MLM Dichotomy

Multi Level Marketing (MLM) evokes a strong opinion when the topic is raised. Simmer down, I am not here to lead you to a link where there is some pitch to please buy up Charlie's product that is piled up in his garage so he can make his rent payment this month. Likewise, this discussion is not to make the case for pyramid schemes. I want to explore with you what I call the MLM dichotomy.

What is a dichotomy? Simply stated, it is "a division into two mutually exclusive or contradictory groups or entities." Let us explore those two very extreme views of MLM. There does not appear to be a middle ground.

Who is a fan of MLM? Certainly the many that have benefited from the "too good to be true" compensation plans. Typically there is some guy in Florida living in a mansion that has massive checks sent to him every month from a downline of thousands of distributors and product users. Every now and then he is paraded on stage by the company executives who tout his humble beginnings, hard work ethic and lavish lifestyle.

Is MLM legal? Short answer is yes! If you want to review a brief history of MLM from a legal perspective, you will need to research the FTC law suit against Amway in the 1970's. Out of that ruling, framed the industry as we know it today. There are companies that have enjoyed a storied history in this space of over 100 years like Avon. There are others that have survived decades such as Herbalife, Tupperware, MaryKay, Nu Skin and Primerica which all have annual revenues over $100 million. Additionally, there are some newer companies that achieved this milestone in the nutritional beverage space such as MonaVie.

The problem lies with the literally thousands of companies that start in this industry each year claiming to be the next big company. They appeal to the mindset that ground floor opportunity is how the millions are made. Just like a stock tip from cousin Louie at a cocktail party, beware the messenger and proceed with caution. Most of these companies are not able to stay ahead of the growth and implode due to significant cash flow issues. Others are not able to create momentum from a broad base of distributors or customers due to price point or insufficient product differentiation in the existing market place.

What about the business model? One could effectively argue that multi level marketing is the purest business model in existence. There is relatively no start up costs, start day one as the boss, leverage other people's time and money creating a substantial residual income stream after years of hard work from a high quality product or service. Hence the dichotomy. Why such a negative perception to a seemingly ingenious model?

Hope brokering. The irony is the attributes that make multi level marketing so compelling is also it's sharpest criticism. Remember our Florida millionaire that is paraded across the stage with the million dollar check amid a large crowd with flashing lights and thunderous music? His story creates hope and sometimes preys on those when they are the most vulnerable. Lost on the crowd is the failure and perseverance of one individual that can not be duplicated by everyone in that crowd yet they all believe they can do it too. Some may, most won't yet they all give it a try.

Traditional businesses have barriers to entry. Some of those barriers include training, education in specialty fields such as mechanics and attorneys. Others require extreme financial commitment such as the medical profession or airline pilots.

There is nothing wrong with getting people to dream again. Certainly life can beat you up and we all seem to lose that child-like faith as we grow older. The issue is balance in the message. The hope and opportunity are over-sold and very few are mentored on an effective business plan to achieve success. I point to the large numbers of attrition in the industry as proof. Let's be clear, even Walmart has a returns policy and expects some buyer remorse. However, Walmart would not be in business today if there were more people standing in the return line than the checkout lane.

Why do so many quit? The dream is not balanced by the reality of the work required to get the result. One simple way to look at multi level marketing is the franchise model. Every time a MLMer "recruits" a distributor, they are effectively creating another franchise where royalties roll up to the "recruiter". Imagine starting a lot of franchises for less than $300 all with the potential to make millions. It only takes a couple of successful franchises to make all the attrition worth the effort. Fair enough. Let's look at the franchise industry. The average franchise fee is $200,000 and it takes 3 years to become profitable. The average MLMer spends less than $1000 in 90 days and quits. In short, they have in their mind the 4-5 people that will lock arms with them and really run with their new business. When those 4-5 tell them they are not interested, their dream is crushed. The hype that intrigued them turns to bitter disappointment. Since they have not invested $200,000 and been counseled on the long term commitment to profits, they quickly turn and run.

The business paradigm. Most that go to school to earn a MBA degree do not aspire to become the next big MLMer. Many are so smart they will not even entertain engaging in the multi level marketing industry. Very rarely do you hear terms like ebitda (earning before interest, taxes, depreciation and amortization), return on capital (ROC), return on investment (ROI) when analyzing multi level opportunities. With one exception, good managers of these companies know these terms very well; not the field generals that are paraded across the stage. The MLM business model is built on emotion through brokering hope. Very rarely does it attract the analytical minded entrepreneur. When it does, they tend to be one of the field generals that get paraded across the stage. I have heard it said like this. If someone can not hold a job they get involved in real estate. If they struggle in real estate they turn to MLM. Oh the irony! On paper it is the purest form of the purfect business model, yet highly educated business talent (book smarts) will not engage. Most of the MLM success stories are rooted in heart-wrenching blue collar tales (street smarts). It is this folklore that further divides the two camps of MLM; thus creating such a dichotomy.

Paul Zane Pilzer is a renowned economist with uncanny accuracy. In 2006 he made the following statement. "Over the next 10 years the United States will create 10 million new millionaires." In fact, he actually published a book making his case and stated that the two strongest industries where this growth will occur is Wellness and Network Marketing.

There is no middle class in MLM. There are those that believe in the model, follow a proven system, dust off their dreams and persevere. At the other end of the spectrum are the thousands that are left with excess product, more debt and once again disillusioned by a trusted hope broker that leaves them with a scorn for the MLM model and industry as a whole. Just like in business, there is no get rich quick solution. It requires hard work and a pragmatic business plan.