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If you’re interested in personal finance, side hustles and making extra money, there’s a pretty good chance that you’ve tried out network marketing at some point.
Even if you haven’t tried it out yourself, you’ve probably had a friend from high school reach out to you on Facebook and say something like: “Hey, it’s been too long, how are you!” And then tactfully direct the conversation towards the new ‘opportunity’ that they are involved in.
Of course, they’d love to get together and tell you more…
What is network marketing
Network marketing a.k.a. Mlm, direct sales, multi level marketing etc. is simply a non-traditional means of selling a product. Instead of putting it on shelves in a store, the company ‘hires’ individuals to sell it for them, usually to friends and family coworkers and others in their personal network.
The model works because people are more likely to trust a product recommendation from a friend of family member than they are to trust advertising. It costs money to get a product to market either way. Traditional companies spend it on advertising, and MLMs spend it on paying commissions to a distribution network.
Mlm companies have gotten a bad rep in recent years and people are increasingly resistant to getting involved with them. In my experience, this reputation is absolutely deserved. Many such businesses now insist that they be referred to as ‘direct sales’ to avoid the negative connotations associated with the terms ‘mlm’ and ‘multi-level marketing’.
My experience with multi level marketing
“I drink coffee and make money”
This was what a friend of a friend said to me when I casually asked him what he did for work. I presumed that this meant he owned some sort of coffee shop. When I dug a little further he just kept parroting the same line, he drinks coffee and makes money…and he’d love the opportunity to take me out for coffee and tell me all about it.
Against my better judgement, I met with him a few days later. That meeting was bizarre. We went to a pub downtown where he seemed to know everybody, and ordered nothing but a pot of hot water. The ‘coffee’ that he had referred to was of the crystallized variety usually reserved for backpacking trips. It tasted awful, and he was quick to tell me that I could make a fortune selling the stuff.
Thankfully, I declined. Though I did later get involved in selling delicious, overpriced protein shakes for another company. This went on for a few months until we attended a ‘training event’ in Vancouver. It was the most awkward, surreal, cult-like thing I had ever experienced.
I was actually excited about trying out this mlm thing, but after that event I was all…
Those two experiences left a bad taste in my mouth about the whole industry. I did a ton of research because I wanted to know if anybody actually makes money with MLM or if it’s just a giant scam that thousands of people have bought into.
My conclusion? With a few exceptions, these companies are almost all terrible and not worth the time of any serious entrepreneur.
Why you should avoid multi level marketing
It’s a pyramid
“It’s not a pyramid scheme!!”
This is what the mlm-ers reading this are probably thinking. My best guess is that they object to the word ‘scheme’, so I simply call it what it is, a pyramid. Pyramid schemes are investments where new capital from the bottom is used to pay those on the top. The main difference between the two is that mlms are sold as a business opportunity, rather than an investment. Reading about the difference between a a MLM and a pyramid scheme definitely leaves me feeling like there’s little difference between the two, besides of course, legality.
If this isn’t a pyramid, then please email me and explain 🙂
Here’s the thing – if network marketing companies offered protected territory, then you could set yourself up as an exclusive supplier within your area. Anybody who wants to buy your stuff comes to you. That’s a great little business.
However, if that were the case, companies would have to charge distributors a lot more (much like any franchise does), as they would have fewer distributors signing up. Fewer people in an area selling your products would result in higher product sales for each distributor. The larger the company’s distribution network gets, the more saturated the market is for the products, and everybody at the bottom of the pyramid makes less money.
The solution? The companies tell you to go out and sign up more distributors… and the cycle continues.
Very few network marketers succeed
I define ‘succeed’ as making a consistent, viable income. I challenge you to find one person who does MLM as a living and makes more than 40k per year. Not somebody that you’ve met at an event or read about in a company brochure…I mean an somebody who you know personally. You probably can’t do it, and that’s because very few people make significant money in multi level marketing.
This study shows that 90% of people involved with network marketing will leave the company within 5 years. That means that most of the people in your ‘upline’ and those who you personally sign up as distributors, won’t stick around for the long term. Why would you put a ton of effort into a business that is so statistically prone to failure? One can reasonably conclude that mlm is not a good long term money making opportunity.
