When it comes to making money online, there are a lot of debates and controversies. One area of debate surrounds the concept of multi-level marketing, and specifically, the question does multi-level marketing work?
At its most simple, multi-level marketing is a specific strategy for marketing that involves individuals earning money not only for sales that they make but also for the sales that people they recruit make.
The approach is also sometimes written as multi-level marketing, multi level marketing, or most commonly just MLM. All of the variations mean the same thing
I always know that if I talk about multi-level marketing, I’m going to get a lot of angry people. There’s just something about this field that seems to draw out very passionate supporters and passionate critics.
Honestly, though, that doesn’t surprise me. In many ways, multi-level marketing is a field of contradictions and this can make it very confusing to navigate.
So today, I want to spend some time looking at what multi-level marketing companies actually are, how they work and where the controversy stems from. Realistically, despite the differences between companies, most multi-level marketing companies do operate in a similar way.
This means that if we can work out, does multi-level marketing work, then the answer applies to all companies in the field, rather than just a single one.
Why is Multi-Level Marketing Popular?
A lot of people believe in multi-level marketing, and one of the reasons is that there are a lot of reputable brands out there that use the multi-level marketing model. In fact, some of these are even household names.
Companies like Amway, Primerica and Avon all use a form of multi-level marketing, even though they don’t advertise it as such. A lot of internet marketing companies also use this model and one of the most famous of these is Empower Network.
Is it a Pyramid Scheme?
Pyramid schemes are a pretty famous way to manipulate people and the is an illegal investment scheme that is basically unsustainable.
Whether or not multi-level marketing is the same thing as a pyramid scheme or not is one of the biggest debates in the field, and it is a pretty major one. However, it’s pretty undeniable that there are some major similarities between the two.
With a pyramid scheme, the basic structure is that an individual pays money to the person that recruited them, and receives money from the people that they recruit, which tends to funnel up the structure.
So, if each person recruited two others, the structure would start to look something like this:
You can probably see where the approach gets its name from pretty easily.
Pyramid schemes are unsustainable because the only possible way for the system to make money is if there is a continuous supply of new recruits. In practice, this is never the case for very long, because people tend to wise up to the scam.
Because of this, the only people who ever really make money in these types of schemes is the person right at the top of the pyramid. Anyone who joins ends up at the bottom and it’s pretty much impossible to make money from there.
When you start to look at the compensation structures of MLMs, you’ll notice that they look remarkably similar. For example, here is part of the compensation structure of Amway:
Now, a lot of multi-level marketing companies will try and distance themselves from the terms associated with the field, so they will make this type of compensation plan look different, and they may avoid using words like upline and downline. However, once you get used to looking for it, it’s pretty easy to see when a company is actually engaged in multi-level marketing.
Whether you call a multi-level marketing company a pyramid scheme or not really depends on how you define a pyramid scheme – and there are a lot of different definitions out there.
Perhaps the most useful (and most common) way of looking at it is that pyramid schemes don’t sell products or services. They are generally touted as investment opportunities. In contrast, multi-level marketing companies do sell products, and in some cases (take Avon for example), the products are actually popular.
Because of this, multi-level marketing companies argue that they are a different entity entirely and that calling them pyramid schemes is misleading and is even defamation.
Honestly, I don’t think this difference means much of anything because it is very difficult to actually make money from this type of company without recruiting (I’ll go into this more in a bit). This means that multi-level marketing companies absolutely rely on this pyramid structure, forcing their members to recruit others.
This also means that like pyramid schemes, the model is unsustainable.
I’m certainly not the only person who thinks this.
Here’s the thing, though…
The fact that multi-level marketing companies sell products (or in some cases services) is really what has protected them from legal ramifications. Yet, there is more and more scrutiny into this type of company, particularly as the number of these companies increase.
There has also been a decent amount of legal interest into multi-level marketing companies. While the overall approach of the companies might be legal, their similarities to pyramid schemes does raise some pretty important questions.
Likewise, most multi-level marketing companies are pretty misleading in the way that they promote their opportunity. Most of the time they make it sound like you can make a large amount of money and/or they imply that making money through their model is easy.
In fact, Herbalife (and companies like it) imply that there is basically an unlimited market, but this simply doesn’t work. The bigger the company gets, the fewer people there are that will want to join and the more people trying to sell the products.
This means that the more the company grows, the harder it will be for members to make money.
This is the inherent flaw in the design of multi-level marketing and of pyramid schemes.
Selling versus Recruiting
Most multi-level marketing companies are promoted as ‘income opportunities’, ‘business opportunities’ or something similar. The implication is that they provide people with a fantastic way of starting their own business and making money, but they tend to be misleading.
People are recruited as salesmen (or distributors) into the company, but it’s actually incredibly difficult to sell through these companies.
Most multi-level marketing companies have products that are decent or even very appealing, but these same products tend to be more expensive than the average for the market.
For example, one of the products the Herbalife sells is this:
Now, there are a lot of people who buy multivitamins, but there are also a whole lot of places where you can shop for them. In fact, if someone was set on buying this particular product, they could get it on Amazon or eBay for somewhere around $20.
Why bother going to a distributor at all?
For that matter, there are a lot of less expensive multivitamins in stores and online.
This means that someone selling Herbalife has to compete with all of these different places, as well as with everyone else who is selling Herbalife products.
