WTF is MLM?

I was always curious to look at regular families trying to take a hand in business by buying cosmetics, toiletry and food and drink products to make some cash. The packaging that comes with it also piqued my interest and as I found it to be complete turd, I did some research to corroborate what I think.

MLM and the best MLM companies

Contents :

1. What is MLM?
2. The business model
3. The Variations
4. Pros and Cons
5. How do the best ones operate ?

What is MLM?

MLM or Multi-Level Marketing refers to a business model wherein networking and recursive recruitment of new members are the foundational design on which the ‘leads’ thus generated are proportional to the depth of the connections tree. Open to much speculation on the productive or ponzi like similarity of its work processes. Nonetheless, MLM thus illustrates the use of human networking though exploitation of the human psyche for a revenue generation stream. Sounds like any other business, doesn’t it. All business focuses on people – it’s by the people for the people, whether it’s in the form of an insurance, and agency, a loan or a subscription. Businesses also need to make profits to survive and thrive, and more often than not the odds are against most ideas that are invested in. MLM beats the model by spreading the risk among many members or ‘recruits’ – this term will make sense as we begin to understand the expansion methodology of this revenue generation model. On the offside the sustenance of this structure depends on its foundational constituents of the recruit tree. Of course a few variations on this fundamental premise do exist and we hope to get a better understanding of their mechanisms.

 

The business model and their variations

Picture an individual who plans to grow his business, he sends out the word about a product he is selling and that word to mouth trend he manages to grow his support network to a self sustaining entity. This process is also called recruiting as the seller is essentially trying to convince the potentials to join the network. It’s quite a bit of glorified door-to-door retail selling of sorts. The resulting network shape could be simplified for analysis to a tree like structure. Here as the individual, the seller is talking to the potential customer; this communication style of marketing is also called Direct Selling. There is no other arbitrator to facilitate the process, and it begins as a one to one contact. The tell tale shape of such a network resembles a triangle and is also labelled infamously as pyramid marketing. This might bear strong semblance to the ponzi scheme but rest assured unless the intentions of this dealer network are proven malicious, it would be better to give it the benefit of doubt.

Each seller in the tree represents the company and once recruited they are entitled to earn a commission for the cumulative quantity of products sold. Thus commissions are the key profit making part of this enterprise.

The other profit making path would be to retail the products and as in a traditional retailer like Wal Mart, they buy the goods from a supplier which in this case would be the company whose products they sell and their entire or partial catalog. The key idea is to buy for less and sell for more. This is done using markup and thus the profit margins are wholly dependent on volume sales. Of course the seller has to take care of various factors for a successful transaction like storage and security of the bought items as well as dependable dispensing of the same. Most goods bought are either cosmetic/toiletries/general store products but are sold exclusively though individual interactions and not really available from any general retailer. This exclusive clientele of customers are the main customer base that keeps the cash flow running. People will always have the use of soap, toothpaste, food items regardless of the economy and thus creating quite a stable arena to sell to. Arguably profit margins are not always at optimum levels and market research has shown that a tenth of the selling force actually make any money out of this endeavour. If the trend could be beaten then it would have but it seems it is the staple average of this model. Focussing on the winning crowd would give us insight into what goes into making it in this game. This would also give a better idea of why the losses are more significant than the winnings. The key observation gleaned from various researches abound on the fact that the key beneficiaries and the ones who gain the most are the ones at the top of the ladder in the scheme. Ostensibly because that’s where the goods come from in the first place. If the first depth layer purchases and takes it to the next circle for the cycle to continue, it does not really matter to the originators who or how many are bought into it. To them a sale has occurred and the winnings are cashed in. Of course overgrowth of any kind will certainly become cancerous. Markups cannot be increased forever and only a few actually benefit and they are the ones who originally propagate the scheme. This statistic almost seems to be a philosophical and sociological test bed of wage differences and the corporate culture of making significant earnings at the cost of the common man. The template no doubt raises more questions than astute facts and figures can give. It almost begins to eerily com though as a major scam that has gained strong foothold of the gullible masses to further perpetrate the idea of “greater income” for the lay person though subscription to their paradigms. The key thing here is people. That’s where the money is coming from. They don’t sell to other corporate or governments, just normal people who strive to make a better living without making a full study of the consequences.

