Can you make money in multi-level marketing?

Posted by on November 17, 2009 in entrepreneur

A funny thing happens during recessions. The number of people enrolled in multi-level marketing (MLM) businesses spikes even as the revenue of MLM companies (at least those publicly traded) decreases. For example, Pre Paid Legal Services, Inc., traded on the NASDAQ exchange, reported in its last quarter that membership revenue decreased 3% but associate services revenue rose 1% due to an increase in total new associate enrollment.

More specifically, I am being told that there are a number of MLM opportunities in the personal finance and self improvement/life enhancement niche (for lack of a better term) popping up with aggressive recruitment efforts underway. Certainly, with  set-up fees less than a traditional franchise and a work from home philosophy, MLM tends to appeal to those who want to make part-time income between jobs or simply want a new career opportunity. But is MLM for you?

First, let’s face facts. MLM has a terrible public relations record. As I posted in the past, MLM is not illegal as a business concept. However, the tactics used by many MLM business, most notably pyramiding, tends to give the entire industry a bad name. Whether perception or reality, the first thing you have to figure out is whether any particular MLM is actually engaging in illegal activities or not.

Pyramiding and building a sales team are very fine distinctions; large sales organizations often compensate senior sales executives an over-ride on their downline. The question often boils down to is an actual good or service being sold or are you building a sales team for the sake of building a sales team (a red flag)? If in doubt, google. FTC/Competition Bureau/SEC investigations or findings may show up and decide accordingly.

Let’s assume the business is actually legitimate, what are some things to consider?

  1. You have to spend money to make money. Most MLM will charge their associates/members/representatives an enrollment fee. For example, Pre Paid Legal Services, Inc. charges new associates an average of $106 (as a note, I am not picking on or endorsing Pre Paid Legal. As a publicly traded company, they have the most readily available public information on hand and, hence, the multiple references to them). The enrollment fee may not be much. But, if you have never sold before, many MLM companies offer training tapes and instructional tools for sale. Even though you can work from home selling, every once in a while, you have to meet potentials.  This all costs money. Stripped of the negative connotations,  MLM is, in essence, like any other business. You can’t run a business without spending some money. Keep this in mind.
  2. You have to be willing to sell. On a similar vein, a business that can’t or won’t sell is a business that dies.  You have to be willing to sell either to clients or sell to other people to join your sales team. Sales is hard. The best salespeople are the people who get rejected the most because they ask for the most sales. You really have to reconcile yourself to this fact (for MLM or becoming an entrepreneur in general). To address the issue head-on, the perceived ugly side of MLM is that you are “forced” to sell to friends and family. However, the first principle of any sales strategy is to sell to your hot and warm list first. Thus, I tend to believe this perceived ugly side of MLM is born of three objections: (i) the good or service is really not worth buying; (ii) a lot of people who loathe selling are joining MLM; or (iii) some MLMs are teaching terrible sales tactics. I am not sure I would have an issue with a friend who was in a MLM who sold food or some other staple at low prices (see the Tupperware parties- not typically MLM but same concept of selling to friends and family and people have little issue with them because they overcome objection (i)); I am not sure anyone appreciates being sold high-fee mutual funds, some dubious alternative medicine or some nebulous plan to reshape your life.
  3. You have to be in it for the long haul. I have started enough business to know that a typical life cycle of a service-based start-up is an immediate spike in business (the hot and warm list sales), a leveling off and then comes the critical junction: you either go up or the entire thing falls apart (the overnight millionaires are so so rare in start-ups). The reason why things fall apart is that an entrepreneur typically fails to start putting prospects in the pipeline in the early stages of the leveling off stage but your costs increase (the mistakes being: (i) in the spike period, you think everything will be great and you increase your fixed expenses too fast; or (ii) you service yourself out of your own business by operating in the business too much and not selling). The same principles apply to MLM but with an additional quirk. The industry has so much bad publicity, sales cycles are typically longer than non MLM. MLMs are not get rich quick schemes.
  4. Your exit strategy is? I can’t answer this question. If anyone can share how you get out of a MLM, it would be appreciated. However, as the Financial Blogger points out in the case of Primerica, your clients were never yours to begin with so you are building someone else’s brand for them.  This would appear to make exiting difficult since you can’t really sell someone else’s good will.

In the personal finance context, The Financial Blogger has long blogged on Primerica which is the most famous of all MLMs selling securities. As with everything else in life, investigate for yourself and then decide. Good luck.

4 Comments on Can you make money in multi-level marketing?

By The Financial Blogger on November 17, 2009 at 6:52 am

On a business point of view, I still don’t get why someone would pick MLM instead of going private and build your own business (especially in the financial industry).

You can make a lot more money by doing what you like (financial planning, selling fund/insurance, helping people) instead of working on recruiting (and sell products to your new recruit’s relatives).

By admin on November 17, 2009 at 11:04 am

FB- I suspect that MLM is pitched as providing some type of support system that going out and building your business would not. It speaks to our sense of belonging.

By Sampson on November 17, 2009 at 4:18 pm

I shudder everytime I think of MLM. I think everyone should attend a Primerica sales pitch. You’ll learn self-restraint about how not to start yelling at sales people and how to polite turn people down.

By Chris on November 20, 2009 at 2:48 am

To Sampson, I shudder everytime I think of X corporation cutting jobs for the sake of better earnings reports, short sighted fixes at the expense of long term gains. MLM gives anybody the opportunity to profit from thier own efforts without the risk or worry that thier boss is going to give them the slip the next day. I say to the folks out their working thier “biz”, go for it! Good for them!

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