In the past we’ve covered how Donald Trump is paid to support MLM. Robert Kiyosaki has exposed for having false logic when it comes to his support of MLM.

It’s time to bring some good news. There are some level-headed people who aren’t simply trying to sell you their brand and/or their book to make a quick buck for themselves. There are people like Mark Cuban who will tell you the way it is:

“With all of this craziness in the stock and financial markets, there will be scams popping up left and right. The less money you have, the more likely someone will come at you with some scheme . The schemes will guarantee returns, use multi level marketing, or be something crazy that is now ‘backed by the US Government.’ Please ignore them. Always remember this. If a deal is a great deal, they aren’t going to share it with you.

I don’t broadcast my great deals. I keep them all to myself. The 2nd thing to remember is that if the person selling the deal was so smart, they would be rich beyond rich rather than trolling the streets looking to turn you into a sucker. There are no shortcuts.”

This is exactly why you don’t see Kiyosaki and Trump wasting their time recruiting people into MLM businesses. They’d rather spend a dozen hours working with ghostwriters (I’m assuming, most celebrities do) to put together a book that they can market to a dozen million people. It’s easy money and almost no work if you already have the brand.

Once again Mark Cuban is dead on. Ignore his advice at your own peril.

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One of things that fascinates me about MLM is how they churn through people. The churn rate is a measure of how fast distributors leave the MLM. As Wikipedia suggests a high churn rate could be for a number of factors.

“It is a possible indicator of customer dissatisfaction, cheaper and/or better offers from the competition, more successful sales and/or marketing by the competition, or reasons having to do with the customer life cycle.”

When we examine churn rate in distributors in MLM it seems most likely that it comes customer dissatisfaction. Since these are supposedly salesmen who deeply believe in the MLM product they are pitching we can discount the competition since MLM products are typically unique.

Looking at the churn rate in MLM

If the MLM business is working well, distributors at all levels are making money and happy with their MLM endeavor. Happy distributors, who are making money, have no reason to leave the business. So what kind of churn are we looking at in MLM? The answer is outrageously high numbers.

Let’s look at some of the numbers put together by The Fraud Files on the MLM HerbaLife:

In the 2004 10-K, Herbalife disclosed: “For the latest twelve month re-qualification period ending January 2005, approximately 60 percent of our supervisors did not re-qualify and more than 90% of our distributors that are not supervisors turned over.”

The disclosure on distributor turnover may well be the most important disclosure the company could make. While Herbalife touts that at the end of 2011 it had 2.7 million distributors, with 548,000 of them “sales leaders,” it doesn’t tell everyone that more than 90% of the 2.152 million must be replaced in 2012 (if turnover is in line with historical reports of such).

Non-disclosure of distributor failure rates is not a new problem in the MLM industry. Robert FitzPatrick notes from his research: “MLM companies seek to obscure their devastating failure rates by disclosing the number only of ‘active’ participants and limiting the income figures to a one-year or even shorter time frames, thus concealing the factor of the ongoing and mounting losses of new participants. If all the participants over a five-year period are included in the calculations, the failure rate rises even further. Less than one in one-thousand will be shown to have gained any profit at all. The so-called successes in MLM are in the same small group positioned, year after year, at the top of the recruitment organization.”

HerbaLife stopped disclosing the turnover rate after 2005. After people like the above started to use that information to explore the massive failure of the business opportunity, HerbaLife would be silly to continuing publishing the data. After all, if it became common knowledge how bad these opportunities are, no one would get involved and the entire system would crumble.

Herbalife (Part 2)

From this Seeking Alpha article:

As we look at this quarter’s results, some interesting data points pop out. First, the company started the year with 4.0 million Members. As of the end of Q3 the company has 4.0 million Members. According to the company’s own regional key metrics disclosures, 1.6 million new Members joined Herbalife YTD. Solving for X, that means 1.6 million people churned out of the pyramid since December 31. That is certainly some impressive velocity. Annualized, over 2 million people will quit Herbalife in 2015 alone. I like to call that data point “Churn”. I think the FTC also pays attention to this data point.

The website Pink Truth uncovered Mary Kay’s turnover numbers from their own disclosure in 2005-2006. The conclusion was Mary Kay destroys a half million women a year:

“Depending upon how you look at it… 41% of the 1,180,000 involved during the year quit. Or of those 700,000 on the books at the end of the year, 69% of them will quit in the following year. 480,000 women churned and burned in 2006.”

You’ve got the 60% of HerbaLife supervisors quit in a year and 90% of their distributors. You’ve got 69% of Mary Kay distributors will quit in a given year. If the business opportunity was so good, why are so many people pushing to get out of it.

The note by Robert Patrick above is particularly insightful. If we were to take a five year view of things, we’d see that the same people at the top of these MLMs making the money stay in year after year, while, logically, all the people at the bottom who aren’t making money get churned through. In ten years, it’s a 5 million women from Mary Kay and 20 million people from HerbaLife with more or less the same less than 1% collecting almost all the money.

Update: The New York Times chimes in:

“But like many multilevel marketing companies, Pre-Paid Legal suffers from high turnover. In 2005, the company replaced at least 50 percent of its active sales force, according to filings with the Securities and Exchange Commission. Industrywide, multilevel marketing companies typically replace almost all of their sales representatives every year.

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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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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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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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