The barrier to entry is too low
There are some types of businesses that you can start for less than $1000. However, they all require some sort of equipment, expertise or skill that you can put to work. One of the problems with becoming a distributor for an MLM product is that it’s just too easy. They tell you that you can ‘invest’ in your startup package fees and you can start making money right away.
Literally anybody can do it, and that’s the problem. It’s just too easy to be a viable way to make money for most people.
As the old saying goes, if it seems too good to be true…
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The products are too expensive
This one really agitates me because I’ve had several debates with MLM reps who claim that their products are expensive because they’re super high quality.
Uh no Lindsay…this is the same crap you can buy at any health food store for half the price. Give me the label of any mlm health shake and I can take it to Wal-Mart, Safeway or a supplement store and find something equivalent or better for less money.
So why is it so expensive? Simple – everybody above you has to make money. Remember that person who signed you up and is pressuring you to sell, the one who is so excited to have you on their ‘team’? Yah, they’re making commission on everything you sell. As is the person above them and probably the person above them.
Oh and of course, the company makes a bit of money too. After the distributor chain is paid they usually take around half or more of the sale…much closer to what the products are actually worth.
Network marketing is predatory
This one is really what pisses me off. The majority of mlm companies sell the idea of independence and financial freedom to those working low-wage jobs, or are having trouble finding traditional employment.
They encourage distributors to target people who need to make extra money. Read between the lines, that means the people in your life that are already having trouble paying their mortgage or rent and putting fuel in their car. The company wants you as a distributor to sell a hope to these people, a hope for a better life that is impossibly difficult to achieve via network marketing.
It compromises your relationships
Have you ever gotten a message out of the blue from an old friend asking how you’re doing, or wanting to go out for coffee? Were you shocked to find out that they were actually pursuing you to try and sign you up as a distributor for some health shake, magic oil or healing fufuberry tea?
Sadly, I’ve been on both sides of this equation. I have had people reach out to me trying to sell and I’ve shamefully done it to others. It makes people uncomfortable and is almost certain to lose you some friends if you keep it up.
Even if you make it, your commissions are paid by the droves who did not
Every network marketing company has one or two high-earning poster boys (or girls) who are paraded around as the example of what you can achieve if you work hard and follow the system. The thing is, their earnings come from two places, legitimate customers who have likely overpaid for a product, and distributor fees and product purchases.
Even if you’re one of the very, very few who make a decent income with mlm, your checks are paid for by dozens or hundreds of people struggling in your downline. I couldn’t sleep with that on my mind.
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The ‘opportunity’ is always shrinking
One of the biggest differences between mlm and an actual franchise of some sort, is that mlm companies don’t have protected territory. If they did, you would have to make your money selling the product, rather than the ‘opportunity’. There are only so many people in a given area who are interested in buying your product. Every time somebody new signs up to sell the product in a market, it reduces the earning potential of all other distributors. If there’s one person in an area that sells a popular product, then they can build a respectable business.
You, the distributor, are the MLM’s best customer
Yep, that’s right – that $400 ‘starter package’? Probably 20-40% of that went directly to the person who signed you up. Additionally, many of these companies require you to keep up a certain order volume to continue being a distributor. Some will pressure you to keep buying inventory to sell, regardless of whether or not you have a customer base.
Additionally, many reps use much of the product they buy as a way to show their potential customers (old friends from high school) that the product is useful. This cuts into what could be their profits.
So what happens when you become one of the 90% who walks away in less than five years? You’re stuck with any stock that you have purchased. The company almost certainly won’t buy it back from you.
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Are all MLMs bad?
I don’t think so. My wife (who will probably read this and disagree with me on some points) is a distributor for two different companies. They both sell good-quality products and don’t pressure her to ‘grow her down line’ which is code language for ‘sign up more distributors beneath you’.
She sells great products to people who want them and skips the ‘opportunities.’
She uses (and wears) the products that she sells and her friends actually seem to enjoy shopping for the products that she recommends. It’s a low-pressure situation and because the companies make great stuff and don’t have a ton of distributors, she gets to make a modest side-hustle income without feeling like she has to compete with 50 other distributors.
Though the companies that she represents have proven to be high quality, my experience has been that most mlm companies are guilty of a smoke and mirrors approach to business. If you’re looking for some simple ways to make extra cash, look here instead.
What are your thoughts on multi level marketing companies?
Have you had experience with one? Tell us about it in the comments!