What’s wrong with multi-level marketing as a business model?

Let me preface this by saying that I am not involved in any multi-level marketing (MLM) business, nor do I have an interest in joining one, whether at the top of the pyramid or somewhere in the downline. The very fact that I feel the need to include this disclaimer, though, is part of what I want to talk about in this essay. Why does MLM have such a bad reputation, what’s wrong with it, and can it be fixed?
If you’re a salesman, you’re already quite familiar with the challenge and opportunity of working on a commission basis. It’s easy: the more you sell, the more money you’re paid. If you’re selling $500 gizmos and you’re paid a 5% commission, selling 3 in a day nets you $75, not much at all. But sell 20 in four hours and you’re doing very well, earning $500, or a delightful $125/hour.
amway logoThis business structure is so well established that many of the businesses with which I consult have “pure commission” salespeople on the team, people who are paid a very healthy fee for each closed sale, but who are paid zero if they can’t close. Since few businesses can afford to be philanthropic efforts, good intentions inevitably meet harsh reality at the sales desk, so it makes sense.
No sales = no income = no company.
Take a step up the food chain in a typical corporation and you’ll find that the sales manager gets a bonus based on the performance of their salespeople, and that the VP of Sales also gets a bonus based on the aggregate sales of the team. Indeed, the CEO of the company is also likely to get a bonus based on the growth of the company revenue year over year.
In essence, a pyramid system where that $500 product might well produce a $25 commission for the sales person, a $10 commission for the sales manager, a $10 commission for the VP of sales and (more likely than not) a $20 commission for the CEO. In other words, $65 (13%) of the $500 sale might well go to commissions in this sort of scenario.
hbs logoHarvard Business School, for example, lists three basic ways to pay your sales force:

  1. Salary plans pay fixed rates of compensation and are appropriate when measurements of performance are difficult to ascertain.
  2. Commission plans pay salespeople in direct proportion to their sales and are appropriate for maximizing incentives or for predicting sales costs in direct relationship to sales volume.
  3. A combination plan includes all variations of salary plans plus other monetary incentive plans. This plan is more complex to administer; however, it allows for greater incentive and flexibility.

Even in that bastion of business capitalism, HBS, commission based sales is a recommended strategy.
Let’s go a bit further down this business scenario too. Now try to imagine the motivation for the sales manager when she (or he) is interviewing a potential hire. What’s their primary motivation? That they can sell the heck out of the product/service. In essence, the sales manager (and VP and everyone else in the company) is going to act based on enlightened self-interest and hire the candidate who seems most likely able to close on product sales.
Many large companies also offer a bonus or reward for new employee referrals too, which extends the incentive for finding good salespeople who can close deals down to the front lines. Now everyone in the sales loop is trying both to help sell product and find new salespeople who can maximize product sales.
(well, some salespeople might be concerned about new folks adversely impacting their own sales, but that’s typically addressed by sales territories, where each salesperson is assigned a different geographic or demographic customer group)
With a typical company, then, we have salespeople who are paid to sell their product and to find new salespeople, managers who are paid partially based upon the ability of their sales team to close sales and, through ESI (enlightened self-interest), also motivated to find new and better employees to continually maximize sales and revenue, and so on, up the chain to the CEO.
Now, tell me how Avon (NYSE:AVP) or Amway are different?
They also have a distributed sales team where each team member is paid on a commission-only basis and are also paid based on a percentage of the sales of their team (in the MLM space, they call this your “downline”). The sales manager has a similar structure and sits one rung higher up on the ladder, on and on, up to the Amway or Avon corporate team itself.
avon logoThere are two core differences I see between a Fortune 500 sales team and the folks in my neighborhood who are selling an MLM product, though: first, traditional corporations don’t have an ever-growing org chart. Imagine if every few weeks another level of management was added to Kodak (NYSE: EK) or Starbucks (NASDAQ:SBUX). It’d produce chaos and, more importantly, would continually dilute the accountability chain. If sales drop, who is actually responsible when the sales team could be arbitrarily wide and deep?
The second difference, and this is the big one I think, is that in a traditional sales group, your incentive for bringing someone else on the team is a one-time bonus, not a percentage of their sales for a specified — or endless — period of time.
The first problem can be addressed by disciplined MLM organizations, of course. They can just say “after we’re four levels deep, we can’t go any deeper”. This makes intuitive sense if you think about each party taking a slice of the pie: even if each party only gets a 5% commission on a sale, eventually you’ll run out of base revenue and be paying more commission than the profit on a given product. That’s a recipe for bankruptcy.
Which leads us to what is the core problem with multi-level marketing companies: offering a percentage of transaction revenue from your downline or sales team without a specified duration.
The math is easy too. If I can earn 5% of every sale you make as part of my sales team or 10% of any sale I make, I’d rather just get you on board and take some leisure time while you do the hard work of closing the sale.
This is the core of where MLM breaks down, obviously, when members are incentivized by the very structure of multi-level marketing to find new team members rather than sell the individual products (and that’s times ten if there’s an “initiation fee” that’s split by the existing organizational members).
But what if there were an MLM business where both of these problems were addressed? Where it couldn’t grow arbitrarily deep (or wide, depending on your metaphor) and where people are paid a sales commission bonus for bringing new people on board, but only for a very finite amount of time?
As I said, I’m not involved with any MLM business, but when I do think about the fundamental business structure, I’m always intrigued by its extraordinary parallels to sales teams in traditional corporations along with its few core differences.
Seems to me that there should be hybrid MLMs that enjoy the benefits of a highly motivated, distributed affiliate-only sales team while avoiding the trap of motivating your team to the wrong end goal: finding more team members rather than selling products. Is there?
MLMs generally have a miserable reputation and even asking a question about MLM businesses structures on Twitter quickly elicited sarcastic and hostile responses. People don’t like ’em, but most of the commentary seems to be more about the people who are the most vocal proponents / salespeople rather than about the business itself. One way to look at that is that Avon, for example, sells a good line of products, has its own R&D team, etc.
Nonetheless, there is a stigma around MLM. Is it justified when you just look at the business structure?
For that matter, if I include an affiliate link to Amazon (NASDAQ:AMZN) or a redirect through something like Clickbank that pays me a commission because you decided to buy something through my link, is that really fundamentally different to me selling you some Avon skin lotion or a carton of Amway dishwasher soap?
What’s your take, dear reader?

67 comments on “What’s wrong with multi-level marketing as a business model?

  1. Great take on what’s become an emotional topic. MLM’s are not by nature horrible things, but they are a flawed business model just by virtue of the fact that they don’t concentrate enough on how the money needs to be generated — namely SALES of product rather than the sale of “the dream” to enlist hoards of people. It would seem that ITTT (“in these troubled times”) there’s a huge opportunity for MLM’s to re-think, re-invent and take advantage of the need for so many out-of-workers to earn a living. And no, don’t contact me…I’m not interested!

  2. The biggest difference I see between flavors of MLM are that some are based on how big your downline can get, while others emphasize your own sales. When I see the pitch talk about how much money you make from the people you recruit realizing that they can make money by signing up underneath you and then signing more people below them, I see this as the bad reputation MLM.
    The other few “home sales” businesses I’ve seen seem to emphasize how people can sign up and make extra money holding parties and selling to friends and family. When was the last time someone tried to sign you up to sell Avon or Tupperware while they were also asking you to buy?

  3. Your premise that MLM’s should be focused and incentivize their sales teams to sell more product rather than recruit, falsely assumes that the MLMs’ business model is based on selling product rather than recruiting. It is not.
    My understanding of many MLM’s is that their very business model is built on the churn of affiliates and revenues generated from the new affiliate’s initiation and monthly fees. Many MLM’s don’t care about selling product at all, just recruiting more affiliates.
    I would contend if MLM’s built their business model as a hybrid as you suggested, they might be more successful, however, they would then need to put more empathesis and standards on the people whom the MLM’s recruit. Which, would make their jobs more difficult and their margins smaller.