The theory of unlimited earnings from a seemingly infinite number of recruits is flawed at best. Recurrent earnings from a trusty and loyal buyers base is almost always the key to a successful business, but that is earned hard and even success stories have taken a plunge when things go awry with the customers questioning the use or honesty of the business they have so long availed of. Enabling the opportunity to people to make money might seem to be a noble idea but looks can be deceiving. The bar for entry is very low indeed, anyone with a little cash can immediately partake his share of the duties. No other qualification is required. The induction programs for more established MLM companies like Amway make this process even better and formal within their realms to make each recruit as he is automatically empowered to sell. As if the key talent for success in life is salesmanship. Now the difference between this and the more healthy soft –skills type seminars are quite evident as the latter emphasize more on the personal development of other talents and encash on the proliferation of their work as more people are willing to buy their services or products. Everyone has some talent and such programs might have a better sociological impact by realizing the inner gifts of people all around making every one an entrepreneur. On the contrary the only outcome the MLM programs actually motivate you to be a very enthusiastic and driven salesman. Not MBA level skills but rather a series of pep talks to listen to and feel energised to go out the door and start selling. This is smart as it turns out people who are not entrepreneurial are actually at a larger proportion to their counterparts and are desperate to make cash, that excitement actually masks a deeper level of financial insecurity that clouds their judgement on actually doing something in their lives as such. In such desperation anyone can be taught to do anything. Similar to joining a cult or mafia, the brainwashing is the first thing that is implemented so that the loyalty is secured on the sellers end. For some though it actually may be a saving grace as genuinely less capable folks may benefit from such programs as the requirements are very minimal. But to think that the majority have to be cow herded for a financial gain that statistically does not beat the odds actually seems to be a very dubious standard. People and resources are finite, but fools are in endless supply, and thus literally insulting the intelligence and trust of the very people who enable the functioning of this market.

Apparently, a lot of omission tactics are used even in the presentation of the business model. A lot of key financial concepts of a successful organization would involve a thorough and transparent disclosure of gross profits and other financial averages. They create a perception of opportunity by incorporating depictions of the business in organisational diagrams that actually gross approximations of an ideal scenario which in reality far from truth. Picture the levels from top down, and to reiterate the point delved in prior paragraph, the levels are not really conducive once its goes lower than 3 levels max. It’s been mathematically proven to require a maximum of about 155 people for the structure to work financially and certainly not 3000+ members. The ‘downline’ or the permanent and non-existent customer base is not really the cash cow. Infact, the base is replenished by new people and it’s never the same people over a longer period of time. That defeats the very definition of a business that exists to serve a loyal customer base and build the business though growth in the base. The pretty picture being painted depends much on the non-disclosure of these keypoints so as to detract the inductees or associates from the real nature of the machinery.

The recruits are meant to keep making payments (read product pruchases) to stay in the circle or kept in the loop. Masquerading as a company to make sales reaped from products and not fees is dishonest to newcomers till and they find out the hard way when maintaining margins over time does not work out. Being a purely commission based business it pays (or does it?) to be upfront about the revenue model.

Every legitimate (and even illegal ventures) have fixed costs, like the rent of the establishment, utilities, transportation etc. Taxes are of course always present. In the financial reports neither components make any mark of any measure so that means it more of a cover up operation. A key point being revenues are not profits unless the fixed costs are broke even, thus the real margins are in a debatable state of the validity of the same.

The idea of rebates are a myth and it is never paid on the retail sales as the only real sales are the purchase payments from the sellers in the still functioning layers and whatever comes from the dysfunctional downline layer. Of course none of them checks out.

It’s an excellent description of a dysfunctional entity that always is a corner around from total collapse. And ostensibly that’s what happens. Infact the main money comes from recruitment and the sales of prep materials like books and tapes. Thus the products are a carrot in a stick while the shoes are taken off your feet to be fit for the stick training.

Opinions of many, though substantiated though extensive study does not seem to make much of a dent to its practitioners, and like it or not junk sells. We have taken a look at the shadier side of MLM, though in itself it may be just as harmless as a mere money transfer channel. Let us look into a few more aspects of MLM.

Pros and Cons

The pros and cons of MLM are skewed at best. The cons outweigh the pros and the legitimacy of MLM as a business is questioned from the outset. Amways’ credibility has hurt tremendously as its actions and insiders whistle blowing have literally blown a hole in their veil. This should already raise awareness of the incredulity of such enrolments. The insidious side of the scam is not only that people lose their money, but rather they end up having a strong dent in their confidence levels and feel that they are failures and that it’s their fault. In reality the design of the scheme guarantees the failure of its participants. The Ponzi scheme has changed faces to a more legal appearance while essentially carrying out the same legacy of fraud and destruction in the worst of forms, where people are toyed with and their hopes are raised to amount to a void, where they are left deficient in money and their perspective of their lives, thus negating any possible positive outcome of the same.

Various questions have been raised on the kind of levels the business is actually operating. Is it an exclusive circle of cheaters who prey on the gullibility and needs of the layperson or is it one of the following : income opportunity, business opportunity, a variation of a gamblers enclave. None of them save the last which might be a better description of the entire operation.

