Calculating Loss and Failure Rates in Multi-Level Marketing Schemes

In Chapter 7 of Dr. Jon Taylor’s book, The Case (For and) Against Multi-Level Marketing, he details the failure rates of participants in multi-lievel marketing companies. In order to analyze the true failure rates and to calculate actual profits or losses from participation in these (improperly termed) “business opportunities,” it is necessary to wade through confusing and incomplete disclosures and to estimate figures that are critical but not provided by the companies.

Dr. Taylor completes a thorough analysis of the numbers. Of the hundreds of multi-level marketing companies active in the United States, Dr. Taylor could find income disclosure statements for only 30 of them. What are the others hiding?

The analysis of these 30 income disclosure statements was completed through the following process:

1. Obtain Average Earnings Statistics – These purport to show the average earnings by distributor level.

2. Determine the Incentivized or “Pay-to-Play” Expenses – Multi-level marketing companies generally have minimum purchase requirements to “qualify” for commission payouts. Determine the amount of monthly purchases required to be considered “active” to qualify for commissions and bonuses. Many MLMs will tell potential recruits that there are no quotas or minimums, omitting to tell them that while they can choose to not purchase anything, they also will not qualify for commission payments without purchasing the quotas. It’s a tricky play on words meant to mislead the recruit.

3. Determine the Total Paid Into the Company by Participants – This figure shows how much money those participating have paid the company. This figure generally includes “wholesale purchases” by participants, or may be calculated by utilizing a company’s published “estimated retail sales” (often estimated by assuming everything purchased by distributors is resold at full suggested retail). Also included should be amounts paid by distributors for to sign up, purchase sales aids, have a company-sponsored website, and participate in training and seminars.

4. Determine the Company’s Attrition Rate – Most multi-level marketing companies will not release retention or attrition figures for obvious reasons. (These figures quickly reveal the scam of multi-level marketing!) Research has found that at a minimum, 50% of people drop out of MLM within their first year. After five years, 90% to 95% or more have dropped out, and after 10 years, almost everyone has dropped out. I have not known of any MLM to release their attrition rates, likely because they are so horrible and an instant indictment of this “business model.”

5. Estimate Operating Expenses for a Distributor – Multilevel marketing company distributors rarely, if ever, release data about their operating expenses. Of this reason, you will have to estimate the monthly expenses of a distributor. If one is heavily recruiting into the MLM (which is required to make significant income), the expenses could easily be $1,000 to $2,000 per month. MLM recruiters will claim there are little to no expenses, and will often claim that you can deduct expenses that are normally personal (thereby benefiting you via a lower tax bill). Don’t buy the hype. Recruiting costs money.

Once you have collected the above information, you are in a position to calculate the profit or losses for a distributor in a multi-level marketing company. The company and its representatives would have you calculate the numbers for only the currently active distributors. But you really have to look at EVERYONE who was active over the period in which the successful distributors were active in order for it to be a fair analysis. (Note: In a follow-up article I will discuss the deceptions that are common when multilevel marketing companies are creating their income disclosure statements.)

Dr. Taylor calculated the profit or loss for a Nu-Skin distributor, as this is the company he participated in and collected lots of information about. He calculated that a distributor would have to reach the level of Ruby or above in order to profit. Anyone at a level below Ruby does not earn enough in commissions to cover the operating expenses or the minimum purchase requirements.

Using Nu-Skin’s 2008 data, the most recent year available, only 1 in 3,922 distributors will profit according to Dr. Taylor’s calculations. This figure factors in all the dropouts, which MLMs would prefer were not mentioned, but a necessary inclusion to make an accurate analysis of success and failure rates. When you consider that only 1 out of every 3,922 distributors will profit, you see that nearly every participant loses money.

The methodology used by Dr. Taylor to calculate profit and loss rates in multi-level marketing companies is sound. Sadly, calculations like this require estimates because MLMs refuse to release the data necessary to calculate these items.  Dr. Taylor’s estimates and assumptions are reasonable, and his calculations are conservative, likely underestimating the true failure rates of distributors.

Do similar calculations with any MLM that releases an income disclosure statement, and you will likely have similar results. (If not worse!) Nearly everyone who participates in multi-level marketing loses money. Those who do profit, only do so because of the failure of thousands of people below them.

Participating in a multi-level marketing company is certainly not “a business” and it certainly is not an “opportunity.” It is all but a guarantee of financial losses, and upon being one of the more than 99% of participants who decide to stop losing money and quit, you will be called a loser who didn’t try hard enough or stay in the company long enough.

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