular points to make it clear. The unbiased reader will likely get the point without the added emphasis. However, an MLM distributor who believes that he/she does not have to sell product will likely experience cognitive dissonance and try to explain away the FTC’s requirement to make sales to others outside the scheme.

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MLMs vs. Pyramid Schemes

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FTC: MLMs with Required Minimum Purchases to Earn Commissions are Pyramid Schemes

MLM distributors have long been claiming that they aren’t involved in a pyramid scheme, but much of the time they are either unaware of the definition of a pyramid scheme or simply not willing to face an inconvenient truth.

Most often distributors erroneously make the claim that as long as they are buying the product and using it, it isn’t a pyramid scheme. This is sometimes called “internal consumption.” For years Amway distributors have said something like: “All we do is buy from ourselves and find others who do the same” with the implication that they don’t need to make sales.

In 2004, the President of the Direct Selling Association (an organization that lobbies for MLM companies), Mr. Neil H. Offen wrote the FTC to get clarity on the legality of this internal consumption business model. The FTC’s response couldn’t have been what the DSA was hoping for. In particular, the letter included this quote:

“The Commission’s recent cases, however, demonstrate that the sale of goods and service; alone does not necessarily render a multi-level system legitimate. Modern pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise these payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. As discussed above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to financial failure.”

I highlighted a few parts to make it clear. If an MLM requires that a distributor purchase product to earn commissions it is very likely a modern pyramid scheme. One way that an MLM can do this legally is if there are enough sales to people outside the scheme, so that commissions aren’t funded primary from those within the scheme.

Using this as a guide is clear that companies such a MonaVie and One24 are pyramid schemes. At a minimum, such companies by being in the industry that they are in bare the burden of proving that profits don’t come primarily from sales to internal distributors.

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MLMs vs. Pyramid Schemes

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Defining MLM Success and Failure

One thing that I happen to see a lot in MLM discussions is idea of MLM success or failure. Success and Failure is a concept that we all know, but it does seem to mean different things to different people. With that in mind, this post is intended to explore it and achieve a reasonable view that all parties can agree on:

Quitting vs. Failing

Let’s start off with quitting vs. failing. An MLM distributor will say that a distributor quit and that he didn’t fail in MLM. This is the kind of logic that Tim Sales has been known to use many times. However, quitting is equivalent to failing in MLM as the person who quits will never make a significant amount in MLM. If I want to be an NFL quarterback and I quit, I have failed to become an NFL quarterback.

Many in MLM consider quitting to be a very bad thing and something to be looked down upon. This is because when someone quits MLM their upline loses revenue. However, when looked from an unbiased, objective point of view, quitting can be seen as a positive thing. Quitting a negative habit such as smoking comes to mind. Quitting the quest to be an NFL quarterback would also be a positive for many people, as only about 75 people in the 300 million in United States enjoy success at it… and some of those are back-ups that rarely play. Similarly quitting a business where well over 99% of people involved lose money would be a positive move.

To recap: Quitting ensures failure, so quitting is failure. However, quitting can be a very good thing if the odds of success are low as in MLM.

MLM Success vs. Failure as a Business

Most people join MLM because of the business “opportunity.” The business is often marketed as a way to “fire your boss”, “work from home”, and “make unlimited income.” Often a new recruit is asked to success his/her dream car, house, or lifestyle. From that moment the expectation is set that success in MLM is achieving these things.

To take the minimum of “fire your boss”, it would require most people to profit at least $40,000 after expenses. If we are going to a dream car likely costing 6 figures and a dream house costing 7 figures we have to bump up the expectation to around $200,000 after expenses. Given those expectations, it seems reasonable to state that success in MLM is dependent on meeting those expectations.

In reviewing the amount of money that a typical person makes in MLM, data suggests that well over 99.5% lose money after their expenses. That means, in the best case scenario you have a 1 in 200 chance of making money. In some of the worst cases it is 1 in 10,000. If you are looking at the people who actually meet the success criteria of achieving the expectations they create, the odds are astronomical.

It is fair to suggest that 9999 of the 10,000 people who get into MLM fail at the business.

MLM Success vs. Failure in Other Areas

I’ve heard people who suggest that people may have other goals than monetary when joining an MLM. One of suggestions I’ve heard is that people join for the social aspect. I would like to think that people have better social prospects than ones that fail to live up on the dreams they sold to people… all while making money off them. Another suggestion that I’ve read is that people join an MLM to get a discount on the product. It is worth recognizing that the discounted product is still overly expensive in almost every case. Additionally, one wouldn’t analyze joining an MLM in terms of success or failure any more than one would analyze drinking a glass of water as a success or failure. It is just something that you either decide to do or not.