The primary advantage of MLM can be singled out in business terms as a system that does not need to employ full time hires as salespersons. This non dependence means less baggage to carry in terms of employee maintenance measures. This reflects in exceptionally low overhead for the employee representation wherein the necessity to keep detailed logs about the inventory are simply negated. Product orders are done using ecommerce or batch dispersals in the form of product catalogs. Here the associate keeps track of all orders he gets from his end and combines them to a bulk order from the company. Thereafter he transfers the orders on his behalf to make the most from his commissions or rebates on the sales volumes. Even though the majority might not make a dime out of it, the early layers do make some profit to keep at it longer than the layers below. It is an advantage obviously for the gainers.

Marketing though a tiered system of individual sales persons transfer the responsibility to the individual. It certainly gives a very strong vibe towards the empowerment of the individual in a competitive environment. Further the reward system is expressed as proportional to the volume of sales and the cash made from new rookies. This also translates into spreading the risk.

The other advantage that seems more immediate is that the starting costs or the initial capital seems minuscule compared to brick and mortar companies. The costs to rent an establishment and register as a company are nill and that seems to motivate entrants to this arcade. The risks are obviously minimized in terms of setting up a business plan though it might seem very short sighted in the long term.

The other advantage would be to leverage the demand for certain products that over time have become household names or similar competitive products. There are actually quite a few companies who deliver pretty standard issue stuff and are dependable in terms of the product quality. Therefore the need to provide value to the customers become a driving and motivational effort.  The essential premise of a long term successful business is to ensure cash flow. That can only happen if the customer base is solid enough to generate revenue for your business. Loyal customers or a niche market are good starting points. Its always better if the market demand is quantified a priori rather than push sell a new product into the market. The benefits can be pre calculated and that translates to better marketing and sales. Once the products are absorbed into the buyer base the continuity is one of the more important aspects of the business at that point. Similar to a subscription to a magazine the payment of the product is paid ahead of the actual procurement or even the existence of the product. That is based on the trust and expectation of the customer base who are willing to part with a premium which is more like a cumulative summation of the total costs per item times the period of subscription. In the case of other subscriptions based sales the revenue from sales are negligible or just enough for the distributions to break even. The main money comes from advertisements. Here the advertisers are actually paying the magazine to be a medium to deliver the message of their product to the readership. This brings a benefit of reaching out to target masses of customers who once enticed with the communicated message are expected to boost sales as their interest is spiked and ultimately translates to money. Though in the MLM strategy the use of advertisements are minimum and that’s where the problem of the pro turning to a con sort of floats to the top. If legitimate businesses make money off advertisements and not on the sales of the products themselves, how does MLM type businesses survive? It seems that the above discussed points of money from recruits are where the actual money comes from. Nonetheless, the money does come from somewhere but the growth is nil and is a point to moot as the mere transfer of the money to layers above does not really translate to the layers below. The initial revenue once taken on will not grow anymore if things don’t go right which is more than what is presented on the outside. It all seems to contradict itself which means that stating the pros does not mean not to take things without a grain of salt.

The individuals have a common goal and it’s more cohesive in the outset though later on it solely depends on the individual effort needed to actually do something worthwhile about it. Basic utilities like telephone, high speed internet, electricity are taken for granted and their cost are again not accounted for in the fixed costs roster. This means that the running costs are minimal. The bottomline or the profits are what matters and simple as it may seem, the relative rarity or the skewed percentage of profiteers make this point again self contradict. In most cases the numbers do the talking, in this case it’s the talking that does the numbers or so it seems.

The tax advantage is evident as in every other form of business in contrast to the regular employee and taking the company’s business as your own translates to expenses deducted income.

The freedom to choose your lifestyle is another benefit. The break from a regular 9 to 5 job means that you can utilise the time in a way you see fit. This benefit is obviously stretched to its limits in the consulting business and the freelancer sphere. However they are actually their own business and that includes services and products they produce themselves. In network selling it’s a sort of pseudo lancing wherein even the time invested to create value is negated. Your job is only to sell the idea to other people and take their cut from being a smooth talker. If you are good in social engineering then this might be the realm of rule if you last long enough before you get scammed in the end, and that’s being optimistic. Essentially you set the time and routine and the place, the stationery, the furniture etc everything you choose, so whether you are wasting time or actually making money the license to pass time in your pajamas is always an entertaining proposition.

The need to build teams or downlines are one the main goals in MLM. Such a support network resembles a team of misfits trying to get in more misfits, and while the smarter few open their own companies and leverage on their entrepreneurship, the statistic for the number of misfits are on the side of more. This means you actually never run short of needy folk, considering that taking their money is where the revenue comes from, it really seems to be legitimate business. It’s taking your money by entertaining you for a short while and leave you empty handed. That does not create any value of any kind, but certainly entertains the entertainers in the long haul. That said the initial support network and hand holding is actually done very well in order to foster trust and loyalty for as long as the recruits can be milked.

