Most persons with a product or service will try to sell it directly to consumers, license it to retailers, or go on Shark Tank. Then we have the world of multilevel marketing, where participants attempt to succeed in business by getting people to compete against them.
That’s not how it’s presented in slick brochures, campy infomercials, and high-pressure seminars, but that’s how it works. The company who makes the product sells it to individuals at an inflated price, and the idea is for those people to recruit more salespersons under them, with a percentage of their sales going back up the line. This is an unsustainable business model and is untenable from a profit standpoint.
It’s possible the company could make money just by selling the product like a traditional business, but they have found it more profitable to have a steady stream of captive customers who buy their product and entice others to do the same.
Among the more common MLM products are panaceas in lotion and potion form. I have dealt with bogus medical and nutrition claims before, but here will focus not on the products’ inefficiency, but on the role they play in multi-level marketing. And that role is to give this charade legal cover. Since a product is ostensibly for sale, it is not considered a pyramid scheme in most jurisdictions.
But make no mistake, “multilevel marketing scam” is redundant. If used as instructed, it will fail. The company makes their money from seminars and from selling the products to distributors at inflated prices. Those persons would then have to resell it for even more, so they idea of consistent profit that way is unrealistic. That leaves recruiting others, who would be under you in this supposed non-pyramid scheme. Distributors are to get a cut from those under them, and the typical model is for an individual to recruit five persons, who themselves all get five more, making 25 persons involved. This will be easier for some than others, depending on one’s networking abilities, number of friends, and personality. But it sounds attainable, and in fact is often attained.
But there are two huge problems with this approach. First is the ridiculous business model of recruiting two dozen people, probably in your town and even in the same circles, to compete against you. And again, just selling the product won’t work because you must buy it at exorbitant prices to begin with.
The second problem is the unsustainable nature of the pyramid. If Sam recruits five salespeople and those five recruits bag five of their own, this could only be repeated seven times in a town of 75,000 before the population was exceeded. And these products are not the type that can be reasonably sold online because the original jacked-up prices will balloon ever higher with shipping costs.
Even if Sam is able to get a group of 25 distributors (who have now become his competition) he receives no wage from the company. The time and labor he puts into selling the company’s product is uncompensated. His only pay comes from the sales generated by those in his section of the pyramid, and that is almost never enough to break even. Sam is not an employee, so he enjoys no legal protections that would entail, and he has no business assets to liquidate or sell.
Moreover, this scheme can take on a creepy feel. I occasionally quote from other blogs to support my positions, but this is the first time I’m borrowing from an evangelical Christian site, specifically womanofgrace.com. It quoted a man named Stuart Adams, who related that his immersion into MLM was akin to his previous experience as a Latter-Day Saint.
Mr. Adams: “There was a cult-like nature to this group. The meetings involved attendees standing up, giving personal testimonials of how they had been cured of their diseases, and talk of why we should not trust the medical profession when it comes to health care, but instead refer to the teachings of our leader, who was brave enough to rebel against medical conspiracy and bring us all the wonderful cures. They were convinced they were in the true group headed by the true leader.”
This particular product was sold by a former Facebook Friend of mine, who unfriended me after I questioned the legitimacy of the product and its associated conspiracy theory, so I have experienced firsthand the unquestioned devotion this cause and its almighty leader can engender.
Customers enjoy going to the mall, chain retailers, or dime stores and also embrace impromptu purchases. This is much preferable to buying cosmetics, mineral scrubs, or a Tang knockoff from their sixth best friend in his living room. And the Internet has eliminated any demand for a small distributor network that might once have worked in rural areas.
The Consumer Awareness Institute analyzed data published by MLM companies and it showed that less than one percent of participants made money. Even cheerier numbers from other sources reveal that just 10 percent of distributors even recoup the money they put in.
If you want to purchase overpriced drinks that you’ll just end up finishing off yourself anyway, head to Starbucks.