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MLM Business Opportunity

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MLM and the Reality of Saturation

When analyzing any scheme where the income is reliant on recruiting it becomes clear that it is unsustainable. The FTC warns that MLMs that rely on recruiting are likely illegal pyramid schemes. For example, MLMs may require you to recruit as many as 30 people just to break even in the business. At a minimum they require that you recruit 3 or 4. Anyone with a basic understanding of math will know that it is impossible or everyone to be able to recruit a 3 to 30 people.

When you present this information to someone who is in MLM they’ll claim no MLM has ever been saturated and that there are always people to recruit. Like many MLM proponents claims, it might seem true on the surface… especially if a particular MLM only has between ten thousand and a few hundred thousand people in it. With more than 300 million people in the United States, there’s many more people to recruit, right?

Not exactly.

MLM and Total Addressable Markets

Any true entrepreneur will look at the Total Addressable Market for the business opportunity. This is typically evaluated by looking at the customers who might be interested in the product or service. In this case we’ll look at the Total Addressable Market for recruiting someone into an MLM.

Let’s start with the entire global population of Earth which is estimated at around 7 billion people. Let’s break that down a bit and look at the addressable market.

  • Limitation by Global Geography – However, MLMs are limited by the countries that they do business in. Furthermore, distributors are unable to choose to expand to a new country on their own. For this reason distributors are restricted to their own country. In the case of the United States a distributor will be limited to 300 million. That’s still a very large addressable market.
  • Limitation by Profession – The business of recruiting others is one of constant sales. MLM distributors may pretend that’s not the case by suggesting that you are simply “sharing” the opportunity, but that’s just mamby-pamby talk for selling. The fact is that not everyone wants to be a salesman. In fact a vast majority of people don’t like sales, which is why MLM distributors created the illusion of “sharing” the opportunity. I would think than 10% of people are genuinely interested in sales.
  • Limitation by Local Geography – Even if you have 300 million people in the United States, the reality is that you will never be able to have a conversation with all of them. Some people live in big cities where there are access to a few million people, but many others live in the suburbs where access is limited to fewer than 100,000 people. That’s still a lot of people, but more than likely you won’t cross paths and have a meaning conversation with more than a thousand of them… and that’s being generous. That’s not a lot of people to “share” or sell the opportunity to.
  • Limitation by Industry – Of all the people local to you who are interested in sales, how many are interested in MLM? If those people are intelligent, they probably realize how bad an MLM business opportunity is because there is no barrier to prevent new competitors and there is no opportunity to control the business. Furthermore they may be smart enough to do their own research and learn that well over 99% of people involved in MLM lose money.
  • Limitation by Company – One thing that MLM companies rarely talk about is that most of them have non-compete clauses in their distribution agreement. For example if one signs up to be a distributor for MonaVie, the person signs an agreement that they will not try to sponsor someone in another MLM. Even though MonaVie may sells primary juice, energy and weight-loss products, it doesn’t want to compete with another MLM that sells collectible coins, for example. What does this all mean? It means that MLM companies know that there are limited people interested in the industry and that they don’t want to share the people with other MLM companies. More importantly this means that even if you met someone local, who happens to enjoy sales, who doesn’t know what a bad opportunity the industry is, there’s a chance he/she will have signed with another MLM previously and not be interested in joining your MLM company.
  • Limitation by Product – There’s a chance that the prospective recruit simply doesn’t like the product. Many distributors in MLM don’t really care if they are selling pocket lint as long as it makes them money. That’s why you’ll see MLM Distributors jump from Zrii for LifeVantage. However, there are a few salesman out there who believe in the product enough to choose a business based on it. To get these loyal folk, you have to have the right product.
  • Limitation by Compensation Plan – As mentioned above many distributors are just looking for the best opportunity to make money. That means choosing a company based on what they perceive is a good compensation plan. If you are trying to recruit someone into your MLM and there’s another MLM with a better perceived compensation plan, you are likely to lose that recruit.
  • Limitation by Past Experience – Many people have been approached to join an MLM before. These people may not be part of the Total Addressable Market because they’ve already made the decision that MLM is not right for them. Perhaps they have a friend who has been approached to join an MLM in the past and they didn’t make money. That will be a difficult person to recruit. The person with the rare friend who made money in MLM is most likely to join with that friend and not with you.

When you add up all the factors, including some that I probably didn’t think of to mention, the Total Addressable Market is quite small and the industry can be seen as saturated in many, many places.

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MLM Business Opportunity

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