David H. Kinder, RFC®, ChFC, CLU
My Opinions on MLM / Network Marketing
Updated: Jan 18
Every once in a while, the topic comes up as I work with various clients as well as other financial professionals who are involved in it. Today, I want to share with you why I think it’s usually an abusive form of business and how I think it should be worked with proper ethics.
The Franchise Model
Network marketers (or MLM’ers) often compare their business to a ‘franchise’ and they often make the comparison that network marketing is far cheaper to get into than a franchise. Subway is one of the cheaper franchises available, but the net earnings of one location is generally around $65,000. To really make franchising work, you need multiple locations. You can do a google search for ‘subway franchise expected revenue’ or similar terms and read various articles on that.
However, let’s take the franchise model and apply it to network marketing:
You have a new McDonald’s franchise. You look around and you have:
You say to yourself: “Business is bad. What should I do?”
Conventional business wisdom says: “Buy inventory, hire employees, and get some customers.”
Most network marketers say: “Go build another McDonald’s.” (ie. sponsor someone new.)
The Real Definition of Business Expansion
Many network marketers recruit others with phrasing like: “My company is expanding and we are looking for talented people to fill management and executive positions.”
Look at my McDonald’s explanation above. Are they really “expanding”? Expanding a business really means that your demand is growing for your business products. Is that really happening? (That’s a key question to ask.)
Legal Does Not Necessarily Mean Moral
Many people will tout how Amway or other long-term companies are legal since they’ve been in business for many decades. However, I hope you can see the delineation between legal and moral. Sponsoring people because “you’re expanding”, but you have no customers yourself… implies that your new recruits are your customers.
Internal Distributor Consumption Does Not Constitute A Legitimate Business
Network marketers often say – especially with consumables, such as skin care or nutritional products – “You gotta be a product of the product.” By any definition of salesmanship, I believe in that.
However, distributors should NOT be the only users and consumers of the products. Are you encouraged to retail your products to others and get real customers?
If you’re ONLY “recruiting wholesale customers to recruit wholesale customers”… I think you’re morally talking about a pyramid scheme, even if the rest of the business is legal.
Can You Tell The Difference? Follow The Money
If the money being made or shown is based on recruiting customers who recruit customers… and there’s little to no focus on retailing of products to other end consumers… you have a moral pyramid scheme.
Should YOU Consider Network Marketing?
You can consider it, if you can answer one question: Can you see yourself promoting and selling the primary products of the company on a regular and ongoing basis?
Personally, I know of a family member (who shall remain nameless) who got involved in a very successful venture. She was a great salesperson and very personable. She sold her company’s product via her Facebook page and hosted online presentations on her products and she was reasonably successful as a retailer!
The problems came when she didn’t stay consistent with her selling activities (she went months in-between doing online presentations) and she didn’t stop her auto-ship orders. This could’ve been because a minimum purchase order was required to keep her compensation status in the company?
Anyway, she kept accumulating boxes of these products, but she wasn’t active in promoting and retailing. At the time, she probably had a false sense of security because the company had a 90% - 95% guaranteed product buy-back policy (small re-stocking fee).
However, the company finally rescinded the guarantee. Distributors were now responsible for selling whatever inventory they had with no guarantees. (If you’ve been paying attention to this kind of business, you probably know which company I’m talking about.)
Was It Her Fault? The Company’s Fault?
She was successful on her own, but she stopped doing what made her successful… and didn’t pay attention to the expenses of her business accumulating. Then the company changed the terms with their reps.
These things happen… but with every business, you must keep an eye on the bottom line and expenses, or it can get the better of you.
What About Companies That Sell Intangible Services?
When I first got involved in a network marketing company about 20 years ago, that’s what they did. They sold long-distance telephone services and you had to sign up 20 different phone lines in order to qualify for their initial “rank”. Most people don’t have 20 phone lines of their own. The company’s business model was “We get customers and customer-getters.” It makes sense.
However, not all services-oriented companies sell to outside customers. Some recruit and the recruiter sells the new recruit their services. Their “first level” recruits are also their customers! Talk about usury! A recruit should be their OWN best customer, not their sponsor’s best customer. Again, an internal model of consumption rather than getting outside customers.
If I Were To Evaluate An MLM / Network Marketing Opportunity:
I would look for people who are actually successfully retailing their products on an ongoing, consistent basis. And then, perhaps recruit from their customers who can see themselves doing the same kinds of activities.
The opportunity is to earn perhaps an additional $500 - $2,000 per month on a part-time, after expenses basis. That’s the real opportunity. But earning overrides on other people’s successful retailing is exciting too! But if you’re wanting to earn “the big money”, it’ll take time over time to make sure you’re building your team right.
Beware of ‘FOMO’!
The “fear of missing out” is the notion that “Now is the best time to get in!” or some other special or other fear being induced to get you to want to get started. If it’s a quality opportunity, it’ll still be here in a few years. The only difference will be if everyone else you know has gotten involved by then or not.
Remember That Your Personal Reputation Is Affected
Is it worth it if you know that you will be “labeled” as “one of THOSE guys”? Is that okay for you?
It’s Certainly Not For Me
I am not in network marketing. I thank network marketing for introducing me to various self-development speakers, such as Jim Rohn, Zig Ziglar, Brian Tracy, Earl Nightingale, and others. Many of them are great speakers and trainers that I have learned a great deal. I wouldn’t be who I am today if it weren’t for these great minds and ongoing personal and professional development I undertook.
For me, seeing how the network marketing industry works, and how it tends to be abused by individuals… I just wanted my note of caution to be out there.