Why a 'multi level' marketing (MLM) plan will never, ever work.

When I started my company in 2012, questions of structure, profit and growth quickly came calling. During that time, I crossed paths with a wealthy founding member of a company with a Multi-Level Marketing (MLM) structure. This person, admittedly made wealthy by this model, has remained convinced that the multi-level model is the secret to unlocking vast wealth and sales potential for any product whether it be a service or a physical good.

Though I instinctively felt skeptical of the multi-level model, I dove into both economic research and first-hand encounters, and the truth was much worse than my initial skepticism.

You do not have a real market for your product.

Think of your favorite fast food franchise. You presume each location makes money, and it most likely does, in a market filled with outside competitors.

As you are already aware, owning an established franchise Is not as simple as just asking for one. Companies who grow through franchising, while always seeking expansion and presence, will safeguard their brand. This requires several layers of 'gatekeeping' measures that, among other things, require steep monetary and personal investment, assess your financial and personal ability to invest, gauge your competence, and train you to acquire knowledge needed to succeed in their business model.

Now, applying this to the MLM model, let us imagine a world where you have already qualified to open a franchise of this type. Your monetary investment in starting up is likely in the millions and your personal and emotional investment is incalculable. You find the perfect location, obtain permits, build, equip, and staff your new franchise only to realize that another franchise of your same brand is being built right next door.

Do you see the problem there? Companies with a multi-level model do not.

Of course, this scenario is extraordinarily unlikely because, as I initially stated, reputable companies protect their brand. An MLM company, by its nature, will allow their ' franchises' to exist in any space and proximity, and this is frequently a stand-out reason to us as to why the model is not a functional or sustainable one.

Inflated Pricing Means No True Selling!

Multi-level models, by their very definition, share sales commissions/profits up through multiple levels of salespeople. While it is valid to state that all businesses move money to multiple levels (sales, management, executive), what is lost in that statement is profits are being split among several people at the same operating tier (sales). The other operations and overhead that exist in any other company would still exist for them.

So, if you actively sell the product, the profits from your effort partially go back into fueling the upline sales team which means that the rewards from your efforts are inherently diminished. In light of this, how can the MLM still give you the illusion of your personal efforts being justly rewarded? They can do this by giving you a fair sales commission and allowing enough 'extra' to pass upward among multiple others.

You can crunch the numbers all you'd like, but the only way to accomplish this is to increase the price of the product to allow for the 'upline' payments.

Any of us who can recall the foundational lessons from high school economics still know that the first law of economics is that a consumer will always choose the lower-priced product - so MLM inherently violates this principle before they sell their first unit.

This leaves the MLM with a massive problem they they attempt to resolve with my next two points of knowledge.

Hyping For Fake Sales

At this point of the reading, we can see that MLM-structured companies have some considerable issues to overcome. They are forced to mark their product's price up in an open market knowing that it cannot compete head-to-head with others.

What does this typically mean? Well, whether they admit it or not, sales are typically made to other salespeople. Now, if this sounds crazy and contrary to your experience, that is partially because these companies do not outright say this. Typically, what they say is to take your focus off of product sales, and work on growing downline sales people. They know that when somebody jumps in as a startup, they'll need to purchase products, marketing tools, and/or training. Most, if not all, of these come fully or partially from the upline salesperson. This can be a variable experience, so let's just leave it at that for now.

So how can they so effectively engage in this model? By hijacking the part of your brain that is open to reward. A common tool is what I like to call 'pep rallies', but MLM companies will call them conventions, training, seminars, or sales celebrations. They are filled with testimonials that praise the company and its model. They talk about expensive cars, toys, and homes that they paid for with cash all while also showing off facilities that, presumably, were driven by their profits from booming sales.

At the corporate level, this may very well be true. Even though the sales commissions are diluted among several tiers and their product is priced non-competitively, sales among their own people can be extraordinarily profitable for those at the founding and ownership levels.

Also, there could be some deception in play as well.

A personal story that I can share in this area is that I was once invited to the home of the MLM founding member (who will remain anonymous), and it was a bona fide mansion. It's not surprising given that this was a founding member and a primary stakeholder at the corporate level, which is what I bluntly expressed to them.

With my skepticism firmly intact, I was later invited to the home of a family who had only joined one year before and, as we were told, had begun to grow in their model. This home, while lesser than that of the founding member, was still a massive hilltop estate. One that inspires awe for most, including me!

Stunned, I told me wife about it. How? Just engaging in these seemingly insane sales models produced this? Only in America, right? As my wife soon proved.... wrong! I had become so distracted by the dopamine-fueled wealth trap that I forgot to do what my wife did next. Check the receipts.

A quick search of local public tax records soon revealed that the home was not his. It was rented. Our patient observation after that revealed that it was a temporary lease at that - a hype investment. The family moved back to their normal home (they they'd owned before MLM involvement) and resumed selling as they had before.

Basic inquisitive skills then revealed several ugly truths. The imported cars were leased and frequently repossessed, the boats and jet skis were rented or borrowed, and the items they'd paid cash for were financed and forcing them to live beyond their means.

Admittedly, this is purely anecdotal, and I do not know how widely spread these occurrences are in other companies. I do know for a fact that they are also not unique to this situation.

So where does that leave things for their sales recruits?

They are only marketing to you.

We have covered that sales to the public/open market are not happening, and selling a product or service is what drives corporate success. This means that the model MUST become based upon fewer sales for higher profit margins.

That 'fewer sales' part? That's the recruited salespeople, who inevitably begin to drop out. Let's consider some important information here:

Key Statistics:

• 99% of participants lose money: According to a 2011 report by the Consumer Awareness Institute, approximately 99% of people who join MLMs either make no money or lose money after expenses.

• Median income is near zero: A 2018 AARP Foundation study found that 47% of MLM participants lost money, and only 25% made a profit—usually a small one.

• Top 1% make most of the money: Income disclosures from major MLMs show that the top 1% (or less) of distributors earn the vast majority of commissions. Most participants never move past the lowest level.

  
  

With these facts in mind, you'll notice that these companies frequently spend their marketing dollars on recruitment of sellers, selling them on a lifestyle, and shoddy pseudo-economic theory based on what sounds like conventional wisdom (risk, reward, and investment).

Then you realize that they're playing to an ever-shrinking market as their poor reputation grows while their ranks shrink with high failure rates:

Why the Failure Rate Is So High:

• High startup and maintenance costs (inventory, training, events)

• Saturation: You need to keep recruiting to succeed, but markets quickly become saturated.

• Deceptive earnings expectations

• Heavy reliance on recruitment over sales: Many MLMs resemble pyramid schemes in practice.

The Bottom Line:

If you're considering MLM as a serious source of income, it’s important to know that almost no one profits, and the business model favors the company and top recruiters—not the average participant.

If it sounds familiar, that's because so many profitable activities are based upon the same concept: the hijacking of the risk/reward part of our brain. This occurs every day in casinos, stock trading (notably day trading), and online scams.

It cannot outright be stated that MLM companies are operating in bad faith, but it is quite certain that they are willing to exploit our desire for acceptance of risk for the temptation of gain.

What do you think? Did I miss something? Feel free to add to the discussion!

Todd Nall is the founder of Travel Experts Network, LLC. and a Licensed Professional Counselor Associate in the state of Texas.