The Ten Big Lies Of Multi-Level Marketing – Lie 1 to 5
by Robert L. Fitzpatrick
As in all pyramid schemes, the incomes of those distributors at the top and the profits to the sponsoring corporations come from a continuous influx of new investors at the bottom. Viewed superficially in terms of company profits and the wealth of an elite group at the pinnacle of the MLM industry, the model can appear viable to the uninformed, just as all pyramid schemes do before they collapse or are exposed by authorities.
Deceptive marketing that ably plays upon treasured cultural beliefs, social and personal needs, and some economic trends account for MLM’s growth, rather than its ability to meet any consumer needs. The deceptive marketing is nurtured by a general lack of professional evaluation or investigation by reputable business media. Consequently, a popular delusion is supported that MLM is a viable business investment or career choice for nearly everyone and the odds of financial success in the venture are comparable or better than other trades, professions, employment or business ventures.
MLM’s true constituency is not the consuming public but rather hopeful investors. The market for these investors grows significantly in times of economic transition, globalization and employee displacement. Promises of quick and easy financial deliverance and the beguiling association of wealth with ultimate happiness also play well in this market setting. The marketing thrust of MLM is accordingly directed to prospective distributors, rather than product promotions to purchasers. Its true products are not long distance phone services, vitamin pills, health potions or skin lotions, but rather the investment propositions for distributorships, which are deceptively portrayed with images of high income, minimal time requirements, small capital investments and early success.
The word, lie, is provoking and it is used here for provocative purposes. At some level, everyone who participates in MLM in which little retailing is occurring is unconsciously lying to himself or herself. Many at the top of these organizations are consciously lying to everyone else. Deception is inherent in this type of MLM scheme and is pervasive in its marketing. Here are 10 of the biggest lies I have found to be present in almost every MLM I have encountered.
Lie #1: MLM is a business offering better opportunities for making large sums of money than all other conventional business and professional models.
Truth: For almost everyone who invests MLM turns out to be a losing financial proposition. This is not an opinion, but a historical fact. Consider some notable examples from among the largest MLMs.
In the largest of all MLMs, Amway, only 1/2 of one percent of all distributors make it to the basic level of “direct” distributor, or “platinum,” and the average income of all Amway distributors is about $40 a month. That is gross income before taxes and expenses. When costs are factored, it is obvious that nearly all suffer a loss. Making it to direct, however, is not a ticket to profitability, but to greater losses. When the Wisconsin Attorney General filed charges against Amway, tax returns from all distributors in the state revealed an average net loss of $918 for that state’s direct distributors.
Extraordinary sales and marketing obstacles account for much of this failure, but even if the business were more feasible, sheer mathematics would severely limit the opportunity. The MLM type of business structure can support only a small number of financial winners. If a 1,000-person downline is needed to earn a sustainable income, those 1,000 will need one million more to duplicate the success. How many people can realistically be enrolled? Much of what appears as growth is in fact only the continuous churning of new enrollees. The money for the rare winners comes from the constant enrollment of armies of losers.
The vast majority of the losers in MLM drop out within a year. In a 1999 court case brought against Melaleuca, one of the country’s largest MLMs, the company claimed it has the highest retention rate among distributors in the entire MLM industry. Melaleuca boasted a drop-out rate is 5.5% per month. This equates to about 60% per year, if the dropouts are replaced each month.
In its annual report to the SEC, Pre-Paid Legal, another large MLM, revealed that more than 1/2 of all its customers and distributors quit each year and are replaced by another group of hopeful investors.
This pattern of 50-70% of all distributors quitting within one year holds true also for NuSkin, the industry’s second largest MLM. NuSkin also exemplifies the accompanying pattern in which a tiny percent of the distributors gain the majority of all company rebates. In 1998, NuSkin paid out 2/3rds of its entire rebates to just 200 upliners out of more than 63,000 active distributors. The money they received came directly from the unprofitably investments of the 99.7% of the others.
In 1995, Excel Communications, another fast growing MLM, reported to regulators an 86% turnover rate of distributors and 48% drop-out rate among all customers.
