Multi-Level Marketing Companies or MLM’s rightfully get a fair
bit of criticism in the news, across social media,
and even in social groups that are aware of their less than upstanding business tactics.
However, despite this almost universal bad reputation, Multi Level Marketing Companies
have grown in size year on year, bringing in an ever-larger pool of unsuspecting victims.
This reality flies in the face of what the critics often say about such schemes, which
is that they are fundamentally unstable pyramid schemes that are mathematically guaranteed fail.
If that was the case, then this now decades old industry
filled with decades old companies is sure taking a long time to live out the apparent certainty.
So were the critics wrong about this one? Well as regular viewers of the channel may know,
I hate video’s that drag out the a simple question unnecessarily.
So the short answer is no, they are not wrong about the industry as a whole,
but they do get a lot wrong about their day to day operations, and this
public misunderstanding may actually be key to explaining how this industry keeps on growing.
So it’s time to learn how money works by defending the indefensible,
a new series that I hope to launch, depending on how well this video goes.
So let’s start with probably the biggest criticism of these companies,
and that is that almost everybody that gets involved with them ends up loosing money.
Critics will throw up charts like this that show that only
a tiny percentage of participants in the schemes make any money at all,
or perhaps they will show you income disclosure statements which again show that only a few dozen
members from each one of these companies make the 6-figure income new participants are promised.
This is all fair enough and in fact MLM companies operating in the united states
are required by law to produce these documents
after a legal ruling mandated that they be more transparent with income expectations.
Even still, these figures alone might not tell the entire story.
You see most people that join these schemes don’t
do so with the expectation of making a business out of them.
Now the companies themselves will normally say that these people are only interested in
joining so that they can purchase the product for a discounted price which is available to members.
Take something like this weight loss shake from Herbalife,
which is one of the largest MLM’s operating today.
The public retail price is admittedly a fair bit
higher than the wholesale price that they make available to their members.
So for someone that will be consuming these products frequently it would make
financial sense to just pay the membership upfront and save the money in the long run.
This is no different from say, a Costco membership, and if anything Costco tends to have
a very positive public image. So perhaps these companies are getting a bit of a bad rap here.
Or at least that would be the case if it were the whole story. In reality, a lot of people sign up
because they are pressured into it by an aunty, long lost friend or third cousin twice removed.
Sometimes the best way to stop these people from blowing up your phone about
their new amazing business opportunity is just to acquiesce and buy their damn sign up pack.
Sure it will probably just end up collecting dust in your garage, but at least you don’t
have to deal with it anymore. Now in this situation, you have become a statistic,
you are part of the 99% of people who join these companies and never make any money.
Now of course this still isn’t exactly what you would call an upstanding business practice.
But I would argue that it lies somewhere in between the horror
stories the critics will present and the fairy tales the companies will tell.
On one hand the 99% of people involved in these schemes are not been relentlessly
sucked dry by a small group of bloodthirsty con artists, but on the other hand that same 99%
are not exactly super eager participants just looking for a great deal on protein powder.
The reality of this issue, as with many others,
lies somewhere in between what the two opposing sides will argue.
But this argument that new members are simply looking out for a small discount
also raises one of the other major issues that critics have with MLM’s,
and that is that their products are extremely expensive for what they are.
Using that same weight loss shake from earlier, we will find that sure
the small discount you get as a member is great, but it still doesn’t make the price
anywhere close to competitive with other market alternatives.
Now the critics will say that the reason that most MLM’s have products priced like
this is that they NEED big margins on their products in order to pay out the
bonuses to all of their members at the top of the proverbial pyramid.
Now this is certainly a part of it, but it’s still not the whole story.
You see most of these companies will market their products as premium alternatives,
which is you know, very hard measure, bbbuuuuttt,
assuming that is the case there are still regular market alternatives that are more expensive.
Even beyond this there are products sold by some
of these companies that actually look like relatively good value.
Amway is one of the oldest and currently the largest MLM operating in the world today.
The company started out by selling a range of cleaning products which actually marketed
themselves as being concentrated and cost effective alternatives to other regular products.
This is just as true today as it was back then. Compared to most other concentrated household
cleaning products, the Amway alternatives are either cheaper or very comparable.
This is also whilst not considering the discounts that are made available for members.
So how does this make sense then? The critics point out that MLM products NEED a massive
markup so that money can naturally pass money up from the bottom of the pyramid to the top, so if
the products DON’T actually have that markup, then this argument kinda breaks down right?