  4. I think Rob is right on the mark. The real profit for the originators of an MLM is often not the fraction of revenue they get from their downstream recruits. It is in, as Rob said, the initiation and monthly fees, and then in additional materials to help affiliates sell the product.
    The real problem with MLMs, in my opinion, is that their products are often undifferentiated and so there is no compelling reason to buy, apart from getting lured in by a good sales pitch.
    Another difference between MLMs and a sales hierarchy is that the middle men in the hierarchy are penalized for poor performance of those below, so there is a disincentive to recruit as many people as possible in the hopes that they make a sale.

  5. It seems to me that once you remove all the elements that make an MLM such a poor business model (with all the attendant problems of deceptive sales practices, etc.), what you’re left with is essentially a genuine non-MLM business with a specific kind of structure to its sales organization. In other words, you’ve taken the MLM out of MLM. So why not just start with a good business model based on a good product in the first place?

  6. I agree with Rob also. MLM got their bad reputation because they are too aggressive recruiting sales people. When you have a company, you have a brand and product. You have a mission statement to go with that product. Recruiting so many sales people don’t really help build the brand, or product. Companies should step back and look at how they can give value back to customers. That’s the basic business model for all business � give value.

    • Parka you made an excellent point. Mlm are not customer focused they are salesperson focused. The pitch is to make them wealthy and customers are a necessary after thought to be considered legal and legitimate. Same goes for these other self help businesses. The”employee” and true customer are the salespeople.They aren’t building a business so that they can develop a product to improve life of potential customers but instead a model to help the recruits make money. Essentially a shallow business

  7. I listened to one of Rob’s podcasts where he had a guest by the name of Jon Taylor who wrote a book on MLMs. It motivated me to write a blog posting on it called ‘The Mathematics of MLMs’ which shows in a mathematical sense why MLMs can never generate a livable income for more than .5% of their members. (That posting is linked to my name below.) The fact of the matter is that nearly all of the people recruited into an MLM are expecting to achieve enough income to live on and a large percentage of them are lured in with the promise of not just a livable income, but a luxurious income which makes for disappointment when they find that they must build a large organization under them where everyone is either losing money or at best breaking even.

  8. The true problem with MLM is that 50 cents of every sales dollar is paid out in commission to the “downline”. Since the company still has Marketing expenses, R & D, Admin exp and Corporate management salaries and “profits” there is little left to put in the product itself. I would guess you end up with about 5 % worth of value (COS) in the product. This is too high a markup. Normal selling expense for a company like HP or Apple is 10-15% not 50%. The top leaders in a MLM structure take down 95% of the commissions and feed off the little guy down stream who is paying too much for products, sign-up fees and sales kits, etc. There are other elements of MLM. Always a “cause” to support, always an attempt to tie “science” in and yes the top “SALES” guy with THE Mercedes and McMansion.

  9. Unfortunately both the main post and a number of the comments are based on quite flawed understandings of the legitimate MLM business model. I’ll take the comments first then do a separate comment on the post itself.
    Rob McNealy, backed up by a few other commentators, says –
    “My understanding of many MLM’s is that their very business model is built on the churn of affiliates and revenues generated from the new affiliate’s initiation and monthly fees.”
    Rob, this completely false. What you are describing is an illegal pyramid model, not MLM. The MLM industry unfortunately suffers greatly from a large number of companies that *call* themselves MLM in order to claim respectability (and legality). Sometimes this is deliberate scams, sometimes it’s through poor legal advice.
    In legitimate MLMs, there is no money made through recruiting or “monthly fees”. It’s made solely on product sales. If a company, and it’s reps, are making money through recruiting and fees, then they’re not an MLM, they’re probably an illegal pyramid, and many have been shut down for exactly this reason. Just because someone *claims* to be an MLM doesn’t make it so, and doesn’t mean legitimate MLMs operate the same way.
    Lee – Jon Taylor’s claims about MLM are essentially based on the same type of circular thinking. Assuming MLMs operate the same way as illegal pyramids, then analyse the operations based on this assumption. Throw in a few other false assumptions, and Taylor comes to a logical conclusion. Unfortunately if your assumptions are rubbish, chances are so are your conclusions. I haven’t read the article on your site, I’ll do so and respond further there.
    Greg – there’s a few problematic assumptions in your comments also. Product value is an important issue, and if you operate a business marketing products at a price higher than the perceived market value, then you have a problem. That problem applies whether you’re talking MLM or not. Similarly, the actual operating margins are important. Products with small margins and low turnover, such as electronic equipment, are not sensible products for an MLM business model. Sensible products have high margin and high turnover – consumables, and preferably higher-end consumables. For example, Amway’s two major brands are for example Artistry and Nutrilite. They’re high margin, high-quality products with a high repurchase rate. Artistry has been independently judged as competing in the same market category as brands such as Estee Lauder and Clinique. I can guarantee you the margins on those brands is significantly more than 10-15%! Indeed from manufacture to end consumer the total markup is often in excess of 90%.
    If MLMs were trying to sell computers, your objection would be perfectly valid, but I’m not aware of any MLM trying to make money doing that. If any tried, they’d suffer the same fate as any other business with expenses outstripping margins – they’d fail.
    The very fact that an MLM company like Amway is celebrating 50 years of operations and is at or near the top of the sales data rankings in the main categories in which it competes should be a bit of a hint that perhaps the model does work and there might be some flaws in your assumptions.

  10. Now to the main post. Dave, your analysis is flawed because you’ve completely missed 2 major components of the MLM model. First of all, the “big money” for reps in MLM is not generally made through retail sales (sales direct to the end user), it’s made through wholesale sales (sales to others who resell the products). When you start an MLM business you primarily earn income through sales direct to customers, retail sales. That component is perfectly comparable to any other sales business, and I have a friend who earns thousands of dollars a month with Amway purely through that model. The “wholesale” sales earn a smaller per-item product, but by generating more of them (and thus more eventual customer sales volume), that ends up being a larger amount in real terms.
    You can’t however compare this wholesaling component to another retail model, which is what you’re doing by comparing it to sales teams. What it can be compared to is traditional product distribution, where there are various levels of markup between Manufacturer and Consumer. For many products in the world today the chain goes something like this – Manufacturer -> Exporter -> Importer -> Regional Distributor -> Retailer -> Consumer. For the big box type chains it might be – Manufacturer -> Warehouse -> Consumer. On the internet today it can even be Manufacturer -> Consumer.
    Profit is earned essentially through volume discounting. The exporter buys in large lots and sells in smaller lots at a markup to a number of different importers, who sell at a markup in smaller lots to a number of distributors etc etc.
    These is just a standard distribution model. How does MLM differ? It doesn’t really, and this is where a lot of the misunderstandings about MLM come about, like the idea of an “endless chain”. It doesn’t exist. In the FTC’s investigation into Amway in the 70s for example, they found the average length of the distribution chain was less than 4 most of the time, and 7 or less virtually all of the time.
    Layers are not continually added, there’s a limit based on volume. For example, in Amway in the United States, the multi-level payment compensation structure stops when an individual generates around a certain amount of sales volume in a month. After that various other profit-sharing arrangements come into place. Before that, profit is simply earned through volume discounting. The “platinum” (formally called Direct Distributor) effectively buys around $18,500 worth of goods, then resells it at a retail markup direct to customers and at a (smaller) wholesale markup to other distributors. These distributors then do the same. At each step someone is buying product in smaller lots at a markup, with the chain ending when it reaches the final consumer (which can be anywhere along the chain)
    This isn’t really any different to traditional distribution, there comes a point where if you continue to add layers of markup, the product out-prices the marketplace.
    So, the point is the number of “layers” in the distribution chain are very similar to traditional distribution.
    Which brings me to the next point, your idea of “limiting” by time how long a participant earns an income through downline volume. If you understand that we’re looking at a distribution chain, not a sales incentive chain, then the idea is obviously silly. The equivalent would be to say that after a wholesaler has had a retail store as a customer for a certain period of time, they have to stop adding a markup to the sales to that retail store, no longer profiting.
    Doesn’t make sense looked at that way does it?
    There’s more, but that’s enough for now, except to address the original question about where the poor reputation comes from. One MAJOR component is the many, many scams *claiming* to be MLM when they are indeed pyramid and other scams. It’s poor logic, but also perfectly human, for people to attribute the failings of these scams to companies that are legitimate MLMs.
    The other issue is poor field behaviour, and this is a legitimate weakness of the MLM model. With virtually no barriers to entry it’s very difficult to properly train and monitor the field, and some folk do some pretty whacko things. Given the sheer numbers involved, even a tiny, tiny, percentage of folk operating like this can be a substantial number, and by their very nature they’re more visible.

