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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MLM Business Opportunity

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