Question: Marc, I've been a long time follower. I loved your Profit Center Dispatch articles, as well as your columns in Early to Rise and The Liberty Street Letter. But I was wondering why you're so negative about multi-level marketing (MLM) and network marketing?
R.N. New York NY
Answer Marc Charles:
Most entrepreneurs love the idea of having other people sell products for them, especially on a commission-only basis.
This concept typically leads people to the enticing concept of network marketing, also known as multi-level marketing, or MLM.
There’s nothing wrong the “concept” of network marketing or MLM, or the people who start those types of businesses.
But here’s the reality........
I reviewed hundreds of MLM and network marketing companies over the past 26 years…
The people who start or launch network marketing companies are typically the ones who make out like bandits.
And in most cases the “members” ......who are typically two, three, or four levels down from the originating level fare much worse!
The good news is…
There are other ways to leverage an army of eager, experienced sales people to work for you – working on a commission-only basis without succumbing to network marketing or MLM.
This is probably a good time to cover the basics of network marketing and MLM.
Network marketing is a recurring theme in the e-mails I receive from entrepreneurs. And there are a lot myths out there.
I’d like to share what I’ve learned so you don’t get involved in a bad business opportunity.
Here's How Network Marketing and MLM Work in the Real World
The payouts or commissions in a network marketing structure occur on more than one level.
For example, let’s say you sign up five people to (a) sell products for you and (b) recruit new network members. Those five people would be considered your "first level".
Then, let’s say the five people on your first level each sign up five new members.
In this example, there would now be five people on your first level and 25 people on your second level. There would be a total of 30 people in your group or “down-line” who are presumably selling products.
You should make a commission on the products they sell... and you would often receive some type of bonus or compensation for recruiting other salespeople.
By the time you get to a third level, money should start falling from the sky – in theory.
In fact, you’ve probably heard network marketing business opportunity pitches which are supposed to work just like this.
But in order for the money to start falling from the sky, the people you sign up – and the people they sign up – need to buy and sell the company’s products.
What usually happens is that the so-called “heavy hitters” in network marketing do not waste their time on trying to sell the company’s (typically overpriced) products to their friends and neighbors.
Instead, the “heavy hitters” focus on getting sign-up bonuses by training people to recruit and train others.
One of the downsides to many network marketing (and MLM) opportunities is the payment schedule and minimum sales requirements can be (and often are) changed on a moment’s notice.
I've known a boatload of entrepreneurs....(more than 30).....who have been screwed by last minute payment schedule changes, commission changes.....or by companies vaporising (bankrupt).
This means you could have 100 people in your down-line and be earning a couple of thousand dollars a month – and without notice the payment structure can change.
What’s more, in order for you to earn bonuses or commissions, your group is required to produce X number of sales – or you don’t qualify.
I’ve seen this happen more times than not.
Another downside of network marketing is a payment structure called the Forced Matrix. This is the most popular network marketing pay structure.
The Forced Matrix limits the width of a network marketing group – usually to five. The depth of the group is limited as well – usually to three to five levels.
The problem with the Forced Matrix approach is what is commonly referred to as a pyramid or “Ponzi” scheme.
This means in order for a Forced Matrix to work new members must be recruited into eternity. We all know this will never happen. It’s like a chain letter.
The attractiveness of network marketing is simple: Recruit people to do all the work for you so you can live a life of luxury, wealth, and abundance – without lifting a finger.
It might be fun to daydream about all the money you’ll make by signing on with a network marketing company.
But the fact remains that most people who join one do next to nothing.
The “heavy hitters” in network marketing understand this and leverage it to the hilt. That’s why they often build networks at light speed… and walk away to the next venture.
This means your chances of earning bonuses and commissions are very low.
In addition, most network marketing companies make huge sums of money from sales literature, motivational tapes, seminars, and motivational conferences sold to their members. Product sales are secondary.
It’s important to remember most network marketing companies have almost no advertising and marketing costs – these costs are passed on to the company’s recruits.
Here’s another dirty secret…
Network marketing companies often acquire products at deep discounts and “wholesale” them to their members at huge markups over what they paid.
Is this legal?
If the structure of a network marketing company is primarily designed to compensate people for recruiting others, the Federal Trade Commission (FTC) considers it to be an illegal pyramid or Ponzi scheme.
In other words, if a network marketing company’s main revenue comes from signing up new salespeople instead of selling products, the FTC will eventually close them down.
By the way…
There’s also a big difference between a “direct-sales organization” like Pre Paid Legal, Inc. and Mary Kay Cosmetics and most MLM companies. The most significant difference is members are not paid
A direct-sales organization does not typically compensate salespeople for recruiting other salespeople.
However, there are direct-sales companies that promote their salespeople to management positions – and then compensate them for the increased responsibility with sales bonuses and overrides. This is perfectly legal... and can be quite profitable for the salespeople.
But direct-sales organizations do not have multiple levels of sales agents who are compensated for recruiting others and thus benefit from sales made on every level.
What’s more, direct-sales organizations tend to sell higher-priced, one-time-purchase products like water purifiers, artwork, home siding, log homes, etc.
Network marketing and MLM companies tend to sell lower-priced, consumable products like vitamins, household cleaners, oxygenated water, and so on. It’s easier to sell these things... and to recruit others to sell them.
Of course, not all network marketing companies and MLMs are bogus or illegal.
But, as I said before, it’s the people who start these companies who make most of the money. The founders also control the commission and down-line structure.
A Viable Alternative to Network Marketing
There are a lot of alternatives to MLM and network marketing.
One of which is Clickbank.com. Clickbank.com is one of the largest digital marketplaces on the Internet. The site only handles digital information products.
As a vendor or developer of a product you can have up to 100,000 "affiliates" selling products for you on a commission only basis.
I'll talk about Clickbank at another time....but it's a viable alternative to network marketing and YOU own your product and company.
I hope that helps.