  11. I have spent a good amount of time with “Network Marketers” as they call themselves. The ones at the top are very successful and excellent at motivating people to “create a business”. Some of what they promote is very positive, but I also have some problems with the business model. It does rely heavily on signing up new distributors and the ones that make the most money focus solely on that. Top distributors can make over a $1 million a year with true “life time earnings” from residuals. I have witnessed it. Companies like nuskin and herbalife are rather large companies and do sell some decent products. I gather that a lot of product is sold by distributors buying their own stuff, but there is some selling to family and friends and maybe more. Therefore there is a massive amount of people and sales resources provided to sell a relatively small amount of product. I do know that the FTC has some guidelines / regulations on how much product these companies need to sell relative to just “sign up fees” so the bigger legit companies do push distributors to sell, rather then just sign up people.
    That being said while I have been happy to be a service provider to this industry, its certainly not for me and for the most part the ones I have worked with have not tried to “pitch me”.
    I think if one was going to go down that path they need to be very hard workers willing to do lead generation from the internet and other sources and spend on marketing. That is what the good ones do. You however cannot go into it expecting easy money for little time, which is how it is often promoted.

  12. Response to David Steadson. I believe you prove my point. In MLM there is little left after all other costs for product value. If as a distributor I have to buy a $100 in product every month to be “qualified” I end up with something worth perhaps $5.00 at cost. The other $95 ends up in other people’s pockets. And to make it worse $45-$50 goes to those in the sales upline. Of course they want me to “sign-up”. In order for me to make money I have to take advantage of others I can sign up so I start making my small share of the $50. This is a poor way to build a value chain. There is something honest about buying a disk drive for example when I know that is costs Seagate 45-50% of my dollars just for the parts and labor they put into my purchase. Its all about value. Your example of cosmetics is a poor one. (hope in a bottle) There is little value in all that fancy packaging and again its all about over-hyped marketing.

  13. Thank you for writing the is article. It certainly helped to clear up several issues for me regarding MLM. I fully agree that MLM by itself not inherently negative, it really comes down to the organization and members who sell the products.
    M Baron
    The Business That Gives

  14. The great thing about Network Marketing is that anyone can start a business. The worst thing about Network Marketing is that anyone can start a business.
    Without the proper training, and without a company that works with integrity from the top down, a new person coming into the business can be quite annoying and way too agressive. That just means they are doing the business the wrong way.
    The popular misconceptions that MLM is all a scam or pyramid scheme, that only the top 1% make any money, that to make the big money you need to get in on the ground floor and that the only people buying the products are people doing the business is NOT my experience.
    The company I’m with (not Amway) has paid out over $4 billion in bonuses. At our most recent National convention there were 6000 distributors there and 1 in 6 had earned over $1 million dollars in their career. Not bad for a part-time business.
    I myself have hundreds of customers/members buying the product each month who are not “in the business”. I also have built an organization of trained distributors who don’t annoy their friends and family and earn good money working part-time from their home. I make more money then my upline (so much for the pyramid thing) and I started my business when the company was 36 years old (so much for needing to be on the ground floor)
    Network Marketing done right, with the right company, and exceptional products is an excellent way to market products that have significant differences from what is available in the typical retail marketplace.
    Because of its accessibility through a low-cost start up, it allows just about anyone, regardless of age, race, sex, income and educational ability, to join the entrepreneur ranks. This makes Network Marketing the highest form of free enterprise we have created to date.

  15. Thank you for clarifying a subject which, up until now, I have found confusing. I particularly enjoyed your comparison between a MLM and a traditional corporate sales team. MLMs are a dicey subject, personally I have reacted negatively when confronted by one. I am not even sure why as I have never purchased anything through a MLM, however my guess is you are right on the money – it was the individuals pushing the product. My gut feel has always told me to stay away from such arrangements, which of course is tough to quantify, however I have learned to trust it over time.

  16. If you want to sell your products or services there are 2 ways to do so.
    1. through advertizing with internet, magazine, radio, tv,and regular shops etc,
    2. by the word of mouth, some time is much better.
    MLM is the later one where the company gives the advertizing money to its distributors to sell its products.
    If you want to be successful you need hard work and leadership just like the tradition sale through the shops.
    The reason MLM gets a bad name is because the participant does not understand the business model and don’t know how to operate the system therefore they fail and blame on the system.
    The system MLM has no problem. Avon has a 9 Billion sale and Amway has a 7 Billion sale.
    Study the system better, make sure the products are good and put effort in it. You will be successful

  17. Hello Mr. Taylor,
    Beijing has recently opened a China Science and Technology Museum adjacent to their famous Birds Nest. They have a wing devoted to mathematics and inside this is an excellent exhibit about multi-level marketing. The animated video presents MLM as an inverted pyramid where the investors’ money drops down on the few; once these originators leave, the pyramid collapses.

  18. Dave,
    Your article articulates perfectly the widespread confusion over network marketing as it’s typically practised. The problem is that what’s typically practised is a bastardized, distorted version of the concept, one created by company owners and high-flying team leaders to maximize their own incomes.
    In life (and business) it’s rarely WHAT we do that makes something legal or illegal, ethical or unethical, desirable or undesirable… it’s WHY and HOW we do it. Our motives and methods/means.
    This is one of the reasons why countries have such difficulty legislating against pyramid selling schemes: you can only legislate for specific behaviour — actions and practices — not for motives or attitudes. So the laws become too technical. There are too many loopholes or the laws impinge on constitutional rights, etc.
    One of the earlier responders raised a salient point: many of the companies CLAIMING to be MLM simply aren’t. They’re either clever counterfeits or ignorant clones of counterfeits. The reason they’re so hard to spot is because there are so few examples of what REAL network marketing companies should be.
    As a marketing professional for more than 40 years (including 30 years of teaching marketing at leading business schools), I’m still surprised by people’s ignorance of how much of the prices they pay for products is spent on marketing-related costs. If we disregard the retailer’s mark-up (which is also part of the marketing cost) and focus on the wholesale price, marketing costs — for market research, testing, distribution, market communications (including advertising, branding, corporate identity, public relations, etc) and sales — typically vary between 60%-70% of the wholesale price.
    Manufacturers typically retain only 30% to 40% to cover cost of manufacture, overheads, administration and profits.
    As a management consultant to direct selling companies (including home party and MLM companies) for more than 20 years, I can tell you, categorically, that very, VERY few MLM companies pay out more than 30% to 40% of the wholesale price in reality, even when the potential payout of their compensation plans claim to be as high as 80% payout or more.
    This is due to various factors, including breakage (unclaimed bonus income that flwos up to the company through distributors’ failure to qualify) and the use of point systems for qualification that can reduce the potential payout dramatically.
    That leaves a substantial amount available for other incentives and promotional activities by the company.
    So, from a company standpoint, the MLM business model can be extraordinarily profitable.
    From a distributor standpoint, provided that the compensation plan being used is balanced and fair (rarely the case, sadly — breakage is like corporate catnip: once an owner gets even a whiff of it, they’re hooked!), the business model is also sustainable, because there is always a finite limit to the number of levels on which commissions and overrides can be paid. As you so rightly point out, a company will go bankrupt if it pays out more than it earns.
    Companies go to sometimes ridiculous lengths to try to distract people from this reality, such as “infinity” bonuses that “pay you to infinity”. They don’t — they always get blocked by someone downline qualifying at the same level as you. And if a leg of your business does pay you to “infinity” (actually, until the leg runs out), it’s such a short leg, or the sales performance is so poor, that your “infinity” bonus is pitiful.
    But it sounded great, and it attracted LOTS of people whose trust exceeded their reason.
    So, regardless of the hype, buzz and spin surrounding compensation plans and the projected earnings possible, the reality is that, at some point, for EVERY distributor, the payout gets blocked. The feasible payout from the wholesale price reaches its limit. The money runs out.
    Where MLM lost its way was when these myths became entrenched in the recruiting pitches:
    * Anyone can be successful in this business.
    * Everyone can get filthy, stinking rich in MLM.
    * You can create walk-away income for life.
    * You don’t have to sell, just recruit.
    * All you do is switch brands, consume and recruit others who do the same.
    These are demonstrable fallacies — but they do NOT make the fundamental concept underlying MLM invalid or unworkable. Yes, they result in huge damage to the public perception of MLM as people discover that they’re what they always were — fallacies.
    So we’re left with a situation, today, where critics of MLM constantly quote fallacy as fact to support their claims and accusations, when they’ve done nothing more than ASSUME, incorrectly, that these things represent the truth of MLM.
    They may represent the way most people practise it, but that doesn’t make it any more accurate. China, North Korea and East Germany were all “Democratic People’s Republics”, but that didn’t make them either democratic or popular.
    It’s understandable, but it’s about as accurate as assuming that the Roman Catholic Church is utterly corrupt because a few well-meaning, but misguided, senior regional leaders tried to protect the reputation of the Church by not acting promptly and appropriately against pedophile priests and simply hid the problem from public view.
    Too many people have been peeing in the MLM pool for far too long, either for reasons of their own (usually from higher above the water line) or because the others have told them that’s what they should do. The water’s become so unsafe that, unless we make a concerted effort to clean up the water — by exposing the abusers and re-educating the abused — it will be no surprise if regulators step in to do it for us.
    There’s no such thing as a sensitive, understanding, sympathetic, well-informed regulator. It’s the last thing anyone needs or should want. But we’ll only have ourselves to blame if it happens.
    John Counsel
    CEO, The Profit Clinic

