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MLM (Part 1) – 4 Reasons Why You Should Avoid MLM “Business Opportunities”

Opinion

MLM (Part 1) – 4 Reasons Why You Should Avoid MLM “Business Opportunities”

Reading Time: 8 minutes

Let’s be honest, the economy has been in better shape. Covid-19 has wrecked the economies and employment figures of most countries around the world. If you live in South Africa, even if you have a job, its highly likely that you have several friends and family members who don’t. It’s a sad fact, but it’s one that is becoming more and more real, the more the unemployment rate rises.

With economic downturn inevitably comes desperation, and where there’s desperation, you will always find people who will take advantage of the desperate. Cue the “Get Rich Quick Scheme”. If you’re a human being and you have social media, it’s likely that you’ve recently come across adverts for an impossibly convenient Ponzi Scheme or a “Millionaires’ Club” sales funnel that just seems too good to be true. Those are topics for discussion for another time and have already been covered by Zonotho, but for today, let’s dive into what is, in my opinion, the most dishonest business practice to be deemed legal by any legal system: Multi-Level Marketing (MLM). In this article we’ll discuss what MLM companies are, how they differ from traditional business models, why they’re dangerous, and how you can protect yourself and your loved ones from the mountains of financial strain they inevitably put more than 99% of their “investors” under.   

What is MLM?

According to Investopedia,

“Multilevel marketing (MLM) is a strategy some direct sales companies use to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits’ sales. The recruits are the distributor’s ‘downline.’ Distributors also make money through direct sales of products to customers.”

So basically, you get recruited by a company to sell their product. For every product you sell, you make profit on that product. A percentage of your profits goes to the person who recruited you. A percentage of that profit goes to the person who recruited them, etc. This also means that if you recruit others to the company, you’ll profit off their sales which provides a tremendous incentive for you to recruit your friends and family into the business.

On the surface, this looks like a great idea. I get to make money selling products, and I get to recruit my own sales team who will also earn me money. What a great opportunity! Except it isn’t.

What’s so Bad About MLM Companies?

1. You don’t make money through selling products

If you speak to anybody who used to be in an MLM company, one of the first things they’ll tell you is that the number one way to make money through them is not through the sale of products to consumers, but through the recruitment of a “downline”. Downline is the term the industry uses to refer to all those you recruit into the business (Let’s refer to them as distributors for the rest of the article). The more products they sell, the more money you make, but more importantly, the more products the distributors buy from you, the more money you make. With many of these distributors contractually obligated to buy a set amount of products from you per month regardless of how much they sell, we start to see the possibility that the main consumers of the product are not those who buy products by their own free will, but rather the company employees themselves.

Imagine working for a company like Sony, but in order to work for them, you must buy (with your own money) five Playstation consoles per month in order to keep your job. A legitimate company like Sony would never do anything that crazy, but that’s basically how MLMs make most of their money.

What you then have is a somewhat closed system in which those at the bottom of the pyramid (yes, I used that word) are responsible for most of the income for the rest of the system. This means that the quality of the product is of little significance in order for the system to survive, because while these companies appear to sell products, they’re actually in the business of selling false promises. That brings me to my next point.

Related: Ponzi Schemes – How to spot them

2. MLMs are built on dishonesty

The truth is that, based on sound research, MLMs are terrible a investment choice. In a 2011 study by Dr JM Taylor, he displays the percentage of people who made profit earned from different income options by comparing the average revenue by those invested in those options versus their average expenses (see the chart from that study below). 

Would you invest in an “opportunity” if you knew that only 0.4% of other investors were profitable? Would you invest in an opportunity if you were statistically more likely to make profit off playing roulette in a casino and even more likely to make profit investing in an illegal Ponzi Scheme?

So how are MLM companies so wildly successful and profitable despite this research? That’s because that 0.4% of people at the top of the pyramid make an insane amount of money off the people they dupe into joining their scheme. MLM companies are extremely profitable, but mostly for the founders and those who got in early. In fact, the later you join an MLM company, the less likely it is for you to make profit through it.

Despite all this, the lifestyle most MLM representatives portray is the exact opposite of what Taylor’s study shows. Because those at the top are so wealthy, they try to convince you that you’ll have the same results as they did if you join today. You really don’t have to go far on YouTube to find many cringey on-stage sales pitches of MLM opportunities which sell the promise of unspeakable wealth, the dream house, and the car you’ve always wanted all through working either part-time or full-time from your home. Yes, there is a tiny chance (0.4%) that you can reach this goal through working for them, but the way they make it seem so easy and convenient is just plain dishonest. Most people who make significant revenue (not profit) through MLM must work full-time hours and have to quit their jobs in order to maintain that revenue stream. You can’t just do it part time from home and somehow become profitable.    

