Multi-Level Marketing Companies
or MLM’s rightfully get a fair bit of criticism in the news, across social media, and even in social groups that are aware of
their less than upstanding business tactics. However, despite this almost universal bad
reputation, Multi Level Marketing Companies have grown in size year on year, bringing in
an ever-larger pool of unsuspecting victims. This reality flies in the face of what the
critics often say about such schemes, which is that they are fundamentally unstable pyramid
schemes that are mathematically guaranteed fail. If that was the case, then
this now decades old industry filled with decades old companies is sure taking
a long time to live out the apparent certainty. So were the critics wrong about this one? Well
as regular viewers of the channel may know, I hate video’s that drag out the
a simple question unnecessarily. So the short answer is no, they are not
wrong about the industry as a whole, but they do get a lot wrong about
their day to day operations, and this public misunderstanding may actually be key to
explaining how this industry keeps on growing. So it’s time to learn how money
works by defending the indefensible, a new series that I hope to launch,
depending on how well this video goes. So let’s start with probably the
biggest criticism of these companies, and that is that almost everybody that gets
involved with them ends up loosing money. Critics will throw up charts
like this that show that only a tiny percentage of participants in
the schemes make any money at all, or perhaps they will show you income disclosure
statements which again show that only a few dozen members from each one of these companies make the
6-figure income new participants are promised. This is all fair enough and in fact MLM
companies operating in the united states are required by law to produce these documents after a legal ruling mandated that they be
more transparent with income expectations. Even still, these figures alone
might not tell the entire story. You see most people that join these schemes don’t do so with the expectation of
making a business out of them. Now the companies themselves will normally
say that these people are only interested in joining so that they can purchase the product for
a discounted price which is available to members. Take something like this weight
loss shake from Herbalife, which is one of the largest MLM’s operating today. The public retail price is admittedly a fair bit higher than the wholesale price that
they make available to their members. So for someone that will be consuming
these products frequently it would make financial sense to just pay the membership
upfront and save the money in the long run. This is no different from say, a Costco
membership, and if anything Costco tends to have a very positive public image. So perhaps these
companies are getting a bit of a bad rap here. Or at least that would be the case if it were the
whole story. In reality, a lot of people sign up because they are pressured into it by an aunty,
long lost friend or third cousin twice removed. Sometimes the best way to stop these
people from blowing up your phone about their new amazing business opportunity is just
to acquiesce and buy their damn sign up pack. Sure it will probably just end up collecting
dust in your garage, but at least you don’t have to deal with it anymore. Now in this
situation, you have become a statistic, you are part of the 99% of people who join
these companies and never make any money. Now of course this still isn’t exactly what
you would call an upstanding business practice. But I would argue that it lies
somewhere in between the horror stories the critics will present and
the fairy tales the companies will tell. On one hand the 99% of people involved in
these schemes are not been relentlessly sucked dry by a small group of bloodthirsty con
artists, but on the other hand that same 99% are not exactly super eager participants just
looking for a great deal on protein powder. The reality of this issue, as with many others, lies somewhere in between what
the two opposing sides will argue. But this argument that new members are
simply looking out for a small discount also raises one of the other major
issues that critics have with MLM’s, and that is that their products are
extremely expensive for what they are. Using that same weight loss shake
from earlier, we will find that sure the small discount you get as a member is
great, but it still doesn’t make the price anywhere close to competitive
with other market alternatives. Now the critics will say that the reason
that most MLM’s have products priced like this is that they NEED big margins on
their products in order to pay out the bonuses to all of their members at
the top of the proverbial pyramid. Now this is certainly a part of it,
but it’s still not the whole story. You see most of these companies will market
their products as premium alternatives, which is you know, very hard measure, bbbuuuuttt, assuming that is the case there are still regular
market alternatives that are more expensive. Even beyond this there are products sold by some of these companies that actually
look like relatively good value. Amway is one of the oldest and currently the
largest MLM operating in the world today. The company started out by selling a range
of cleaning products which actually marketed themselves as being concentrated and cost
effective alternatives to other regular products. This is just as true today as it was back then.