The one advantage that you should take as a genuine advantage is the field training experience on public speaking and social engineering. This actually might help you develop these skills and used for bad or good having these assets are always a benefit regardless of the domain you are in. Its also the oldest trick in the book, the confident con.

How do the best ones operate

Legitimacy might be in question but it also might be your lucky day. We have taken a sceptics overview of the various planes of the MLM business model. Lets ignore the infamous ones and take a look at the current crop of supposedly successful MLMs. The websites give a very optimistic and  legitimate view based on the graphics and the literature. They present a series of steps that motivatingly worded and it really does seem good. The key points are highlighted and numbers are posted at every sentence to make it look official. The sites themselves are designed in simple corporate style and host links to product pages typical information pages.

                                                                        

The Empower Network products are a good example of a carefully pitched site. The lucrative money making tips sentence is styled in a cursive font and placed strategically in the top of the page, near the arrow sign giving a road checkpost feel to visitors to get into. The entire right column is full of “give you info” boxes and self selling advertisements. The familiar menu is on the top below the main site banner with the words Empower Network styled in multiple fonts and bright and dark colours to give maximum show effect without looking too corporatish. The use of sundials give a feeling of being in the warmth of life giving energy that plays into the visitors instinctual need for safety and comfort. It is primarily a one page design which simplifies navigation and engages the visitors to read the content in a top to bottom fashion. The introduction is very upfront and the description and timeline of this enterprise is given right at the outset, the familiar and tried and tested  3 W’s – Who, Why and What are actually used in the start of every paragraph header.

They guide the text towards a higher commission team with a corresponding VIP titled graphic with a colour combo that says shady and rich..more like exclusive, but you get the idea, complete with a crown graphic. Are they saying that own you or something? Further below you see a graphic of a group session at a venue giving the impression that they are an established act with people from all age groups, you see kids with masks and elder folks in shorts and women of different races that sells the idea of a team effort very well indeed. The setting looks cozy and exclusive. After that it summarizes the message of how much money you can make. It sells the idea of 100% commission Of course it then goes over the minimum fees required to join the circle. This is like any other club like membership sort of premium. There also seems to be a one time only purchase options for residual income that sells to the tune of 3500 dollars with a note saying that the purchase is required to avail any commission to start with. What you do after that is upto you. The training packages are sold at the bottom of the site that cost about 500 dollars. It further highlights the point that you make this money back when you find a new buyer. The set is neatly packaged in 5 dvds and a book in a well designed box. The primary business is blogging and they also provide a blog to all of its members to increase exposure online. Blogging is undoubtedly a phenomenon and its no surprise that it plans to capitalize on the same. Advertisements are the main source of revenue along with the whole adwords buzz. Basically they are going to coach you to make money off a blog. That actually takes time to generate content and use the funnel principle to generate more traffic to your blog. The more traffic the more chances of making it monetarily viable. On this front it actually seems to be genuine as blogging and how to teach blogging is a good idea. Though after you have invested 500 dollars to this activity it would then seem a chore ostensibly for any of this to make value at the outset. Over time you can expect some rich dividends as many others in the blogging sphere. The site seems well directed to their market niche. Their information is clear and well communicated and the product is legitimate resembling services through enrolment and membership. Empower Network does a good issue of the MLM model and does it well indeed.

Conclusion

While we have taken a better look at some of the key figures and facts of this industry, the fact that it exists warrants us to take a smarter decision if we ever plan to partake in MLM. While being infamous for being an exploitative legal loophole based thriving money making mechanism, it does merit that people and companies did and do get rich. The 99% might not make it though the 1 percent have lived their dreams. Not all MLMs seem to be suspiciously functioning though there seems to be significant and mounting proof that selling dreams to people without a skillset or education is not exactly a reality. The demographic of people who join MLMs have strong similarities in terms of their financial standing and goals in life. While benefitting a few, the majority have incurred losses and not just financially, but also in relationships and self concepts getting misdirected. Better products do sell, but the model seems flawed at best. But then taking a look ar recent conspiracy theories, it seems every dollar comes with an interest, meaning the banking industry survives through debt, which runs in an infinite loop, as the mint manufactures debt. The interests can never be paid off your sum, so taxes come into play. A nice way to take a good fraction of what you earned from you. If the very people who sign the checks are in the making of a Ponzi scheme of their own, its fair to assume that other enterprising individuals want a share of that. Put it that way, we are the ones conning ourselves, with a few making that prized getaway. The world never seemed any truer.

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One thought on “WTF is MLM?

  1. I all the time used to read paragraph in news papers
    but now as I am a user of web thus from now I am using net
    for articles, thanks to web.

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