  19. In your closing paragraph, you asked how selling Clickbank products as an affiliate was any different from selling Avon or Amway products. There is a huge difference, both in terms of compensation as well as where in the totem pole you are located.
    The Clickbank model is basically a flat sales distribution arrangement with every affiliate at the same positon and compensation rate. The Amway model has many different compensation determined by when you started up with them and how successfully you’ve grown your pyramid base under you.
    With Clickbank, I can do my own marketing through PPC or SEO to be successful whereas with Amway, my success is dependent on the activity of the pyramid workforce linked under me.
    Personally I am more comfortable with controlling my PPC and SEO eforts than motivating people with a diversity of business and sales competencies!

  20. I am curious as to what you think of my business model, as you asked, “Seems to me that there should be hybrid MLMs that enjoy the benefits of a highly motivated, distributed affiliate-only sales team while avoiding the trap of motivating your team to the wrong end goal: finding more team members rather than selling products. Is there?”
    I think there is.

  21. It seems to me that in order to accept MLMs, one must be business minded. Many people think like self-employees and therefore believe that they are the only ones who should control how much they make. Humbug! Having a down-line is like starting a small business, you must train, help then automate and watch the money come. Get out of the self-employed quadrant and move into the entrepreneur quadrant.

    • No not necessarily Jamar.. Yes and no. I have a friend who I recruited in my Amway downline he eventually left, couldn’t do it he said. He then started a business (develop software)that help college students easily apply to multiple schools using same info shared with all colleges attached to it… sold it for $5 million and went to start another startup… Yep a serial entrepreneur and he said he couldn’t do a mlm… It’s all about personality and what the person wants. Though I’m still in Amway, in doing my own thing as well, though my uplines are not very happy with that, and are whispering in my wife’s ear to cause issues so I’ll leave my venture alone…. But I digress, don’t Box people and make it seem as though you do not have an entrepreneur spirit if you “can’t” do an mlm

  22. MLM’s make money, no doubt. If you go to the headquarters of NuSkin, Amway, and many others your eyes will pop out upon seeing the Fortune 500 type buildings. That said many of the distributors barely make enough to cover their costs, while a very few at the top are making insane levels of income.
    It’s far from a perfect business but at least the little guy gets to play. We can’t join GM and sell their cars, we can’t join Proctor and Gamble and sell their soap, but we can get a side business with many other MLM’s. There is something to be said for “the dream” even if the majority don’t achieve it.

  23. It’s really interesting how people react to the MLM industry. Like many other industries, the MLM industry gets a bad name because of people who sell hype but have no idea how to market a business… but the other side of the coin is there are so many people who are looking to “get rich quick” and they aren’t willing to put in the work necessary to truly build a business.

    • Yeah although everyone is jumping on and to defend MLM. The ever present issue is the people. Same with religion the philosophy can be great but if the people do not practice it well then it is flawed. And with most MLM, generally it is over hyped and made to target materialism. Hell I’m in Amway and most of our major functions focus on the money, cars, houses and then they throw in some XS excitement and belief belief,, power of spoken word(which is effective) and anecdotal advice. Followed by, check with YOUR upline to verify this info. I’ve heard info on 1 CD saying do this and another contradicting it then my upline tells me something different from them both! I’ve asked questions about various levels AND how to make money effectively and I’ve been told “don’t ask questions since you’re not there yet, focus only on what I tell you now” my wife (who was in it before me for years) has been verbally abused by our upline and when I go to defend her, she gets upset because I’m not submitting to the ,”system”. I can’t even seem like I’m upset or they’ll try to break us a part, with little suggestions and sadly it may work. In essence MLM are harmless but guys these things are flooded with egos and sociopaths. Therefore the system gets corrupted and this makes it bad. I’m in it still because I love my wife, she never really tried to get me in until they essentially re energized her and got her core again, by then we were married and I had to join our she would be sad and angry all the time and consider divorce… Sure sure that’s on us but you see how it can get… So in the mean time I generate about $1000/mo from Amway retail but a lot of friends have left and family avoid me… So I’m generate another venture though she found out recently and told our uplines they want me to stop it and focus on Amway and they have her upset again… Sigh MLM… amway smh

  24. I have been involved in several MLM/Network Marketing companies over the years and if you follow their plan and do what is expected, you can expect some success. However,timing can play a big part of it too.
    We are now starting to see companies that are leveraging the internet for generating leads in addition to offline marketing. By combining these two marketing strategies your more bound to be successful.
    Really what is the true pyramid scheme, corporate?

    • No corporate is not a scheme stop the MLM talk. In corporate you get compensation, you’re expected to do a task, you get a regular source of income and they tell you on your contact you’re subject to termination at owners discretion. It’s not your own boss thing but it is understood… hell even in MLM you can get “fired” if you break their rules soooo you’re not really independent. Don’t downgrade jobs to up sell MLM. Your MLM functions because employee make the products so be respectful and not an a-hole

  25. I note that this article was published over a year ago, so I am aware that my comments may pertain to out of date opinions … however…
    Since Robert Kiyosaki himself, who is not a network marketer, has just published a book praising the virtues of mlm, we now have a serious authority figure and entrepreneur backing our cause.
    The point Dave Taylor’s article seems to have missed is that this is network marketing, not “network selling.” The key to success in mlm is duplication – i.e. a lot of people doing a little. Furthermore, the best mlm companies have long ago cottoned on to the fact that they need to produce excellent promotion and presentation tools for distributors. The point is that mlm companies do produce outstanding products, but what is truly “for sale” is an entrepreneurial opportunity that is available to all. That, surely, especially in today’s scary economic climate, is a very good thing.
    I think so, but more significantly, even though he has no axe to grind, so does Robert Kiyosaki.