To obscure their dismal numbers, some MLMs classify their distributors as active and inactive. The Active group includes only recent participants and those still buying products or receiving rebates. Payout and retention statistics are then disclosed only on the active group.
If ALL distributors who participate are included the losses and the average incomes are exposed as much worse. And, if all the distributors who enroll and quit over several years are included, the odds of success for a new distributor/investor are shown to be absurdly low. Yet, these companies typically advertise their business as an opportunity of a life time with unlimited potential.
Lie #2: Network marketing is the most popular and effective new way to bring products to market. Consumers like to buy products on a one-to-one basis in the MLM model.
Truth: If you strip MLM of its hallmark activity of continuously reselling distributorships and examine its foundation, the one-to-one retailing of products to customers, you encounter an unproductive and impractical system of sales upon which the entire structure is supposed to rest. Personal retailing is a thing of the past, not the wave of the future. Retailing directly to friends on a one-to-one basis requires people to drastically change their buying habits. They must restrict their choices, often pay more for goods, buy inconveniently, and awkwardly engage in business transactions with close friends and relatives. The unfeasibility of door-to-door retailing is why MLM is, in reality, a business that just keeps reselling the opportunity to sign up more distributors.
Lie #3: Eventually all products will be sold by MLM, a new form of marketing. Retail stores, shopping malls, catalogues and most forms of advertising will soon be rendered obsolete by MLM.
Truth: MLM is not new. It has been around since the late 1960’s. Yet, today it still represents less than one percent of US retail sales. In year 2000, total USretail sales were $3.232 trillion, according to the Dept. of Commerce. MLM’s total sales are about $10 billion. That is about 1/3rd of one percent and most of this sales volume is accounted for by the purchases of hopeful new distributors who are actually paying the price of admission to a business they will soon abandon. Not only are MLM sales insignificant in the marketplace, but MLM fails as a sales model also on the other key factor – maintaining customers. Most MLM customers quit buying the goods as soon as they quit seeking the business opportunity. There is no brand loyalty.
These basic facts show that, as a marketing model, MLM is not replacing existing forms of marketing. It does not legitimately compete with other marketing approaches at all. Rather, MLM represents a new investment scheme that uses the language of marketing and sales of products. Its real products are distributorships which are sold with misrepresentation and exaggerated promises of income. People are buying products in order to secure positions on the sales pyramid. The possibility is always held out that you may become rich if not from your own efforts then from some unknown person who might join your downline, the big fish as they are called.
MLM’s growth is a manifestation not of its value to the economy, customers or distributors but of the recently high levels of economic fear and insecurity and rising expectations of quick and easy wealth. It is growing in the same way day trading on the stock market, legalized gambling and lotteries are.
Lie #4: MLM is a new way of life that offers happiness and fulfillment. It is a means to attain all the good things in life.
Truth: The most prominent motivating appeal of the MLM industry as shown in industry literature and presented at recruitment meetings is the crassest form of materialism. Fortune 100 companies would blush at the excess of promises of wealth and luxury put forth by MLM solicitors. These promises are presented as the ticket to personal fulfillment. MLM’s overreaching appeal to wealth and luxury conflicts with most people’s true desire for meaningful and fulfilling work in something in which they have special talent or interest. In short, the culture of this business side tracks many people from their personal values and desires to express their unique talents and aspirations.
Lie #5: MLM is a spiritual movement.
Truth: The use of spiritual concepts like prosperity consciousness and creative visualization to promote MLM enrollment, the use of words like communion to describe a sales organization, and claims that MLM is a fulfillment of Christian principles or Scriptural prophecies are great distortions of these spiritual practices. Those who focus their hopes and dreams upon wealth as the answer to their prayers lose sight of genuine spirituality as taught by all the great religions and faiths of humankind. The misuse of these spiritual principles should be a signal that the investment opportunity is deceptive. When a product is wrapped in the flag or in religion, buyer beware! The community and support offered by MLM organizations to new recruits are based entirely upon their purchases. If the purchases and enrollment decline, so does the communion.
Source: Pyramid Scheme Alert