| The dismal science|
|Competing Theme Parks|
|Rides And Rollercoasters|
| Style over substance|
In mainstream terms, it's most similar to franchising, where a business operator buys into a specific brand and in turn receives support from the company that owns the brand. However, MLM is different in a few crucial ways. First, a standard franchising model is protected—franchisees buy into a specific segment of the market with the understanding that they will not be directly competing with other franchisees within the same brand; MLM offers no such protection against market saturation. Second, a normal franchise model is fairly flat—all franchisees deal directly with the corporate brand-holder for supplies, point-of-sale materials, and the like.
MLM works differently. MLM developed in a largely rural environment with limited supply-lines, so the individual stakeholders (usually called "distributors") have stakeholders that they report to (their upline), and in turn are often responsible for recruiting others (their downline); it's all weirdly feudal, actually. As a general rule, the primary path to solvency is through extensive downline recruiting, with the upline receiving a cut of the downlines' profits—as opposed to most businesses, where the path to solvency (or even profit!) is to sell sufficient product to consumers. There is no reason this can't work, given a strictly regulated recruiting system fundamentally similar to that used by franchises. But most MLM systems don't limit recruitment; without such regulation, many MLM organizations operate as little more than pyramid schemes that continue to exist largely because people feel embarrassed to report them.
The structure (more or less)
Essentially, the idea is that any given upline collects a cut of the sales from every member of their downline. As a result, it's very much in the interest of the upline to make sure that the downline recruits as heavily as possible, with as deep a pyramid beneath them as possible.
The problem is that in a recruiting-driven MLM, there is no upper bound save the market population itself, and the bottom rung of distributors makes no money at all except from sales. This ensures a fierce scramble among distributors to sign up their own downline (Amway in particular is notoriously aggressive about this) so they can move up the ladder, often to the exclusion of product sales, and also ensuring market saturation—most distributors wind up selling only to themselves and perhaps a few friends, with only the most driven (and often least principled) making a living this way. In this regard, the typical MLM is, as said above, not much different from a pyramid scheme.
It is usually the case, also, that a "new" distributor is required to buy a minimum amount of company product, ostensibly to sell it at retail. However, the only support materials usually provided by their recruiter(s) are ones that promote the signing on of more new distributors. As a result, many a person out there has a closet full of Mary Kay cosmetics that they don't need, and can't sell. A simple perusal of eBay is evidence of what becomes of that several hundred dollar investment made in order to achieve new wealth and prosperity in ten hours a week from home.
But what is the market here?
That's very hard to say. When possible, most people vastly prefer the retail experience—it's more convenient and does not open people up to accusations of conning their friends with substandard products or high prices. Internet and catalog shopping and reliable shipping services have long since obviated the need for a tightly-knit distributor network serving remote areas; in urban areas, where retail shopping has always been fairly available, MLMs were never important to begin with.
A few MLMs, such as Mary Kay Cosmetics, being more product driven (if not exactly free from criticism ), do offer added value to customers in the form of consulting services related to the product.
The promise and the reality
The promise made by many MLMs is that a participant will be able to make lots of money in their spare time. The reality as shown by these reliable papers is quite different:
- The Times: "The Government investigation claims to have revealed that just 10% of Amway's agents in Britain make any profit, with less than one in ten selling a single item of the group's products."
- Scheibeler, a high level "Emerald" Amway member: "UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] population of 33,000, 'only about 90 made sufficient incomes to cover the costs of actively building their business.' That's a 99.7 percent loss rate for investors."
- Newsweek: based on Mona Vie's own 2007 income disclosure statement "fewer than 1 percent qualified for commissions and of those, only 10 percent made more than $100 a week."
- Business Students Focus on Ethics: "In the USA, the average annual income from MLM for 90% MLM members is no more than US $5,000, which is far from being a sufficient means of making a living (San Lian Life Weekly 1998)"
- USA Today has had several articles:
- "While earning potential varies by company and sales ability, DSA says the median annual income for those in direct sales is $2,400."
- In an October 15, 2010 article, it was stated that documents of a MLM called Fortune reveal that 30 percent of its representatives make no money and that 54 percent of the remaining 70 percent only make $93 a month. The article also states Fortune is under investigation by the Attorneys General of Texas, Kentucky, North Dakota, and North Carolina with Missouri, South Carolina, Illinois, and Florida following up complaints against the company. In 2013, the FTC's court-appointed receiver determined that Fortune was nothing but an illegal recruitment MLM and that least 88 % of the members did not even recoup their enrollment fees and that more then 98% had lost more money then they ever made. Refund checks mailed out totaled over $3.7 million.
- A February 10, 2011 article stated "It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches."
- "Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing": "You'd be hard-pressed to find anyone making over $1.50 an hour, (t)he primary product is opportunity. The strongest, most powerful motivational force today is false hope."
- Multi-level marketing at the Skeptic's Dictionary
- Multi-level marketing
- What's wrong with multi-level marketing? Web 1.0 at its finest. Seriously, there's something so beautiful about that web design that it makes me want to cry.
- How Utah Became a Bizarre, Blissful Epicenter for Get-Rich-Quick Schemes
- Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13–19.
- FTC (Jan 28, 2013) "FTC Action Leads Court to Halt Alleged Pyramid Scheme"
- FTC (May 13, 2014) "FTC Settlement Bans Pyramid Scheme Operators From Multi-Level Marketing"
- FTC (Nov 8, 2016) "FTC Returns More Than $3.7 Million to People Harmed by Pyramid Scheme"