Simple Multi-Level Marketing Advice

In times of economic hardship Multi-Level Marketing companies such as Amway, Melaleuca Mona Vie, Herbalife and the like sprout all over the landscape enticing people with promises of easy riches. I am not going to say that all Multi-Level Marketing companies are scams, but some of them definitely are, and many tiptoe along a fine line along which they could easily fall either way.

The trick is for the potential recruit to perform the required due diligence before investing their time, reputation and hard earned money. That's easy to say, but how does a person with no business experience perform due diligence on a business opportunity? In the recent economic crisis a lot of people have lost their jobs and are looking for a way out. As a result MLM businesses have grown to the point that Amway is actually advertising their opportunity on television. As a sequel to a previous article on how to spot a business opportunity scam I offer these suggestions.

Watch out for evasiveness. If someone approaches you and invites you to a business opportunity meeting ask them what the business is, what it does, and what you would be expected to do. If they won't tell you then walk away. If they are proud of what they do and really want to offer you an opportunity then they won't be afraid to be up front with you from the beginning. Any relationship that begins with obfuscation or deceit is bound to turn out badly.

If you decide to investigate further and attend the meeting you need to have discipline. Tell yourself over and over again that you are not going to sign anything at that meeting. If you set an appointment try to hold it in a public place like a restaurant rather than at the person's or your home. It is much harder to strong arm someone in a room full of people than it is in private.

Chances are the person who approached you is going to bring another person with them, that person is directly above them in the chain, known as the "upline". The presence of that person is a sure indication that your recruiter is just getting started. Let them make their pitch. If you don't understand something, don't hesitate to ask them to explain it in more detail and don't accept evasive answers. The following ten questions are designed to help you evaluate the opportunity, and determine if it is a legitimate retailing operation or a recruiting pyramid.

How many retail customers, who are not recruited to sell product, do you have each month?

In order to be a legal marketing business they must have at least 10 retail customers each month. These are people who they deliver product to, receive money from, and are not connected to the organization in any other way. If they do not have at least 10 retail customers then they are an illegal pyramid under the FTC v. Amway (1979) ruling.

What percentage of your sales are to retail customers each month?

Another part of FTC v. Amway stated that at least 70% of all merchandise sales must be to retail customers in order for the scheme to be legal. The purpose of these two parts of the ruling was to prevent "front loading" of recruits. In front loading, recruits are required to buy merchandise to join the plan and maintain certain purchase levels to remain in the program. In spite of the ruling neither of these requirements is very rigidly enforced.

Are sales to representatives for their personal use considered retail sales?

One way that many of these organizations get around the FTC ruling is to consider product bought by representatives for their personal use to be the same as retail sales. In fact some of them consider the difference between the wholesale price paid by the representative and the listed retail price, which they didn't pay, to be profit. They will explain to people that they can make money by "buying from themselves". This profit will be shown on income potential literature and in some cases even reported to stockholders and government regulators. It is a gimmick to make it appear that people are making more money than they actually are.

What is the dropout rate after one year, two years, after three years?

Direct Sales is a hard business to be in, and frankly most people fail at it. The dropout rate gives an indication of how profitable and easy the business is. If they tell you that anyone can do it and it takes only a few hours a week to be successful, and then you find out that the dropout rate is 90% after twelve months, that indicates that there is something seriously wrong with their claims of easy money.

When all participants, not just active participants, are included, what is the average profit per month per participant over the last three years?

To inflate the earnings potential of the business to recruits many of these companies state earnings only for "active" agents and earnings over the previous twelve months or even less. This has the effect of lumping the earnings of the people at the top of the scheme, who make a lot of money, with a limited pool of people at the bottom who either lose or make very little. When all participants are taken into account it becomes readily apparent what the real earnings potential is.

How does your product's price point compare to other similar products available from other outlets?

It is supposed to be a sales business and this is a basic sales marketing question. If the price is not competitive with similar products available from other outlets then the product is going to be a tough sell. Many of the products marketed through MLM are high priced; they have to be in order to pay commissions to a lot of people in the chain. If they are too expensive you won't be able to sell them no matter how good they are.

What is the market size for this product in this area?

