Network Marketing Truths

Network Marketing, Multi-Level Marketing, Direct Selling. These names all describe the same system, which we will just call "MLM." 

So what is an MLM? Start with a normal business. A company has some stuff to sell. Before the existence of media outlets, such as TV, radio, billboards, and so on, the company would pay a bunch of sales reps (called consultants, advisors, distributors, members, associates...) to sell the product to people. That's a typical sales scenario. Tupperware was there long before MLM. You, as a salesperson, would buy stuff from the company at wholesale prices, sell it locally at retail, and pocket the profits. There was no middleman, so it was "direct selling." As a traveling salesperson, you operated with low overhead, with no storefront to worry about.

However, paying a crowd of sales reps creates a problem for the company, in that not all sales reps are equal. Some are good sellers, others are not. The company has to manage all the different reps, and it is complicated. Then someone came up with the idea: Why not let the reps manage other reps? Just reward the rep who recruited good reps by giving them a share of the profits. The more the "lower" reps (the recruitees) sell, the more the "higher" rep (the recruiter) makes in bonus. So the recruiter has the incentive to recruit good people, which benefits both himself and the company. Thus was born "multi-level marketing", or MLM. The recruiter became known as the "upline", and the recruitee became the "downline."

Later, when "MLM" became associated with some pyramid schemes disguised as MLMs, the term "Network Marketing" was used.

Most MLMs are done wrong, pitched as a get-rich-quick scheme, and quickly collapse, leaving their reps up the creek without a paddle. Furthermore, it further confuses the issue that many scams disguise themselves as MLMs. Studies have shown that in the 30 largest MLMs, OVER 99% of participants actually posted a LOSS!

In view of the risks, here are a few things you need to be aware of before you join an MLM.

1. Marketing = Sales

To succeed in multi-level marketing, you have to SELL things, and sell a LOT of things. Marketing means sales. If you already have the gift of gab, and can convince people to buy things from you, congratulations; you may have a chance. If you can't sell, and are not a people person, then you have a long way to go before you can succeed in an MLM, and you may want to consider another path.

And if you were told you don't need to sell anything, just recruit, you are in a "pyramid scheme," not an MLM.

One of the big controversies with the MLM system is the cost of marketing. The company is passing on the cost of marketing AND some of the profit onto the reps so that the reps can do advertising. But does the company actually pass ENOUGH profit for the reps to do so? You can probably recruit the first few customers or reps for your team for little or no cost from your circle of friends and family, but most cannot expand their clients or team beyond that without expending significant money on marketing. This leads to the charge by some critics of MLM that most MLM companies are only out there to exploit this free marketing and recruiting from a rep's initial circle. This is not the complete truth; but it's not far from the truth.

If you cannot sell the product to a stranger, consider whether you can sell the product at all. Selling to friends and family does NOT count as selling. Most friends and family will buy something from you because you asked, but that will cost you somehow, just not in $$$.

Many prominent studies show that vast majority of MLM reps (> 99%!) actually LOSE money, as they vastly underestimate the cost of marketing, and vastly overestimate the size of the potential market or prospect pool for the product they are trying to sell.

EXAMPLE: Penn & Teller's cable show BULLS***! Season 8 Episode 5, titled "Easy Money", is a condemnation of MLM. Take the ManCave rep for example. He is expected to host the party, provide all the booze and meat and snacks and whatnot. Even with the high margins on the few items he does sell, he barely breaks even on that sales event. When you throw in the time taken, prep time, and clean-up, he probably would be better off working at McDonalds. Another guy spends 12 hours a day promoting this nutritional drink for 9 months, and actually LOSES money, instead of making any. And these are typical results.

2. "Niche Product" Does NOT Mean Sales

Just because the product is "cool" or "unique" (i.e. niche) does NOT mean you can sell it. You may not have the right mix of potential customers in your area, or you simply may not have access to that pool of prospects. You better figure this out BEFORE you join and plunk down money for the intro kit.

Again, consider: how you would access that pool of prospects? How much marketing money and time would you have to spend? What do you expect the conversion rate to be (that is, how many pitches will end up making a sale)? Will you make enough on the sales to justify the marketing dollars spent, and make a profit?

Most product literature always makes the product sound like the Second Coming. If it's a nutritional supplement, it will cure every ailment under the sun, from AIDS to gout (just kidding). If it's cosmetics, it'll make you 20-30 years younger.

But think about a product like that. Do people really NEED that, or just WANT that?