Well maybe, but first we need to consider one of the more central criticisms,
and that is that ultimately people are not sold on these PRODUCTS at all, so it really doesn’t matter
if the companies are selling, overpriced weight loss shakes, bargain basement cleaning supplies,
or even life insurance policies, (and yes there are MLM’s that sell life insurance policies)
No no no, all of that is irrelevant, what really matters is that new members are told
that they can make millions of dollars by joining these companies when in reality
the “business opportunity” is stacked against them.
So the obvious defence to this is that… people do become rich in these schemes… there are hundreds
of examples of people that are incredibly well off due to their involvement in these companies…
But of course the critics will argue that most don’t become wealthy.
This is also fair… Even if we ignore the majority of people that sign up to these companies and do
nothing we will still find that most people involved end up loosing money, and even of
those who do turn a profit, most would probably be better off working a minimum wage at mcdonalds.
But at the end of the day this is business.
If you were to go out and start your own business doing your own thing tomorrow,
there is a very good chance that you would stand
to loose a lot more money than a member of one of these companies.
For every tale of someone loosing a few thousand dollars by stocking up on vitamins,
skincare or leggings from these companies,
there is a story about someone loosing tens of thousands of dollars trying open a café.
Sure most people who try to make a businesses out of an MLM fail and end up loosing money,
but most people that try to make money with any business fail,
and probably end up loosing a lot more money.
So in a way MLM companies are just offering people a chance to start a
sales based business with very little in the way of upfront investment or financial risk.
And sure, the promises of easy riches are obviously grossly exaggerated,
but to someone who realises that starting a business is hard work,
This is a genuine opportunity (an opportunity mind you, not a guarantee) but rather an opportunity to
build something without needing to re-mortgage a home or get a small loan of a million dollars.
What’s more is that you can start from day one, and if at any point you decide that the
business is not going well you can close up shop without the stress of paying salaries, or rent
or suppliers or any of the other fun stuff that goes along with running a traditional business.
Ok…
Now here is the reason why it’s so important to understand this counter argument that these
businesses put forward, because realistically, this is how they pitch their businesses these day.
If you find yourself in a meeting for one of these
companies they are going to have an answer for every objection you have,
which can make even the most staunch anti-mlmer think twice about diving in.
Most people lose money? – Well EVERYBODY looses money when they become a member of Costco, and
just like at Costco most of our members only shop with us very occasionally and have no interest in
making this a business. This is actually great for you because you have an inbuilt pool of customers.
Well even most of the people that do this as a business lose money? – Well starting
a business is hard, and we simply give people the opportunity to start their own
business without the huge financial burden that comes with opening a café lets say.
Well the products are overpriced – No no, some of our premium products
are more expensive than inferior budget alternatives you will find at Walmart,
but compared to other premium offerings we are actually very competitive. What’s more
is a lot of our every day products are actually more economical than anything else on the market.
These responses are all true, and it’s how most of these businesses present themselves these days.
They know almost everybody has an opinion of them,
so they try to reshape that opinion by actually working with the common criticism they receive.
And it’s also the reason that products like these are priced
cheaply. This is what people in marketing call a loss leader. It’s a product that is priced
very cheaply (sometimes even un-profitable) to get people into the store in the hope that
they will end up spending more money on items that actually are profitable.
MLM’s like amway will do this with low value items like their cleaning products
here for the same kind of reason, they will show it to potential new recruits
to dispel the criticism of overpriced products, only to turn around and sell
them overpriced products from the ranges that actually make them a lot of money.
This adaptation is what has allowed these companies to keep on growing despite the
almost universal understanding that these businesses are kind of shady.
So I am not going to call these businesses an outright scam,
that makes it too easy for one of these companies to pull the same
kind of objection handling nonsense we have seen throughout this video.
In-fact, I will hold true to this new series and
defend the indefensible by actually giving these companies a promotion.
If you are looking to go into business for yourself and you are a skilled salesman
that is willing to work on a commission only basis, while also being willing to build and
manage a team of commission only salesmen beneath you then by all means go ahead.
But if you are not looking to start your own business, or your not a good salesman,
don’t let the people involved in these companies convince you that you are either.
Now, we will hopefully continue to defend the indefensible if this video does well by looking at
the value that hedge funds add to society by doing nothing but moving huge piles of money around.
But if you want to see accounting on a grand scale before we make that video,
go check out our explanation as to how the federal
reserve bank became the most profitable organisation in the world just last year.
And as always if you enjoy these video’s please
consider liking and subscribing to keep on learning How Money Works.