In order to be successful you need to know what the market is for the product; basically how many people want it and are willing to pay your price for it. To describe the market for weight loss pills by saying that 25.2% of all adults in Florida are overweight and there are 18,547,000 people in Florida therefore the market for these weight loss pills is 4,673,844 people is something marketing experts refer to as "Chinese Hands". It goes like this: "There are 1 billion people in China and each person has two hands therefore the market for gloves in China is 2 billion units." In our case, not all of those 4.7 million overweight people want to lose weight, and not all of the ones who do will want your pills. They should be able to tell you how many people in your area have a need for the product, want a product like the one they are selling, and are willing to pay the price they are asking.

How many units of the product do you expect to sell at retail to end users per month at this price point? Has that market level been reached?

Another basic marketing question. All products have a limited market penetration potential. Microsoft has an 89.7% market share for its operating systems, phenomenal, but not everyone uses Windows, some like Apple, others use Linux. Coca-Cola has a 46% market share, but not everybody drinks Coke. Some people like Pepsi, others drink Shasta because it's cheaper. Still others don't drink soft drinks at all. At a given price there are only so many people who will by a product. Anyone in a sales business should know what that number is and how close the market is to saturation. If market saturation has been reached then you will not be able to move the product at the listed price no matter how hard you try.

When a commission is paid, what is my portion of that commission, and what portion will be paid to higher levels in the organization?

Here is where they will get very confusing with talk of rebates and overrides, uplines and downlines. Make them keep it simple. If you join today and sell one unit of the product tomorrow, what will your commission be and what will the commmssions of those above you be.

An example of how it should work: I used to sell insurance, it was straight commission sales. When I sold a policy 85% of that commission went to me and the remaining 15% was divided among the people above me in the chain. This consisted of my manager, the agent who was in charge of our office, and the regional sales director. That's it, three people, and I got most of the commission. In many MLM companies this is turned on its head. The person making the sale gets the smallest portion of the commission while those higher up the chain get progressively larger cuts and there can be six, eight or ten people, all getting paid from that same commission. The effect of this is to make it very difficult, if not impossible, to make money by retailing the product.

In this scenario the money is in recruiting people and moving up to those higher compensation levels. As mentioned earlier, to pay all of these people the products have to be overpriced, and that makes them difficult to sell. Recruits can't sell the products, they get frustrated, and they quit. In the end a lot of money gets kicked up to a few people and a lot people end up with a garage full of soap that they can't get rid of.

Are there support materials that I will be expected to buy as part of this program and events that I will be expected to attend? What is the cost of these and what are the consequences if I opt out of participating in them?

By far this is the most sinister of the facets of MLM. Many of these organizations have a secret "pyramid within the pyramid". Recruits are told that success in the business is the result of "The System". Follow the system and success is assured. The system consists of motivational CDs that recruits are told to listen to religiously. These are usually recordings of speeches given by top distributors at the major events that are periodically held. Recruits are told to set up an automatic delivery of these recordings for one a week and they cost $5 - $8 each. Then there is the book of the month, also on auto-delivery at $20 - $40 per month. Then there are the events; small monthly events, quarterly gatherings, big yearly bashes, and special motivational seminars, all of which the recruit is expected to buy tickets for at anywhere from $20 to $200 or more each. This money flows directly into the pockets of the top distributors as does money from the sales of their motivational materials at these events. Failure to participate in the system often results in the new recruit being ostracized by their upline which ensures their ultimate failure in the business.

In the case Brig & Lita Hart v. Amway et al (1997) it was revealed that one of the biggest Amway distributors, a man named Dexter Yager, derived 70% of his income from the sales of these motivational materials, an amount in excess of $40,000,000 a year gross. In other lawsuits it was revealed that many of these "kingpins" actually lost money in their Amway businesses but made fortunes selling these motivational materials to recruits who eventually failed and quit, to be replaced by new recruits most of whom also failed and quit.

Are all MLM opportunities losing propositions? Put simply no. There are some, notably Avon and Tupperware, in which many people have had success, that success is based on selling product not recruiting people. It doesn't matter if Acai Berry Juice cures everything or Noni Juice makes people superhuman. If the answers to the questions above are evasive, or indicate that the money is really in recruiting people, then your chances of success are akin to winning the lottery. If it is a recruiting pyramid with a product being used as a cover, then you must accept that mathematically there is no way for people in the bottom three levels, where roughly 90 - 98% of the participants are, to make any money. The scheme is not really a business; it is simply a way to transfer money from a lot of people at the bottom to a few people at the top.