Compared to most other concentrated household cleaning products, the Amway alternatives
are either cheaper or very comparable. This is also whilst not considering the
discounts that are made available for members. So how does this make sense then? The critics
point out that MLM products NEED a massive markup so that money can naturally pass money up
from the bottom of the pyramid to the top, so if the products DON’T actually have that markup,
then this argument kinda breaks down right? Well maybe, but first we need to consider
one of the more central criticisms, and that is that ultimately people are not sold on
these PRODUCTS at all, so it really doesn’t matter if the companies are selling, overpriced weight
loss shakes, bargain basement cleaning supplies, or even life insurance policies, (and yes there
are MLM’s that sell life insurance policies) No no no, all of that is irrelevant, what
really matters is that new members are told that they can make millions of dollars by
joining these companies when in reality the “business opportunity”
is stacked against them. So the obvious defence to this is that… people do
become rich in these schemes… there are hundreds of examples of people that are incredibly well
off due to their involvement in these companies… But of course the critics will argue
that most don’t become wealthy. This is also fair… Even if we ignore the majority
of people that sign up to these companies and do nothing we will still find that most people
involved end up loosing money, and even of those who do turn a profit, most would probably
be better off working a minimum wage at mcdonalds. But at the end of the day this is business. If you were to go out and start your own
business doing your own thing tomorrow, there is a very good chance that you would stand to loose a lot more money than a
member of one of these companies. For every tale of someone loosing a few
thousand dollars by stocking up on vitamins, skincare or leggings from these companies, there is a story about someone loosing tens
of thousands of dollars trying open a café. Sure most people who try to make a businesses
out of an MLM fail and end up loosing money, but most people that try to make
money with any business fail, and probably end up loosing a lot more money. So in a way MLM companies are just
offering people a chance to start a sales based business with very little in the
way of upfront investment or financial risk. And sure, the promises of easy riches
are obviously grossly exaggerated, but to someone who realises that
starting a business is hard work, This is a genuine opportunity (an opportunity mind
you, not a guarantee) but rather an opportunity to build something without needing to re-mortgage
a home or get a small loan of a million dollars. What’s more is that you can start from day
one, and if at any point you decide that the business is not going well you can close up shop
without the stress of paying salaries, or rent or suppliers or any of the other fun stuff that
goes along with running a traditional business. Ok… Now here is the reason why it’s so important
to understand this counter argument that these businesses put forward, because realistically,
this is how they pitch their businesses these day. If you find yourself in a meeting for one of these companies they are going to have an
answer for every objection you have, which can make even the most staunch
anti-mlmer think twice about diving in. Most people lose money? – Well EVERYBODY looses
money when they become a member of Costco, and just like at Costco most of our members only shop
with us very occasionally and have no interest in making this a business. This is actually great for
you because you have an inbuilt pool of customers. Well even most of the people that do this
as a business lose money? – Well starting a business is hard, and we simply give
people the opportunity to start their own business without the huge financial burden
that comes with opening a café lets say. Well the products are overpriced –
No no, some of our premium products are more expensive than inferior budget
alternatives you will find at Walmart, but compared to other premium offerings we
are actually very competitive. What’s more is a lot of our every day products are actually
more economical than anything else on the market. These responses are all true, and it’s how most
of these businesses present themselves these days. They know almost everybody has an opinion of them, so they try to reshape that opinion by actually
working with the common criticism they receive. And it’s also the reason that
products like these are priced cheaply. This is what people in marketing call
a loss leader. It’s a product that is priced very cheaply (sometimes even un-profitable)
to get people into the store in the hope that they will end up spending more money
on items that actually are profitable. MLM’s like amway will do this with low
value items like their cleaning products here for the same kind of reason, they
will show it to potential new recruits to dispel the criticism of overpriced
products, only to turn around and sell them overpriced products from the ranges
that actually make them a lot of money. This adaptation is what has allowed these
companies to keep on growing despite the almost universal understanding that
these businesses are kind of shady. So I am not going to call these
businesses an outright scam, that makes it too easy for one of
these companies to pull the same kind of objection handling nonsense
we have seen throughout this video. In-fact, I will hold true to this new series and defend the indefensible by actually
giving these companies a promotion. If you are looking to go into business for
yourself and you are a skilled salesman that is willing to work on a commission only
basis, while also being willing to build and manage a team of commission only salesmen
beneath you then by all means go ahead. But if you are not looking to start your
own business, or your not a good salesman, don’t let the people involved in these
companies convince you that you are either. Now, we will hopefully continue to defend the
indefensible if this video does well by looking at the value that hedge funds add to society by doing
nothing but moving huge piles of money around. But if you want to see accounting on a
grand scale before we make that video, go check out our explanation as to how the federal reserve bank became the most profitable
organisation in the world just last year. And as always if you enjoy these video’s please consider liking and subscribing to
keep on learning How Money Works.