Many MLM representatives will gladly tell you how much money they make. A few years ago, I went to an event hosted by a well-known MLM company. Out of the fifty or so people in the room, about thirty of them stood on the stage and disclosed how much money they made the month before. They disclosed some impressive numbers. I heard many amounts between R2 000 and R20 000 per individual. One guy even made over R100 000 in a month! Ask them about how much profit they make though, and the narrative quickly changes. How is making R10 000 in monthly revenue significant if you spent a compulsory R8 000 on stock and are in hundreds of thousands of Rands in credit card debt in order to maintain your status at the company?   

It’s not unusual for MLM representatives to lie about their products as well. With a business model that relies mostly on its own distributors for revenue, and with these members contractually forced to buy products, there’s almost no incentive for the product to be of high quality at all. They just need to have the appearance of quality in order to bait people into joining the MLM company. While there are MLM companies that do sell high quality products, most don’t. A typical retail business like your local bakery would likely have low sales if their breads and cakes were of low quality, therefore the market keeps them accountable to make the best products they can. MLM companies know that desperate distributors will always buy their products despite their poor quality because they get sold a false promise of wealth if they just keep investing.

If you’ve been to an event aiming to market an MLM health product, I’m sure you were bombarded by testimonials about how their essential oils, face cream, or dietary supplements cured their diabetes, their cancer, or their depression. I even heard a testimony whereby a lady claimed that her company’s health shake helped her to fall pregnant! Most of these claims are either false or are as a result of the placebo effect because there is no legitimate scientific research to support them. Also, you’ll never see these claims displayed in any of the company’s official marketing material because it’s illegal to make false medical claims without legitimate evidence. The companies themselves don’t discourage their distributors from making these claims though because it draws in new recruits and the responsibility of the false claim legally falls on the individual who made the claim, not the company he/she represents. It’s a win-lose situation in favour of the company and to the detriment of the distributor (are you starting to see a theme here?).      

Many distributors also lie in order to get you into the room so they can pitch to you. “Hey, Hun! Let’s meet for coffee next week to catch up!”, your old friend from church might say in a text. So, they give you an address to meet them for a catch-up session, and boom! You’re in a room full of people and you’re being given a 2-hour sales pitch. If your first impression of a company is them deceiving you, should you really be giving them your time and attention. This exact thing actually happened to my wife a few years ago, and while we do forgive that person, we did lose respect for them.       

Related: VIDEO: WhatsApp Gifting – Stokvel, scam or business?

3. MLM companies operate similarly to dangerous cults

Wait, what? That escalated quickly. The title of this section sounds extreme, but it is warranted. World-renowned cult expert Stephen Hassan talks at length in his work about MLM companies and how they use cult-like tactics to dishonestly lure people into their organisations through false promises, get them to invest huge amounts of money into the organisations, and keep them tied to the organisation through controlling their behaviour, access to information, thoughts, and emotions (Just like how cults do!). His litmus test to distinguish cult-like organisations from legitimate organisations is to run them through what he calls the BITE model. “BITE” is an anagram for Behaviour Control, Information Control, Thought Control, and Emotion Control. The rest of this article will contain several examples of the cult-like tactics that MLM companies use. If you’d like more of an elaboration on the BITE Model and how MLM companies operate like cults, check out these two videos from Genetically Modified Sceptic:

and

Also, if you’d like to learn more about how to protect yourself from dangerous cults, check out this amazing interview with Stephen Hassan: https://www.jordanharbinger.com/steven-hassan-combating-cult-mind-control-part-one/.

4. MLM Companies Take Advantage of Women

By this point, we’ve discussed that MLM companies are dishonest and predatory in nature. MLM membership is also majority women (around 74%) which means that women are disproportionally being lured into these false opportunities. This isn’t a coincidence either because many MLM companies target women to join through peddling typically feminine products such as make-up, skin care, and women’s clothing. Their marketing is also often aimed at taking advantage of women at definitive stages of their lives, such as when they give birth, or when one of their loved ones passes away. A typical message a new mom receives from an MLM recruiter often assumes that the new mom is a neglectful parent if she wants to go back to her job after her maternity leave is over. These messages often imply that if moms aren’t working from home through an MLM company, they are bad parents. Thanks for the subtle sexism and mom-guilt, but no thanks.

These companies often portray a #BossBabe lifestyle in their marketing as champions for women’s empowerment. Their marketing and events also market the MLM membership as being part of a “sisterhood” or family built on communal support. This isn’t the case though because, often, as soon as you leave the MLM company, the “sisterhood” you thought you had typically ghosts you and cuts you off (just like cults do!). For an in-depth example of this, check out this episode of Sounds Like MLM But Ok:

In Part 2 of this article, I will discuss Common Tactics Used by MLM Distributors to Portray Legitimacy as well as how to handle distributors if you do cross paths with them.

Next: MLM (Part 2) – Common Tactics Used by MLM Distributors to Portray Legitimacy



PLUS, we'll send you our Zonotho Personal Finance Starter pack to help you take your financial prowess to the next level!


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Dave Roebuck

I'm a Business Owner and Mental Skills Trainer at Evo Sports South Africa. I work as a personal trainer for the athletic mind and love to research all things sport and psychology related. I'm also passionate about understanding and dismantling narcissistic behaviour and predatory business practices.

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