  26. Yes MLM does have a relatively bad reputation. As is see it, it doesnt have anything to do with an intrinsically bad or flawed business model.
    Im my opinion the bad reputation is because of the following to reasons
    1. MLM Companies with leadership without integrity OR with a product line of low quality.
    Some company owners have no intent of continuing to run the company. They only built it to a certain size, getting all the “MLM junkies” in and after a couple of year when sales start to drop they split with the money and go to Bahamas.
    This actually happens more than you would imagine.
    Of course this also happens in other industries but we do seem to have a a big share of these scoundrels in the MLM industry. Unfortunately as long as there are greedy people in the world that doesn’t do their homework on the company they are about to join these kind of businesses will continue to excist.
    Other companies have a very poor product line where the main attraction seems to be the money involved. These companies will not prevail in the long run.
    The second reason for the bad reputation of mlm is: No or very poor training of distributors leading to very unprofessional bahvior and wild and hyped up claims.
    No business or salesperson in any other type of business would run around jumping up and down hardly being able to contain themselves with excitement, shouting “this is amazing… you have to join now”.
    This is unfortunately how many if not most people in mlm behave.
    Dispite all the bad press In the late years the network marketing and direct selling industry has improved the reputation and gotten endorsements from many famous business and political leaders Including Bill Clinton, Donald Trump and Robert Kiyosaki.
    AS I see it MLM business model is superior to many business models, but being a new and growing industry we have some problems that need to be ironed out.
    I’ve been in the MLM business for over 2 decades now and I’ve also run traditional businesses(and still do). My final conclusion is that there are minuses and pluses with every business model. Despite the downsides of MLM I still think it is an excellent business model especially for new entrepreneurs without a lot of business experience.

  27. Well one important aspect that has to be taken into account is the education and training that an individual who joins a good company can benefit from.
    Not all mlm companies have a good training but the ones that do help a great deal in enhancing an individuals overall business knowledge and personal development.

  28. Having experienced some success at the top of my network marketing program’s comp plan, I was for a long time prejudiced in favor of the MLM model. But every MLM company is not the same, nor is each company’s culture. There are good and bad Democrats and Republicans too. If the model, the company, the comp plan, or the product doesn’t work for you, just say no.

  29. I think the responsibility lies with the MLM companies. Just like big brands watch what is being said on the internet about their product or services. Companies that decide to run with an MLM structure should focuss more on protecting their name and brand by using the internet to track how their sales force are selling the products but more importantly recruiting their downline. I believe the downline recruiting process is where a company can have their image tarnished. As individuals start to sell more to the downline with less than truthful promises based on made up successes!

  30. Dave,
    Great post on breaking down MLM vs traditional business model. Both are very similar when you start to look at it. MLM always gets a bad name, and its not because is a bad model its normally because someone gets involved with a company and doesn’t see any results. That is like getting into a car and not turning the key to start it. Then saying all cars are scams, they don’t take you anywhere. Turn the key and start the car, or in a MLM case, go recruit and sale something.

  31. Dave, you offer some interesting insights. I agree that MLM has a poor reputation, but being a successful networker myself, I must point out that times have changed. Those who continue to do MLM the traditional, sales-oriented way are going to be challenged in this new economy. According to renowned economist, Paul Zane Pilzer, in a article titled Creating Fortunes In The New Economy [google it], “The fortunes to be made in the years ahead will not be predominantly in physical delivery, but in education – not in physical distribution, but in intellectual distribution;…” Effectively, the concept of MLM has evolved into Intellectual Distribution, which really is a giant step in the evolution of free enterprise. Today, Intellectual Distribution using the multi-level structure is an attractive business proposition to many people as it allows the average person to build a lucrative home-based business generating leveraged and sometimes, residual income through starting part-time and with minimal upfront investment.

  32. MLM or any business is driven by traffic .. the method of distribution is evolving and that company which can deliver its product to the masses most efficiently will prosper MLM is a filtering system where the masses DO have the opportunity with the Right company at the Right Time to obtain financial Freedom

  33. My take on failing network marketer is this, They don’t know how to market themselves as a leader.
    Their sponsor, whom they trust to lead them in a profitable direction has no clue. You can’t market your product to your friends or family why! This is not your target market when it comes to building your downline.
    Your target Market is other marketers, they already understand the process of the comp plan. You must be pro active in your marketing efforts with these three key elements…
    Show your downline how to build a list, build relationships with this list and then market to your list(monetize). Which it comes down to this…
    They must know who you are, they must like you and trust you. You will never build your downline if you throw you company or products in their face and ask to do something they don’t understand.
    They don’t join the company they join YOU… This is where you must brand yourself as a leader to get to know people and build a relationship with them through blogs,social networking, auto responders,your picture and Youtube Ect.
    David, does this by telling who he is what he has done and what he will not do, and then tells his story to inform or educate you on the aspects of business comparing apples with oranges.

  34. I think that Dave’s premise is based on old school MLM’s and their old school methods and their old school comp plans. Amway and Avon have not changed nor evolved very much in the time they have been around. However the companies that have been structured properly and created in the last decade have built a better more efficient way of doing things, not to mention some of them have adapted to the technological and online marketing way of doing things. The old friends and family and home meetings approach (as if they ever really cared what you were doing anyway) have been replaced by attracting and qualifying viable willing prospects.
    True MLM’s and Network Marketing companies, those that now exist (outside the old modeled Amway’s and such), are about creating true leverage with a team, where everyone involved has an active personal vesting and interest in the growth of the team because it means more money for everyone involved.
    It also important to realize that not all businesses are created equal. Mixing in the companies that have given the industry a bad name and those that will continue that pattern, is unfair to the industry as a whole. It’s like saying coffee shops suck just because you hate the Starbucks experience or that the Real Estate industry is corrupt just because you went into foreclosure.
    The MLM world deserves it’s lumps and should learn from it’s mistakes, and I think as a whole we and it are a better entity here in 2010, because we have changed our ways and evolved with the times. Like anything business related enterprises there are risks and rewards, good and bad, and not every business (or company) is a good one. You have to do your homework, weigh your options, and decide if what you want to do is actually worth doing.

  35. Ok, I have not read all of these comments But this is my take on Network Marketing.
    Network Marketing is a Business in a Box. It is a Personal Development Course.
    Is Network Marketing or Multi-Level Marketing for everyone, No. Can it be for everyone? I Believe so.
    Confucius say 🙂 “Whether a man says he can or whether a man says he can’t, He is right”
    Yes, this is what many MLM companies base their ‘hype’ off of, ‘Belief’ and “Without Faith, Why do it?” ..Without faith, why do anything.
    The problem with network marketing is the people who join.
    Distributors sign up and run around like a chicken with their head cut off for the next 30-90 days, they don’t get the proper leadership or guidance for success..they ignorantly try and sign-up all of their friends and family, off of the basis, that because they are friends and family, they should just sign-up, with out truly understanding the benefits of being apart of a good organization.
    Network Marketing is a business in a box because when you sign up, if with the right company and team, your team will provide you with the necessary “How to Build” tools whether in a warm or cold market And Then on top of that, when you are experiencing problems, if one is equally humble and ambitious, you call your mentors AKA your upline and they will provide you guidance and a “pep talk” to keep you going and bring you to success.
    There is another saying “Your business can only grow as big as you do”
    Network Marketing is a Personal Development coarse. The right company doesn’t just teach you how to make money but how to grow as a contributing member to society in a positive way and how to teach others, your family, friends or anyone else interested, to do the same.
    Now not everyone wants to be a contributing member of society and not everyone has the foresight, commitment or determination to see things through and make them happen.
    The biggest problem in MLM is lack of knowledge and follow through.
    I am proud to say, I am apart of an incredible team of individuals, who stuck by my side for over 9 months until I finally got the hang of things, until I finally got the confidence to succeed. I now teach others how to expidite there growth and how to have residual monetary and relationship success for the rest of their life!
    After all this business is about relationships. The more Integrity based relationships one can build..the more success they will have.

