Understanding the Churn Rate in MLM

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.

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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