This is the danger of those miracle juice / pill MLMs. Those products are actually luxury items. People WANT the miracle product, but they don't NEED it. You have to convince people that they need this product for their well-being. In a depressed economy, the market for luxury items dries up, yet it is during these times that recruiting hits fever pitch, probably because candidates are more vulnerable, more susceptible to recruiting speeches about having a "secondary source of income."

Also, consider the product type. Does the product get used up? Or just used? Cosmetics, nutritional supplements, and so on are consumed, so people who like the product will always order more. On the other hand, some products simply do not lend themselves to repeat business. How many sex toys or personal alarms would someone need?

EXAMPLE: I had a friend who was recruited into selling Quorum personal security items, like bike locks and personal sirens. Selling these items is a dead end, as each person only needs one, so he has to constantly look for new clients. There is virtually no repeat business. It is much harder work than he realized.

Also, keep in mind that the business opportunity itself is NOT the product. If anyone is selling the opportunity as the product, it's a scam. They are selling membership, in order to sell ... more membership.

The product makes all the difference. Calculate the market for the product, and discount any hyperbole or sales projections from your upline or the company. They are always too optimistic. THEN calculate the cost to reach such a market in your area.

3. Marketing > Network

The marketing is more important than the network. In the term "network marketing", the primary word is MARKETING. "Network" is an adjective, modifying "marketing", and thus is secondary. The primary purpose of network marketing is to market a product, and ultimately, to sell a product. The secondary purpose of network marketing is to establish a network of reps to form a team in order to expand sales.

It is easy for those pitching the opportunity to you to make the wrong emphasis, to portray the easy life: "Just sit there and let your team do the sales, and you rake in the $$$." However, this picture is a lie. Finding the right people to recruit is not that simple. It takes more than passion to sell, and selling large amounts isn't easy. Most of these bonuses are less than 10%. If your downline sells $1000 worth of merchandise, you may pocket up to $100. However, if you sell the same amount of merchandise yourself, you can probably pocket quite a bit more, as the margin on MLM products is typically 100% (i.e. $500 profit on $1000 sales).

Legitimate MLMs, in order to reduce their uplines' reliance on sales commissions and encourage the upline to actually sell something, limit the level of downline sharing. They do this by using a reducing scale (the further the downline, the lesser the share) or imposing a cutoff (no sharing after the 5th level, for example). If you see an MLM that promises to share "infinite levels," or allows you to "stack" (that is, buy multiple positions), it's very likely a scam, because it emphasizes recruiting over actual selling.

If anyone who's trying to recruit you emphasizes recruiting over marketing a product, that recruiter is doing it WRONG, unless the company itself also has the same emphasis on networking and recruiting over marketing, in which case the whole company is probably a scam.  

EXAMPLE: TVI Express, whose FAQ specifically states "You don't need to sell any products," was declared a pyramid scheme on three continents. It has no sales, and was all recruitment.

The American Federal Trade Commission (FTC), which oversees consumer affairs in the United States, has a "Koscot Test"; it requires any MLM in the US to base its bonus at least 70% on actual sales (by a downline), and less than 30% based on recruitment (of the downline). An MLM not compliant with this criterion risks being ruled a pyramid scheme and shut down.

The emphasis in a sales network must always be on sales, not recruiting. Anyone switching this emphasis is either doing their job wrong, or scamming.

4. Upline = Boss

Your upline is your boss in this business, and your success depends on finding the right one. He (or she) should teach you what you need to do to succeed. To that end, he should show you, by example, how it's done. Eventually you will need to pass on the knowledge to those you recruit yourself.

If he is not teaching you, not arranging team meetings where techniques can be shared, doing more recruiting than selling, or doing other things that make you uncomfortable, you're either with the wrong upline, or in the wrong business.

Your upline or boss should also be ethical. All legitimate MLMs have a "code of ethics" which all reps must agree to upon joining, where any deviation may result in investigation and even dismissal. If your boss is using logical fallacies, unverified claims, or any unethical behavior to score a sale or obtain a recruit, you should run away as fast as possible. Such behavior may be endemic in the company, or it could just be your upline, but in either case, beware.

A good upline will allow you to shadow him for a few days to see how he does business, and is willing to answer questions on how long has he been at this, how much has he made from sales, and so on. Honesty is important. If you're being recruited by someone who's only been at it for three weeks and has yet to make a sale, then you're dealing with a scammer.

The ethical way of recruiting is to only recruit an existing customer. If someone presents the business immediately out of the blue as a "money making opportunity," and barely mentions the product, he's doing it wrong (see #3 above), and is not behaving ethically.