  36. Dave:
    When you really look at MLM and compare it to any other business, it is a great business model for all involved.
    But, the reason I think MLM looks bad is because the flow of revenue is clearly stated that it goes directly to the person(s) that “recruited” you. If you were to just tell the person under you how they would get paid and “hire” him instead of “recruit” him, then there would be no ill feelings.
    The first thing I heard about MLM was how much the person above you will be making and that makes you feel like a slave, although employees are not much different.
    It’s a stigma that’s hard to break.

  37. You make a great point here Dave, and I think it’s the point any knowledgeable person tries to make when they are doing a MultiLevel Presentation and that is a Network Marketing business model is the exact same business model as any company across the globe.
    Like you said, a business without a sales force means they are making no income and therefore there is no company.

  38. Hey Dave –
    Very well written article!
    The way I see it is that Network Marketing / MLM / Direct Sales opportunities are exactly like affiliate marketing in principle (commissions paid out for sales referred by affiliates).
    The methods to which people decide to buy in the MLM model vs. affiliate model seem drastically different because what products are being sold.
    Reputable MLM companies generally take more care in how they design/formulate their products than traditional mass-market brands so that there’s really leverage in the quality of the products they offer, whereas affiliate marketing almost solely based on price points.
    One commonality in both models is the intangible reason end users decide to purchase something… for example, a great product review or article will increase the chance of an affiliate link being clicked on, while in network marketing the person who builds relationship better has the advantage of winning that sale or enrollment.
    All in all, it’s really just people’s actions that cause the stigma in the industry. Business structure alone is probably not enough to “judge” the business.

  39. Hi Dave,
    There is nothing wrong with MLM or Multi-Level Marketing. It is a good business actually. What’s wrong with it are the people scamming other people just to get their hard-earned profits. People that are sweet talkers promising others to be millionaires in just days. Of course, we know that is not possible. We just need to warn people to research on these MLMs religiously before submitting to them
    Thanks,
    Ann

  40. You make some good points. I don’t believe there is anything inherently wrong with Network Marketing as a business model. What I do believe is wrong within the industry is that in many instances it is set up in such a way that people are only being sponsored for their 90 day value. What I mean is that they are sponsored with the expectation that they will only last around 90 days. By then they will have paid an entry fee and probably paid for 2 or 3 auto ship orders as well as a quantity of sales aids. By this time, the new team member has realized that they are actually going to have to put as much effort into their new venture as they would a job. Except that at a job, they do not have that monthly expense known as auto ship. I see this as an industry wide leadership problem. However, in the minds of the public is shakes out as a problem with the business model. You asked the following question:
    [“Seems to me that there should be hybrid MLMs that enjoy the benefits of a highly motivated, distributed affiliate-only sales team while avoiding the trap of motivating your team to the wrong end goal: finding more team members rather than selling products. Is there?”]
    I think there may be one out there. Of course I don’t believe there will ever be a perfect company. But there is a company out there that has products that every living, breathing person must have, there is no traditional auto ship, so no issue with taking on an additional monthly expense, each distributor is also a consumer of the products but a consumer of the products is not required to be a distributor. The distributors only get paid if they are acquiring new customers for the company who actually buy the products. This should allow for ample motivation. The company is called MPB Today. It will take some time to see if we end up with the same leadership problem which is occurring in the Network Marketing industry but due to the universality of the products there is a good chance that it may work.

  41. Dave,
    I just came across this blog entry and the first question that did pop into my mind was whether or not you were an “MLM’er” so I’m glad you clarified that from the get-go and it does say a lot about the perception of MLM that you feel like you have to give that disclaimer. I am in an MLM but I feel like that is mostly our fault. Your post talked about a sales-driven model but most of us in MLM dig ourselves a deeper hole by have a tunnel vision on “recruit, recruit, recruit” without making much of an effort to move product independent of the internal consumption of the distributors. Any worthwhile MLM will teach people how to make a living off of selling their product first and then build leveraged income by teaching and training others to do the same.

  42. hey dave,
    great stuff.
    the traditional business model definitely has some flaws, but as we know there has been two huge changes to the industry. firstly GPT and direct sales companies came out of this stigma. you get paid higher commisions and there is much mroe focus on trianig your people. now there has beena new introduction of the hybrid model. bringing the two worlds togehter. the biggest problem with the whole industry is a deficiency in quality training. its a marketing and sales game adn its a business, so fi you dont have the desire to run your own business, make sales and understand marketing, then this busniess is not for you.
    matty patetrson.

  43. Your well-written article really got my attention. From my perspective, MLM has such a bad reputation for a variety of reasons.
    1. Scams and rip-offs come and go. Unfortunately, they get more press than the legitimate well-run companies. The whole industry gets a black eye.
    2. Many pay plans are stacked in favor of the heavy-hitter distributors. The part-timer has a hard time getting a decent check because of too many “hoops and gotchas” (my term for hard-to-meet requirements). These pay plans can look good on paper, but when the part-timers do not qualify for a chunk of the commissions, the company gets to keep more money. The greed of some companies is another black eye for the industry.
    3. Many people that get involved do not understand that MLM is a real business and it is not like buying a Lotto ticket and hoping for the best. Many people fall short of their goals because they did not give a good effort and/or they give up too soon. When that happens, people tend to blame the industry or the program rather than admit the truth. These people then unfairly bad-mouth MLM.
    MLM, as a business model, is okay for the most part. One of the big problems is a lack of understanding.

  44. This entire thread is one of the most balanced and informative discussions about a subject near and dear to me, that I’ve ever read.
    Let me add to the discussion what I see as the biggest reason why most new distributors fail in network marketing, and leave their companies with little to show for their effort. That is the syndrome summed up as an industry composed of “Those unable to sell pushing unwanted products on those unwilling to buy.”
    Or said another way, the biggest reason why new distributors fail is that they often go after the only “market” they know, their immediate friends and family. The chances that this market wants any of what they are selling is small, especially considering that there are usually less expensive alternatives available. If these prospects are not interested in building a business themselves, there is usually no good reason to buy.
    These old school MLM promotion methods simply don’t work well for most people, especially those with no understanding of marketing in the first place.
    A far better way to succeed at network marketing is to make the effort to understand online marketing, and create a “You” centered online business that has as one component a network marketing profit center.
    One big advantage is that it is then possible to attract truly qualified leads to your business, thus getting away from the friends and family scenario. There are other benefits too numerous to discuss here.
    The Internet did not exist for many years after the network marketing model evolved. In my opinion mastering or at least getting good at online marketing is really the primary way to succeed as a network marketer.
    I’ve written an entire free course on this subject, and I invite anyone with an interest in learning more to drop by and get a copy.