This makes for a pretty hard sell.
Realistically, there are very few people who can make a consistent and worthwhile profit through this approach. Personally, I think you only really have a chance if you have a large network of people who actually want to buy (and can afford to) and you are really good at selling things.
Even then, few people will become regular customers, and most might buy off you once or twice a year if that.
This means that for consistent profits you have to turn elsewhere. Specifically, you have to start recruiting people into the company.
This creates a really interesting situation.
You end up with people who have been largely unsuccessful at making money going out and promoting that company to others – trying to get them on board. Most of the time, the person trying to recruit others is going to have to lie and overhype the opportunity.
Thing is, they probably got involved in the company themselves because someone did the same thing to them.
I’ve actually listened to someone give this sales pitch before to a pretty naïve couple. The guy giving the pitch was clever – I’ll give him that. He was dressed in a suit and he used all the right words and the right examples.
However, nothing he said rang true.
He didn’t talk about any of the challenges with multi-level marketing that I’ve outlined here and he barely mentioned the concept of recruiting others at all.
Instead, he focused exclusively on the concept of selling products to others and rebuffed every single question about whether selling was difficult and what would happen if the couple couldn’t sell the products.
Thankfully, I don’t think the couple had enough for the start-up fee, because honestly, they would have lost money in the company.
The guy selling to them, though – he would have made a bit.
In many ways, this is what it takes to be successful in a multi-level marketing company (or in a pyramid scheme for that matter). You have to be willing to be convincing and misleading to recruit others – personally, I couldn’t do it.
A lot of multi-level marketing companies have costs that aren’t apparent up front.
Many times, you will have to pay a regular membership fee to remain a distributor or you might have to pay for a website, for insurance, or something like that. This can get expensive pretty quickly, particularly if it takes you a while to actually start making a profit.
Another common approach is for the company to recommend that their distributors purchase the products themselves, then turn around and try to sell them.
As you can imagine, the risks of doing this are huge, because it’s really difficult to predict just how much stock you are going to be able to sell. This means that you could end up getting stuck with any product that you didn’t see – product that you paid for.
To make matters worse, many companies offer better percentage profit for people who buy more in a given month. This places pressure on people to buy more product than they actually need, just to try and keep their potential for profit high.
All in all, it is a very ugly system, and it often ends up costing distributors thousands of dollars instead of earning them anything.
To be fair, not all multi-level marketing companies take this approach, and there are some that just require an upfront fee and nothing else. If you really want to try the multi-level marketing approach, that is the type of company you want to work for.
But, read the fine print very carefully.
Differences Across Companies
Now, it is important to note that multi-level marketing companies do differ quite considerably from one another. This includes differences in the products that they sell as well as differences in their compensation plans.
Both of these areas are important.
For example, selling supplements or health products is often difficult through this kind of company because those products are so easy to obtain from other sources. Likewise, there are a huge number of multi-level marketing companies that sell those products.
But, there are other companies that sell products that are more unique, such as toys or spices. In some cases, the company may even offer items that are significantly different than other stores or businesses. As a result, it can be easier to be successful in a company with that kind of product, rather than one that sells more general products.
The compensation plan is also important, because that defines how people earn money. All multi-level marketing companies emphasize recruitment, but some do so more than others. In some cases, it’s almost impossible to earn money without recruiting people. But, in other cases, it really is possible to make some money this way.
As a result of this, some companies will offer people more opportunities than other companies do.
Does Multi-Level Marketing Work?
Multi-level marketing does have its defenders and I have no doubt that some people really do make money through this approach.
One of my major issues with multi-level marketing is that it is practically impossible to make a decent amount of money without being misleading. If more people made money just by selling the products, I might reconsider my view, but few people do.
Again, this does depend a bit on the company, but people often make minimal money selling the products and some even lose money instead of earning it.
The thing is, these companies are presented as income opportunities, but there are hundreds of thousands of income opportunities out there that don’t involve working for a company at all.
In the modern online environment, there are so many people who have developed their own opportunities and have thrived in niche markets simply meeting needs that are actually out there.
Most multi-level marketing companies take a set of products (or services) then try to make people want them.
Realistically, this is an incredibly unproductive approach.
For making money, you want to be providing what people already want.
So, instead of asking, does multi-level marketing work, maybe you need to be asking yourself how you can make money without relying on a company like this.
Honestly, multi-level marketing companies have these incredibly complex compensation plans and force you to follow a range of different rules and regulations, just to earn a commission.
Let’s put aside every other way of earning money and making opportunities for now and just look at the concept of selling other people’s products for profit. After all, this is the part of multi-level marketing that most people initially find appealing.
This is why I find affiliate marketing to be such a powerful concept.
Affiliate marketing shares one main thing in common with multi-level marketing – you are promoting a product that isn’t your own. But, with affiliate marketing you can take advantage of the power of this approach without having to fight against a complex structure of recruitment and bonuses.
Plus, there is a lot of powerful training out there for affiliate marketing. That training can get you started on the right foot, so you don’t risk anything as you work on earning money.
One of the best places to start is a service called Wealthy Affiliate. This is a training site that focuses on providing education to beginners and experienced users alike. It’s a great way to get started in affiliate marketing and to learn whether the approach is right for you.