Failure Rate of MLMs vs. Small Businesses

Many MLMers bring up the idea that small businesses fail too. The implication is that because both MLMs and small businesses fail they are the same.

Unfortunately this is another HUGE MLM myth.

The U.S. Small Business Administration has this handy PDF of information of small businesses in general. It quotes:

"7 of 10 survive the first two years, half at least 5 years, a third at least 10 years, a quarter stay in business 15 years or more."

We can easily flip this around to show that 30% fail in the first two years, 50% in 5 years, 70% in 10 years, and 75% in 15 years.

We also have extensive proof that failure rate in MLM is 99.5% or worse each year.

Let's imagine that a million people start small businesses. After the first two years, 700,000 are still in business. After 5 years, we have 500,000 in business. After 10 years, we have 300,000 still in business. Finally after 15 years, we still have 250,000 successful small business owners.

Now let's see what happens with a million people who start MLM businesses. Assuming a generous 90% failure rate (again it is typically much higher) after two years, we are left with only a thousand people. After 5 years, we are left with 10 people. We can't go any further on, because then we'd be looking at fractions of a person.

It's not even a close competition.

With small businesses you have 500,000 successful businesses. With MLMs you have 10.

It's like comparing the failure rate of running a 5k with running 3000 miles across country. They may both be able to point to success and failures, but the scale is so very different that anyone who attempts to make such a comparison looks ridiculous.

This post involves:

Bad MLM Arguments

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MLM vs. Network Marketing vs. Direct Selling

The title consists of three terms that actually mean the same thing in the MLM universe. That may seem to hard to believe for a person not involved in MLM. However, each time that an MLM term gained a negative connotation because company after company collapsed, a new, more ambiguous term arose from the ashes.

Let's take all three terms in turn:

  • MLM - First there was MLM - multi-level marketing. This was very straight-forward. It describes a system of marketing a product and getting paid on various levels or tiers.
  • Network Marketing - Networking Marketing is a more ambiguous term as it can apply to the standard MLM definition above, but it could also apply to many other companies. For example, an agent for a movie star builds a network of contacts and markets his/her clients to those contacts. This could also be called network marketing, but in this case the focus on various levels or tiers is hidden. A network one-level deep is still a network, but it is not necessary MLM.
  • Direct Selling - Like network marketing, this term further obfuscates the levels and tiers, but also the networking aspect. If I buy an orange at a grocery store that is direct selling of that grocery. If I sell a Pez dispenser on Ebay that is a direct sale. If a little girl sells a glass of lemonade from the lemonade stand, that is direct selling. None of these examples describe any kind of MLM structure.
  • Update: Incentivized Referral Plan - One24 has started playing even more word games. They say that they aren't an MLM, but have an Incentivized Referral Plan. However, if you watch how their green ticket system works, it's clearly an MLM.
  • Update: Community Commerce - Not to be outdone by One24, after more than 5 years of being in the MLM business, MonaVie has started calling their MLM, "Community Commerce."

Shakespeare in Romeo and Juliet wrote that "a rose by any other name would smell as sweet" with the meaning that the names of things do not matter, only what things are. This is wise advice in this case. These companies are constantly changing how they categorize themselves, because as millions of people lose money in them, the news spreads that they should be avoided. For example, most consumers know to avoid MLM, but they might still be tricked into getting involved in "Community Commerce." It sounds as if it might even spruce up your neighborhood, doesn't it?

Bottom Line: When someone uses the term network marketing or direct selling to refer to something that is MLM, it may be because they are trying to group an MLM in a very recognizable legitimate form for business. One question to ask yourself, "If they are trying to disguise what the business really is, what else do they have to hide?"

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MLM Mind Games

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