You’ve probably seen the advertisements: “Start your own business!” “Be your own boss!” “Become a part of something great!” Or the bumper stickers and even vehicle wraps advertising Mary Kay or Herbalife. Maybe you’ve gone to a friend’s house for a dinner that turned into a sales pitch, or noticed the catalogue in the office break room. But chances are, even if you didn’t know exactly how it works, you’ve seen multilevel marketing in action.
Multilevel marketing (MLM) is a system where, instead of participating in direct sales, companies set up a pyramid of affiliates to sell for them. In theory, this should create a self sustaining sales force, with the minimum possible effort from the top so the headquarters can focus on product quality and innovation.
As a “business owner” in an MLM, one would have two main responsibilities delegated to them: selling the product directly and, more importantly, recruiting others to sell for them in exchange for a slice of the commissions. Again, theoretically this makes sense — it isn’t too different from a typical dealership model — however, the problem starts to arise from the product itself.
Lower level participants in the pyramid are usually forced to buy their goods at or near retail price (often from people higher up the very same pyramid), giving the choice of either selling for a minimal margin, or struggling to move overpriced product, neither of which is particularly profitable.
This shifts the focus on recruiting more salespeople instead, in hopes of making profit that way via commissions. However, the new recruits are one level still lower on the pyramid, and will face the exact same issues, but larger.
The end result of this system, all too often, is a funnel directing the cash, to the tune of hundreds of millions in the most successful MLM schemes, directly up to the top of the pyramid.
In a review by the Federal Trade Commission, over 99% of participants in Herbalife, formerly one of the largest MLM companies, made no profit, and half actually lost money, unable to even pay back the startup fee and initial inventory outlay. The resulting settlement cost Herbalife $200 million in restitutions.
A similar investigation into Amway in the UK showed 98.4% of participants there did not make a profit, compared to £220 million in profit at the top of the pyramid.
While MLM remains legal in most countries, joining one at the lower levels is not much better than (and much more work than) ‘investing’ in a pyramid scheme.
If you get an offer to start your own business, particularly in sales or affiliate marketing, the first thing you should do before you sign anything is consult with a small business financial advisor who can read the fine print and ensure that you are joining a legitimate, profitable business venture.