Why MLM is a Bad Business: No Barriers to Entry

This post is part of a short series along with Why MLM is a Bad Business: Lack of Control.

I recently read The Millionaire Fastlane by DJ DeMarco and about a dozen pages of the 300+ page book dealt with MLM. (Full Book Review: Millionaire Fast Lane Reviewed)

DeMarco breaks down the key factors that all good business opportunities have. He presents these as “Commandments.” In this post we’ll look at the Commandment of Entry.

Commandment of Entry

DeMarco explains the Commandment of Entry as the following:

“As entry barriers to any business road fall, or lessen, the effectiveness of that road declines while competition in that field subsequently strengthens… Low-barrier-entry businesses are weak roads because easy entry creates high competition and high traffic, all of which share the same pie…

Network marketing, or multi-level marketing (MLM), always fails the Commandment of Entry—unless you own and create the MLM company yourself. If you’re in a room with 2,000 other people who do exactly what you do, you’re fighting stiff probabilities. Who is the innovator, the leader, and the one standing on a cliff parting the Red Sea? The guy on stage who founded the MLM company is the Fastlaner. And you? Sorry, but you’re just another soldier in his Fastlane army, a cog in his marketing strategy. The MLM founder doesn’t need to climb the pyramid, because he built the pyramid! You can be a pyramid builder or a pyramid climber. You can be the sheep or the sheepherder.”

He writes a little later about how everyone flocked to Ebay to make millions when it was new. Then he writes about how everyone jumped on blogging to make millions. Everyone investing in tech stocks… well you get the picture. Underlying in DeMarco’s advice here is that monetary wealth is a finite resource. We can’t all be rich. He sums it up best with “If you want to live unlike everyone, you can’t be like everyone.”

DeMarco isn’t the first person to note that barriers to entry are a good thing to have in business. If everyone could make an iPhone, Apple would be broke. The truth is that few companies can even make a phone that competes with it. Why? There are too many barriers to entry. For example a company has to have tremendous contracts with numerous parts makers and be able to negotiate millions of devices to get bulk pricing to compete with Apple. Then you need to create a music store to compete with iTunes, which means getting all the music contracts. Google is just starting to get there with this and we know how big that company is. In short, if you are Apple, you one have to worry about Google Android and maybe Microsoft Windows Phone competing with you. No one competing with you is a good thing in business.

In MLM, if someone else hit your town with any MLM opportunity, chances are you won’t be able to recruit anyone. That’s because just about every MLM uses the same recruiting techniques. Very few people enter MLM because they are truly excited about the product… they are pitched a business of financial freedom and that’s what they are looking for. Since just about every MLM pitches it, it doesn’t matter much if your selling juice and someone else is selling pre-paid legal services, you simply aren’t very likely to recruit anyone.

Take a minute and imagine a world where a McDonalds franchise could be started for $100. That would be a low barrier to entry. We know today that a McDonalds franchise typically makes good money and it costs a lot more than that, but this is just a hypothetical. If McDonalds were $100 and presented any kind of real business opportunity there would 20,000 in every small city. McDonaldsville would have no one to sell hamburgers to except themselves. A McDonalds that doesn’t sell hamburgers doesn’t make money.

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Why MLM is a Bad Business: Lack of Control

I recently read The Millionaire Fastlane by DJ DeMarco and about a dozen pages of the 300+ page book dealt with MLM. (Full Book Review: Millionaire Fast Lane Reviewed)

DeMarco breaks down the key factors that all good business opportunities have. He presents these as “Commandments.” In this post we’ll look at the Commandment of Control.

The Commandment of Control says that the best business are ones where you have full control of the business. This makes sense because you should control your own companys destiny. If someone else can put you of business with the stroke of a pen, it is a problem. This is so basic that I feel I shouldn’t even need to go further, however I will.

Let’s apply the same Commandment of Control to MLM. The MLM company dictates all the rules. Distributor agreements will vary from MLM to MLM, but most of them have these rules that give the company the power:

  1. They allow the company to terminate your business at any time for any reason at their discretion. The result is that you can’t rely on that income as 100% of it could be gone tomorrow through no fault of your own.
  2. They limit your opportunities to join other businesses, even if they don’t compete in any way. For example, one person from Numis coin sales tried to recruit me and two weeks later was telling me that he was out of the coin selling business and into selling LifeVantage Protandim pills.
  3. They have the ability to change pricing and compensation structure whenever they want

In addition to the above there is also the control that you give up outside of the distributor agreement. For example, while you generally have the ability to price the product at whatever you want, they dictate the wholesale price that you can buy it for to be much more than it costs. LifeVantage Protandim filed with the SEC that it paid $1.20 per bottle of 30 pills including packaging (buying in bulk a million bottles). It sells the bottle to distributors for $40 and recommends that distributors sell them at $50. A distributor can choose to sell them at $80 if they want, but other distributors are selling at $50 and there are people on Ebay selling it in the $40-$45 range. So while you have the ability to charge more, you aren’t likely to make many sales that way; you’ll just make enemies when those people found out that over-charged them.

It isn’t difficult to recognize where the real money is in Protandim. The company pays another company to create it for $1.20 and sells it to the distributor for $40. That’s a gain of over 3,300% for being a middleman. The distributor making the sale gets 25% profit for his/her effort. If you really owned the business, you’d have the product made for perhaps $3 a bottle (you would have to pay more because you wouldn’t be able to order a million bottles like LifeVantage did). Then you’d sell them at $35 a piece. Every LifeVantage consumer would flock to your business because you saved the customer anywhere from $5 to $15 per bottle. You’d make $32 per bottle ($35 minus your $3 costs) on all those customers. Instantly control gave you a multi-million dollar business. However, since you don’t have it and LifeVantage does, you are just one in a sea of distributors with no competitive advantage.

Finally, there’s another layer of lack of control. The MLM company itself has its own set of business risks. It could have problems producing product supply. It could have issues with declining product quality. It could go out of business due to poor business decisions from management. If it is one of the exotic juices like MonaVie or a pill like LifeVantage Protandim, it could be shut down by the FDA for the illegal claims made by the company. In fact, MonaVie CEO, Dallin Larsen’s last company Royal Tongan Limu Juice was shut down for that very reason. It could be shut down by the FTC for being an illegal pyramid scheme (“Not all multilevel marketing plans are legitimate. Some are pyramid schemes.”).

MJ DeMarco writes of a friend who lost his business when the MLM company changed the product line and compensation plan, “He never had the keys to his business, and his empire was nothing but a mirage founded on false foundations governed by a political party in which he had no voice.” Further on he does it one better:

“I was involved in four MLM companies. Not once do I remember dictating product decisions, research and marketing, marketing restriction, rules, cost analysis or any other activity fundamental to owning a business. As a network marketer, you don’t own a business—you own a job managing and creating a sales organization… MLM distributors are commissioned employees disguised as entrepreneurs…”

He’s right. A MLM distributor is not an entrepreneur and doesn’t own a business. It is a commissioned sales job in a business where the distributor has no control.

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