  45. Wow, this blog has heated up some real debate, some great points and some interesting perspectives. first of all, I have been And continue to be a networker and I make no apologies for that.
    Here are some of my observations.
    1. The corporate is a great place to hide if you are an unproductive person. its filled with them. A friend of mine working at bank recently said it was a “great time to get rid of the dead wood” she was referring to those indeviduals who had been at the company a long time, however were more of a hinderance than an asset to the company. In the traditional model , Whether you are productive or not, you will get paid. Its an over head for the company which they pass on to their Clients. When times are good , there’s no problem, When times get tough.. the culling begins. And its ruthless . ( my friend found her self redundant a month later).
    so on both ends we have an unfulfilling marriage taking shape. We have overhead – which is usually the reason for the failure of 95% of the businesses that go under. We have insecurity – knowing that unless you are deemed useful, you are likely to be made redundant in the lean times. and the rule of self interest applies – why share information with others – why make others as useful as you . the company sees you all as a team – the staff see each other as competition.
    Network marketing is a strange and wonderful beast.
    Network marketing is fair . every one starts at the bottom, Nobody starts at the top because of their reputation , colour,sex, or past exploits. You start at the bottom. you have the same payplan as everyone else. what determines you’re success is your skill and your work ethic. The great thing i love about network marketing is that it offers no appology and no complaint. you are paid in direct proportion to the value that you have brought to the organisation. Simple. No salary, no favour. you either learn the skills, like any other profession requires or you don’t get paid. lawyers , doctors dentists accountants.. they all have to go through a learning period before they can command the extortionate rates some of them charge.. Why … Because they bring that value and people will pay for their expertise. A skilled networker, can go to a company and generate millions and millions of $ in revenue for that company because of their activity and training. Now if you would pay a lawyer for his services, a doctor or a dentist Why would you not pay a professional networker who has generated millions of Dollars for your company in accordance with an agreed commission plan.
    Secondly, this is a business. the Company has agreements with the distributorships, which are independent business units. They have the autonomy to conduct their business in any way they see fit as long as its with in rules ( like any other business). The networking company is run like any other business and they make a calculated decision when formulating their pay plans. If they get it wrong they Don’t last… thats normal for any business.
    The professional networker can build a business and has the right to leave it to his offspring in a will. just like any other business owner. The key problem is the fact that some people getting into networking, do not respect the fact that it is a profession and must be treated with respect other wise. they Will fail – just like a plumber wold fail At running a bakery unless he were retrained.
    just because it cost minimal amounts to get in, does not mean you’ll make any money any more than buying a guitar makes you jimmy hendrix.
    So in closing, I Would say that, this is a profession not a hobby. Those getting into Networking had better take the time to learn the skills or they will fail. if they will not do so, then its best they stay in the traditional system. Lest they fail and create more bad press for an excellent business model.

  46. Wow, this blog has heated up some real debate, some great points and some interesting perspectives. first of all, I have been and continue to be a networker and I make no apologies for that.
    Here are some of my observations.
    1. The corporate is a great place to hide if you are an unproductive person. its filled with them. A friend of mine working at bank recently said it was a “great time to get rid of the dead wood” she was referring to those individuals who had been at the company a long time, however were more of a hindrance than an asset to the company. In the traditional model , Whether you are productive or not, you will get paid. It’s an over head for the company which they pass on to their Clients. When times are good , there’s no problem, When times get tough.. the culling begins. And its ruthless. (my friend found herself redundant a month later).
    So on both ends we have an unfulfilling marriage taking shape. We have overhead – which is usually the reason for the failure of 95% of the businesses that go under. We have insecurity – knowing that unless you are deemed useful, you are likely to be made redundant in the lean times. and the rule of self interest applies – why share information with others – why make others as useful as you . the company sees you all as a team – the staff see each other as competition. Not so in networking , infact its the opposite. In order for a person to succeed, they must help others to Succeed. I must share information, they must train and they must nurture talent. There is no competition. In that sense. The people at the bottom can work in the knowledge that there is nothing in the structure of the payplan that prevents them from earning more than the people above them who got in earlier.
    Network marketing is a strange and wonderful beast.
    Network marketing is fair .
    Everyone starts at the bottom, Nobody starts at the top because of their reputation , colour,sex, or past exploits. You start at the bottom. You have the same pay-plan as everyone else. What determine you’re success is your skill and your work ethic. The great thing i love about network marketing is that it offers no apology and no complaint. You are paid in direct proportion to the value that you have brought to the organisation. Simple. Many professional networker won’t look at a company until its at least five to ten years old.
    No salary, no favours. you either learn the skills, like any other profession requires or you don’t get paid. lawyers , doctors dentists accountants.. they all have to go through a learning period before they can command the extortionate rates some of them charge.. Why … Because they bring that value and people will pay for their expertise. A skilled networker, can go to a company and generate millions and millions of $ in revenue for that company because of their activity and training. Now if you would pay a lawyer for his services, a doctor or a dentist , why would you not pay a professional networker who has generated millions of Dollars for your company in accordance with an agreed commission plan.
    Secondly, this is a business. the company has agreements with the distributorships, which are independent business units. They have the autonomy to conduct their business in any way they see fit as long as its within rules ( like any other business). The networking company is run like any other business and they make a calculated decision when formulating their pay plans. If they get it wrong they don’t last… that’s normal for any business.
    The professional networker can build a business and has the right to leave it to his offspring in a will. just like any other business owner. The key problem is the fact that some people getting into networking, do not respect the fact that it is a profession and must be treated with respect otherwise. they will fail – just like a plumber would fail at running a bakery unless he were trained.
    Because it cost minimal amounts to get in, does not mean you’ll get paid like a pro any more than more than buying a guitar makes you Rock star
    So in closing, I Would say that, this is a profession not a hobby. Those getting into networking have the opportunity but not the right to make what ever income they desire, but they had better take the time to learn the skills required or they will fail.
    if they will not discipline themselves to master the skills of the business, then its best they stay in the traditional system.

  47. I agree that some MLM companies are sketchy,and full of false promises. However, the industry itself is not bad. Most of the sob stories about people who invested their money and walked away empty handed, experienced this because they expected instant results and weren’t willing to put in actual work. It takes a lot of work to brand yourself online, get a significant, content rich blog built, and to market yourself effectively. But the market really is huge and the opportunity is there to make a lot of money…

  48. I realize this post is old, but I wanted to throw this question out there…
    If MLM is a bad business model, then why do men like Bill Gates, John Maxwell, Robert Kiyosake, Warren Buffet, and Donald Trump support them as well as invest in them? Thanks.

  49. MLM is a great model but it is flawed due to the training a new person receives. Typically a person is taught to work their “warm market” (Friends and Family) Very few people know what to do after that. The key is having ongoing training to show how to develop leads outside of the friends and family list and easily convert them into customers and distributors. How people are trained is exactly how the person who signed them up is trained. So if the model gets flawed…the same flawed process is repeated over and over.

  50. I am a traditional business owner, have been employed in corporate America, and participated in “network marketing” or “multi level marketing”. What I’ve come to realize as undeniable truth is that any successful company impletments multi level compensation and position, and relies on networking to gain new customers. Who wants to pay high marketing costs to gain more market penetration when a warm contact or referral has such a significantly higher close ratio? What company exists that doesn’t have a top earner, middle earners, and low level earners? How many companies have Presidents, Senior Vice Presidents, managers who manage sub groups of employees? Seriously, it is so ridiculous that people get so bent out of shape about network marketing! They implement one of the oldest and most successful models to gain new customers and many of the companies offer hyper consummable products that people are already budgeted for and no behavior change is required to enjoy the products. Are there bad multi level companies out there who deceive and have terrible products, of course! Are there terrible corporations in traditional business that mistreat consumers, lie, deceive, and ultimately fail, of course. Wake up people, do what you are good at, what you enjoy, and what will ultimately provide financial stability for your family.

  51. John,
    With due respect, for someone considered to be an expert in business issues and providing thoughts on what’s wrong with the MLM business model but NEVER has been involved with any MLM company, honestly has no tangible insight on how the model works. You are ONLY providing theory based upon the structure and not experience. Since there are approximately 5000 MLM companies, you really need to do some real research by participating on a personal level, therefore you can have something to offer as a solution. What I can suggest is you need to take a back seat and discuss topics you have experience in or decide to do some homework to see which MLM company offers you the best solution to an existing problem. Until then, your opinion is as relevant as my next door neighbor who heard of that ‘thing’ and who’s uncles uncle was in one of those and tried to get me into it.

