Commentary on fraud, scams, scandals, and court cases.

The Myth of Retail Sales in MLM

Multi-level marketing companies (MLMs) like to refer to themselves as “Direct Sales” companies, because this puts the focus on the sale of the product or service, and takes focus off the business of recruiting.

I’ve been researching MLMs for years, and I’ve found that companies use the product or services simply as bait and a cover. It is “bait” for recruiting because it looks legitimate to a potential recruit. (How many people would join MLMs if they were truthful and told you that what you really had to do was constantly recruit new people?)

It is a “cover,” since it is what makes the schemes legal under state and federal laws. Pyramid schemes (which are simply a transfer of money up a pyramid-like structure) are illegal. But if you use a legitimate product or service as your cover and your reason for transferring money up the pyramid, you can successfully claim that your company is not a pyramid scheme. Again, the product or service takes the focus off recruiting.

But the truth is that the people involved in multilevel marketing companies 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 still retailing? Right? That’s what recruiter or an MLM lifer will tell you. “We looooooove the products and services. That’s why buy them. So we’re customers and these are legitimate sales!”

In truth, the members of the MLM probably wouldn’t buy these products and services if they weren’t part of the schemes. They make these purchases largely because there are requirements that must be met in order to receive commission checks for recruiting activity. Without these required minimum purchases, MLMs would see the purchases by representatives drop dramatically.

Why is there so little retailing of products and services to third party customers? Robert FitzPatrick, an internationally recognized authority on multi-level marketing and pyramid schemes and a court certified expert witness on MLMs and pyramids, explains in this article, A Disguised Pyramid Scheme: The Non-Retail “Direct Selling” Company:

Why Retailing Does not Occur

Several key factors – in combination – make retailing unfeasible and unprofitable and reveal the company to be a pyramid recruitment scheme, not a direct selling business as its claims to be.

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.

Multi-level marketing companies want you to believe that their product is special and has some secret benefits that no other product on the market has. This is done to justify the relatively high prices of MLM products. But I’ve never found such claims to be true. Every MLM product I’ve looked at has a competing (or better) product available through traditional retail channels (in stores or online) at much lower prices.

MLM products are next to impossible to retail in any quantity that will provide a full-time, sustainable income for the seller. These companies love to brag about their “top earners.” But if you look at those people, you will see that none of them are top earners due to large amounts of retail sales. You will see that they are top earners due to lots of recruiting into the pyramid.

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