When someone introduces you to multi-level marketing (MLM), they are likely talking to you about the sales aspect of the company. They are talking about the fabulous product (maybe even about how it “sells itself”) and they are probably downplaying the recruiting aspect (since so many people hate the recruiting concept).
MLMs like to call themselves “direct sales,” another attempt to focus on the selling of the product, even though the companies live and die by recruiting. The product or service being sold is simply the bait to get someone in. It is used as the “cover” for the scam, as a product or service is necessary to combat claims of being a pyramid scheme.
The truth is that people involved in MLM do little actual retailing of products or services to third-party customers (non-members of the scheme). The vast majority of the purchases of products and services are made by the members of the MLMs themselves, either to stock inventory (which they will probably never be able to sell) or for personal consumption.
That’s not retailing. That’s making purchases within the scheme. The members of the mutli-level marketing company likely wouldn’t buy those products or services if they weren’t in the scheme. They’re making purchases for a variety of reasons: to move to the next level, to “qualify” for a commission check, etc.
Robert FitzPatrick, an internationally recognized authority on multi-level marketing and pyramid schemes, wrote about why REAL retail sales do not occur in MLM. While a handful of distributors may make consistent sales, the vast majority do not. Here is why:
1. The products are high priced and non-competitive.
2. The products are undifferentiated. Similar or even identical products are available for purchase from other companies, in stores or over the Internet.
3. Choice is restricted in the direct “person-to-person” method of selling and more people prefer to purchase goods of this type in stores where there is wider choice and no pressure upon personal relationship.
4. The profit margin (difference between wholesales and retail) is inadequate for covering sales costs and achieving a net profit. Discounts and free samples are often required and all other sales and marketing expenses are borne directly by the individual sales person. At least a 50% gross profit, which equates a 100% markup (Purchase for $50 and sell for $100) must be viewed as a bare minimum for retail selling and in many cases is still inadequate. As the net profit shrinks the requirement to increase volume grows. Yet the time required to increase the volume makes the selling effort unprofitable and unfeasible. It is simply not worth the effort. Recruiting other sales reps replaces the effort to sell directly.
5. The competition for selling the product is too high for profitable retail selling. The non-retail direct selling scheme allows – and strongly encourages – the authorization of unlimited numbers of sales representatives. Each salesperson is instructed to enroll close friends, neighbors and family members also as salespersons. In this manner, retail sales to these people are no longer possible since they now can purchases the goods at wholesale prices. As saturation of authorized sales people occurs in a community, cost-effective retail selling becomes nearly impossible.
6. The company offers little training or support for retail selling. The focus and priority are placed on training, motivating and rewarding the recruitment of more and more sales people.
7. The compensation plan richly rewards the recruiter over the retailer, luring the new sales representatives immediately into recruitment efforts and away from retailing, even if they have not already determined that retailing is unprofitable. The non-retail schemes pay more to upper levels of hierarchy – who have nothing to do with the sales – than they do to the person at the bottom who actually makes the sale. Not only do those higher up the chain receive more pay – per sale – than the ones making the sales but also they do not have to incur any sales costs. Their profit per sale is therefore many times greater. The result of this pay plan is to discourage retail selling.
8. Whatever opportunity exists in the scheme for profitability is based on being positioned high on the chain. Recruiting is the only way to advance to the higher levels where the leveraged high incomes can be gained.
MLMs promote how unique their products are, and how valuable they are compared to the products you can find through traditional retail outlets. This is done to justify their high pricing (and the pricing is a function of all the levels of the pyramid which are paid commissions). But all the MLM products I’ve looked at have a better products available online or in stores and much lower prices.
On the whole, distributors can’t develop a base of retail sales that will provide a full-time, sustainable income. They typically can’t even develop a part-time income that is sustainable. Look at the “top earners” in MLMs. They are not there because of retail sales (even though that’s how they get you to sign up). They are there because of recruiting.