  52. Miguel Ortiz: I’ve looked, but my research is failing. Which MLMs have Gates, Buffet, et. al backed, please?
    thanks,
    Dan

  53. While I do understand your point here “here are two core differences I see between a Fortune 500 sales team and the folks in my neighborhood who are selling an MLM product, though: first, traditional corporations don’t have an ever-growing org chart. Imagine if every few weeks another level of management was added to Kodak (NYSE: EK) or Starbucks (NASDAQ:SBUX). It’d produce chaos and, more importantly, would continually dilute the accountability chain. If sales drop, who is actually responsible when the sales team could be arbitrarily wide and deep?”
    A better comparison to the network marketing industry is the franchising model. A McDonald’s owner, for example, might own multiple McDonald’s franchises, so goes a network marketing company.
    “The second difference, and this is the big one I think, is that in a traditional sales group, your incentive for bringing someone else on the team is a one-time bonus, not a percentage of their sales for a specified — or endless — period of time.”
    Not so in the insurance or financial services industries, or the relationship between a real estate broker and realtor. All of those industries pay out overrides for ongoing deals and/or commissions.
    Jamie Gaymon

  54. It’s fascinating to read all the different opinions on what’s wrong with MLM and what makes it work. Let me throw in my thoughts. When the only effective method of moving products requires salesmanship (usually described as “sharing the products”) 95% of the population are eliminated from your opportunity. Most people can’t or wont “sell”. You have to have a method of moving the products (or services) to market that does not require “selling”. Why is this so vital? If products do not move, nobody gets paid. When you have a simple method of moving products without persuading sympathetic friends and family to part with their money, you have the makings of the best recruitment tool ever; your own retail and earnings story. What better recruitment tool than to be able to tell (and prove to) people that you personally earned £400 in your first month working part-time around your day job. If the retail side of the business works the networking will work.

  55. We’ve all been taught that if something is too good to be true then it must be. Most people cannot open their minds enough to ignore that “rule.”
    A legitimate MLM is structured no differently than any other mainstream company out there. But since the vast majorities of us are consumers, we don’t know what’s happening on the back end of our supermarkets, pharmacies, natural food stores, etc. The sales people are back there, hawking their stuff, hoping to get a big commission if they can convince the owner/manager/whoever to buy a big bundle of their stuff. The salesperson’s manager is hoping the same, doing all he/she can to motivate that salesperson. The sales manager’s boss is doing the same, right up the line to the CEO at the top of the corporate pyramid.
    The institution of higher learning I work for is a pyramid…every company is a pyramid, folks. Some are good, some are bad. Some are legitimate, some are not. Overrides, residuals, bonuses, etc. vary from industry to industry. Just because you don’t know about it doesn’t mean it’s not happening. Some of the wealthiest people in the world are such because of the insurance business. There’s an article for you: “Insurance – Scummier than MLM?”

  56. What if once you joined you didn’t have to sell any products, but rather you paid your bills through the company? Wouldn’t that solve the problem of “not focusing on the revenue-making sales and only focusing on ‘getting people in'”? I think so. You pay bills regardless. It’s as simple as shifting yourself over as a customer.
    Are we allowed to leave our e-mail address here? If so, pcunagin@trinity.edu if you’d like to continue the discussion (assuming we aren’t notified of comments once we leave the blog?).

  57. I am an Amway IBO, IBO means Independent Business Owner, with some stress on the independent part. and by that I mean I set my own targets and pursue my own goals, if I want to make $5000 USD a month, then I will have to work for it, and its up to me where I focus, whether it be sign ups or sales. If I were you, I wouldn’t knock amway until i tried it, as the old adage goes; nothing tried nothing done. There are alot of people on the internet involved in this theoretical debate over Amway/MLM but the truth is, there are people in these businesses who actually make money, what I would like to see, is for the people who bash amway to show me a way where I can logically earn $ 1000 USD a month, offering criticism without offering a solution doesn’t help anybody, if the intent of your article was to educate and inform, you should have included suggestions as to where people can make money on the side while maintaing a full time job. I am still working in a full time job, and yes I also work hard as an IBO, but guess what… I’m getting paid to do it.

  58. Hello, I haven’t read the entire article and I will but while I have this on my mind, I thought I would share it and ask for your input. I am a physician/surgeon of about thirty years. I get paid only if I see patients. They come to me for care and I recommend treatment which cost them or the insurance company money. I get paid about 60% less than I did in 1983 thanks to managed care and greedy corporate insurance companies – Long Story. I also teach health classes and recommend Young Living Essential Oils that are therapeutic in nature and actually cure as well as treat symptoms. A much better approach to healthcare than prescribing toxic medications. Lives are changed for the better. I prefer this kind of medical care because a changed life and a smile is worth the work put into it. Young Living is a MLM company. You pay for a product retail or wholesale and, if you share with others, you can get a “thank you” from the company with a bonus check every time the person that you shared with ordered. It can build on itself as I am sure you are aware. A third generation MLM if you will – perhaps a profit sharing plan?? Anyway, you identified MLM and “pyramid” in the same breath which leaves a negative connotation from the old Amway days. Personally I much prefer this business model over traditional retail models (when was the last time Sam’s Club sent you even a thank you card for referring a customer to them much less a bonus check!)but I don’t see you giving the same pyramid designation to corporate America – and that is just how that model is designed. You have a top of the pyramid CEO with increasing levels of less important worker bees who do the bidding of the level above it and depending on the levels below it ending at the feet of the top or the pyramid. How it significantly differs is that the newer MLMs are a family depending on each other but when one member gets sick and can’t work, the family members under that person are still supporting a pay check for the sick member – the check keeps coming in. The sick member never gets fired, or harassed. A good friend of ours lost her husband, She had four children. She grieved for a year and did not work her Young Living Business. She finally went back to building her business a year later but never missed a monthly check. I don’t see that happening in the corporate world, do you? why do you give MLMs a designation of “pyramid” and not the corporate world models?

  59. Most of them join MLM just to make quick money. It is understandable and a pity that many fail. Maybe with proper Coaching and Training, they may be successful?

  60. This post by Dr. Tom deserves a re-read:
    I have this on my mind, I thought I would share it and ask for your input. I am a physician/surgeon of about thirty years. I get paid only if I see patients. They come to me for care and I recommend treatment which cost them or the insurance company money. I get paid about 60% less than I did in 1983 thanks to managed care and greedy corporate insurance companies – Long Story.
    I also teach health classes and recommend Young Living Essential Oils that are therapeutic in nature and actually cure as well as treat symptoms. A much better approach to healthcare than prescribing toxic medications. Lives are changed for the better. I prefer this kind of medical care because a changed life and a smile is worth the work put into it.
    Young Living is a MLM company. You pay for a product retail or wholesale and, if you share with others, you can get a “thank you” from the company with a bonus check every time the person that you shared with ordered. It can build on itself as I am sure you are aware. A third generation MLM if you will – perhaps a profit sharing plan??
    Anyway, you identified MLM and “pyramid” in the same breath which leaves a negative connotation from the old Amway days. Personally I much prefer this business model over traditional retail models (when was the last time Sam’s Club sent you even a thank you card for referring a customer to them much less a bonus check!) but I don’t see you giving the same pyramid designation to corporate America – and that is just how that model is designed. You have a top of the pyramid CEO with increasing levels of less important worker bees who do the bidding of the level above it and depending on the levels below it ending at the feet of the top or the pyramid.
    How it significantly differs is that the newer MLMs are a family depending on each other but when one member gets sick and can’t work, the family members under that person are still supporting a pay check for the sick member – the check keeps coming in. The sick member never gets fired, or harassed.
    A good friend of ours lost her husband, She had four children. She grieved for a year and did not work her Young Living Business. She finally went back to building her business a year later but never missed a monthly check. I don’t see that happening in the corporate world, do you?
    Why do you give MLMs a designation of “pyramid” and not the corporate world models?

  61. This is a very contentious topic for many people. MLM’s have in fact had a somewhat bad reputation because of many of the hiring and frontloading investments which leaves the new individual with product they don’t have a clue about getting sold, and big profits for the enroller. This is why I’m not involved in MLM’s

    Also, Dave, the author pointed out, just because there is a multi-level commission structure, many sales organizations are this way, this doesn’t mean it is an illegal company.

    He hits the nail on the head. on-going sales incentive are important both in building success in the sales organization but also for a thriving business. Many mlm’s are built on high priced product that don’t bring long term value so when the excitement dwindles, so do the sales.

    However, just because the company has a tiered commission does not make them a pyramid as David Wobs stated.

    – Jon

  62. Does anybody knows how commissionment works in serious companies like AVON, Mary Kay, AMWAY? For instance, on a $1 basis, 0,30 goes to sellers, 0,10 managers, 0,05 directors and so on…

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