Your upline should be a mentor out to teach and inspire sales, and must be ethical and honest. Treat him like a boss. If the boss lies and cheats, leave.

5. Are You an "Easy Mark"?

MLM reps will often market towards people who are desperate for more income, don't have enough savings, know nothing about owning a business or franchise, know only how to work as an employee (that is, by following orders), know nothing about selling, and want quick money with minimal work. These people will jump at a "money making opportunity" and will be easy to recruit, and might even score a few sales by pushing the "intro kit".

What aggressively-recruiting reps don't realize is that these "easy marks" would make very bad sales reps in general, and MLM reps in particular, because they can't sell. They sell the wrong things (recruitment instead of the product), at the wrong time or in the wrong situation, to the wrong people, and generally let their desperation show, driving away potential customers.

Furthermore, a "team" of easy marks often devolves into a personality cult, where the upline becomes a cult leader indoctrinating all downlines, and the desperate are eager to embrace a cult, because they need to follow a leader, having a E-quadrant ("Employee") personality (according to Robert Kiyosaki in the Cashflow Quadrant). This often leads to problems if the leader is not completely ethical. Like attracts like: these desperate people simply recruit more desperate people, none of whom actually know how to sell, and the team and its leader just go on recruiting more desperate people. This degeneration essentially turns an MLM into a pyramid scheme, with little if any sales. 

During such a spiral, some of these leaders may order their downlines to ignore all criticism, all "negativity." No doubts concerning the MLM and its leader are allowed to exist.

"Easy marks" are also vulnerable to dogma and logical fallacies presented as facts during their recruitment meeting and subsequent meetings. Then, such folks, when they wake up, blame their upline, their MLM, and the entire MLM industry for their failures, and become poison pills to the whole MLM industry.  

If you are an "easy mark", do NOT join. People will simply take advantage of you. Do NOT join MLM if you are desperate for another source of income, looking to get rich quickly, and so on. There's nothing wrong with having goals, but your vulnerability will show, and unless you are lucky you will be taken advantage of.

6. Beware Unscrupulous Leaders

MLM is "remote" work. Any official training, if it exists at all, is done remotely via VHS tape, DVD, and Internet streaming video, or if someone has time, video conference or webcam. There are no ethics police involved day-to-day to make sure all the reps are behaving ethically. Although legitimate MLM companies have a code of ethics which all reps must agree to upon joining, enforcement is haphazard. In a more traditional workplace, company supervisors will keep eyes on the reps, with periodic reports and a mechanism for customers to complain to higher-ups. In an MLM you have to complain straight to the company's ethics panel or customer service.

In a regular company, to be employed, you have to pass an interview and probably a background check, and even a second interview. To work in an MLM, you pretty much just buy the intro kit, fill out an application, and that's it. There is no initial culling process in a MLM to weed out unscrupulous recruits. Unscrupulous recruits then become unscrupulous leaders by recruiting people.

Most MLM reps will not outright lie, but many will equivocate, perhaps unconsciously. They emphasize the easy-to-sell parts, ideas like "Sit there and let the team sell things while you reap the profits", and simply neglect to mention the parts about hard work selling stuff yourself.

The truly nasty ones will recruit you with lies, get you to buy the intro kit at inflated prices, and then leave you to fend for yourself, and convince you it's YOUR FAULT that you can't sell anything, because selling is so obvious, and you should have dragged all your friends, neighbors, and family into this already (so he can make his sales bonuses).

A "team" without oversight often devolves into a personality cult, where the upline becomes a cult leader indoctrinating all downlines, and the desperate are often eager to follow a leader who may not be completely ethical. This devolution can turn a legitimate MLM into an illegal pyramid scheme that preys upon new recruits.

One more problem with the lack of oversight is the lack of a way for a company to regulate or do anything about what the reps are telling people about the company. Legitimate companies should limit their reps to only pre-approved marketing materials. Not-quite-legitimate companies will allow their reps to say almost anything.

This lack of oversight has also led a huge number of scams to disguise themselves as MLMs, by adopting the same buzzwords (matrix, payout, upline, teamwork), emphasizing recruiting, and barely mentioning selling anything. You "work hard" by recruiting a lot of people, and ignore selling. This also leads to a secondary market of "marketing coaches" who try to teach people how to recruit. Many of these coaches are also MLM members, making their tactics very shady. (And a scammer would not care about the company image at all.)

David Bayliss

Lifetime Financial Planner

david.bayliss@genistarfinancial.co.uk