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Multi-level Marketing

October 15, 2006

Q- I'm interested in becoming part of a multi-level marketing company. I've been doing a lot of research on multi-level marketing because I've never done it before. I am also doing a lot of research on this one firm. I am intrigued by the company, but I don't want to get involved in a pyramid scheme or in a company that is not financially stable. That is why I am taking my time in researching the company and asking questions. What is your opinion of multi-level marketing companies?

For so many prospective entrepreneurs, multi-level marketing (MLM) firms have such a strong appeal. They are low in start-up costs and bring glorious promises of eventual rewards. However, according to LSU's College of Business and the annual reports of many MLM companies, only 2% of network marketers earn substantial incomes.

An MLM firm works on two levels. First, there is normally a product to be sold. These products run the gamut from candles to cosmetics.

Secondly, there is the concept known as "downline." Your "downline" refers to the assemblage of people under you that have been recruited to sell more products. Just about every MLM firm that I have seen puts a considerable amount of emphasis on establishing this downline pipeline. Herein lies the essence of the MLM: in order to be successful, you have to increase your downline. There is a catch, however. As you can quickly see, the size of your downline has a finite limit as the potential market gets smaller and smaller. Those at the very top are generally the only ones who make the real money.

The vast majority of these MLM's are just pyramid schemes where the success of the pyramid is a function of the growth of its base. Pyramid schemes are illegal. The FTC has stepped in and identified the following guideline for determining pyramid schemes: a business would not be considered a pyramid scheme if at least 70% of its sales income is derived from non-distributors. Many MLM firms are in violation of this condition, yet they continue to operate. It would seem that, while this is the law of the land, it is hardly enforced.

In addition, many MLM's suggest that selling door-to-door or friend-to-friend is the new wave in marketing, but this is not the case. If anything could be referred to as the "new wave" in marketing, it would be the internet. Selling one-on-one is not a very efficient way of making sales at all.

Moreover, using "warm sales leads," or selling to friends and relatives, is a strategy fraught with danger. Just imagine how many ex-friends you might now have because they resented being pressured into buying your products. People just do not appreciate having friends deliver the hard sell. If you are ready to destroy the footing of all of your social relationships, this might just be the thing for you.

As you can no doubt tell by the tone of this response, I am not a fan of MLM firms at all. Sure, initial costs may be low, but the probability of success is just too small. I would strongly encourage you to look into other ventures.