Why would a business owner who is already established want to join a Multi-Level Marketing opportunity?
In this video, I answer some questions about why this is such a compelling offer and why joining an MLM can be so dangerous.
Check it out, or read a transcript (with links and other juicy details) by scrolling down.
(Side note: In the video, I mentioned 10 reasons rather than seven; look for 3 bonus reasons later in this post!)
I’m a business consultant and blogger. I write and talk about how to run a business and make long-term choices that will help you avoid risk. My specialty is helping licensed natural health practitioners, but a lot of what I share can apply to any business owner (especially if you’re in a service industry).
Recently, I shared descriptions and examples of 10 different business models (read What’s the Difference Between Brick-and-Mortar, Franchise, Direct Sales, and MLM?).
There are so many ways to creatively provide products and services to the world, find Ideal Customers, and use internet marketing to share your message.
One model that has come to my attention a lot recently has affected me personally. This model takes advantage of people who are vulnerable, and it is not a sustainable solution in the long run.
I believe the MLM model itself is flawed.
Even if some people in certain MLM companies have success, or if some of the products benefit certain (very enthusiastic) people, the model itself is structured in an unsustainable way.
The retail cost of MLM products is higher than comparable ones in the marketplace. MLMs charge a higher price point in order to alleviate the expense of paying a percentage to “consultants” (or distributors) who are promoting the products. Rather than focusing on outside sales, the distributors typically consume a large portion of the products themselves; most of their income comes from a percentage of their purchases, instead from sales to outside buyers. Even if they are interested, the retail cost is often so high that potential buyers have a huge incentive to join as a distributor in order to get products at a discounted rate.
When you add someone under you, this person is called a downline. And when reps in your downline sell products or recruit other people, you get a percentage of all of their sales and bonuses. That becomes your income stream. You are incentivized to keep growing your “downline” group. There is no way to sustain this growth. Many studies give evidence of the illogical and predatory tactics used by MLMs. Even if every person on earth were to join, there would still not be enough money to benefit everyone at the bottom level.
Most people who join an MLM don’t make any money at all. In fact, if you factor in the overhead costs and inventory and other investments to run the “marketing business,” the vast majority LOSE money.
Additionally, distributors are not actually business owners. They may call themselves “BossBabe” or “CEO” (I’ve written about these terms here). In reality, an Independent Contractor is simply representing the parent company. She or he is contracted to sell things in a certain way.
Contractors have no control over the products, the ingredients, the shipping time, the distribution method.
They have no strategic decision-making capacity.
They don’t make choices for the future of their own business.
They are at the mercy of the parent company.
And the parent company can go out of business (as happened recently to the beauty company Jamberry).
If you’re a true business owner and your distributor goes out of business, it shouldn’t affect you. You would still have options to source your products from another distributor, or make adjustments in your service or product options to continue serving customers.
But as an MLM rep, the parent company’s fiscal health will directly impact your ability to continue operating. So it’s not a true business.
Why MLMs are Dangerous for Current Owners
There are 7 reasons (plus 3 bonus ones) why I think this is especially dangerous for established business owners.
I have talked to several healthcare practitioners who joined an MLM because they use and trust the products, and believed they would benefit their patients and customers. But unfortunately, everyone I spoke to has suffered financial setbacks by investing in what they soon realize is a ruse; the “investment” does not turn out in the way they were expecting.
In fact, many practitioners who join MLMs lose large amounts of money because they heavily invest in inventory that they cannot sell to end user, since it is so overpriced. So they have to either sell products at a discount (which goes against their contractor policy with the MLM!), or they give up and sell unused products back to the company.
Or they keep using products for personal use, but that requires a monthly minimum to remain an active contractor and retain the discount. A contractor is primarily consuming the product, not selling it.
Here are my 7 (plus 3 bonus) reasons that MLMs are so attractive to an established company owner.
1. You know how to sell.
If you own a business, you already know how to convince people to buy.
You have proof that you can create value through a service or product.
You can fulfill a need that buyers have.
Owning a business means that you have primary decision-making capacity and capability. If you are not the primary decision-maker in a company, then you’re probably not a business owner—or at least, not with majority ownership.
Making strategic decisions for the future is one of the many benefits to being business owner; but it’s also very lonely. (I’ll be getting into that in a minute.)
Since you already have the skills to manage and run a business, you’re a prime target for the MLM “opportunity.”
2. You know it takes effort.
Once you’ve operated a business on your own, you are very familiar with the structure and methods needed to deliver products or services on time.
You know how to create policies and procedures.
You know to make a marketing plan.
You know how to advertise.
You know how to brand and design.
You know the ins and outs of these tedious tasks… and you know that it takes a lot of work. Many of these tasks are very hard to do.
Most of the time, these activities are not the primary giftings and strengths of solo owners like healthcare practitioners, whose training is in diagnosing and treating patients to bring healing and relief. They are not necessarily experts at business development, spreadsheets, analytics, marketing, and influencing others to buy.
If you’re a business owner who is weak in these areas, you are more at risk of being drawn into an “opportunity” where this is all done for you. It’s pre-packaged. All you have to do is sign up, and the MLM company does everything else.
So joining an MLM can be very tempting, especially when you’ve done SO much on your own and know how hard it is to turn a company into a profitable venture.
3. It’s an established brand.
Unless you are invited to join a new MLM at the ground floor (which is really the only way to make real money with the MLM business model), you’re probably looking at an established company. It’s one that most people will recognize right away. It has purchasing power; its products are “proven” to work. Brand familiarity is one ways MLMs convince new recruits to join.
“It will be easy to sell,” they promise.
“Everybody’s heard of us,” they say.
But this is a sneaky tactic. Just because the products are popular doesn’t mean they have superior-quality ingredients and realistic outcomes.
Many MLMs are influence-only, with very flimsy and unproven results. There’s not much substance behind their claims.
4. You lack confidence.
The fourth reason a business owner would get involved with an MLM is because they don’t feel as confident in their ability to keep the company afloat. Maybe they’ve been operating for years and are not seeing any profit. I’ve seen this happen so many times.
A lot of business owners take a salary cut rather than sacrifice other areas of their company. If their business is struggling to pay the bills, they will cashflow the business using personal funds or loans from friends or relatives, rather than admit that things are bad and they need to make serious adjustments.
This doesn’t happen because an owner isn’t thinking clearly. It’s actually the opposite: they care SO much about the business succeeding, that they will do anything to keep it afloat. But after years of getting further and further behind, it can be exhausting and demoralizing to realize you’re failing. The process of failing happens due to a series of bad decisions; and unless you make radical changes, your business will continue to get further in debt.
It’s really sad to see someone who believes that they’re not that bad off. But if they’re honest and willing to analyze the whole business, they will recognize the total amount of debt and negative cashflow is more serious than what they had believed.
The sooner you can make an honest assessment of your financial situation, the faster you can make healthy decisions and start working toward your long-term goals.
Joining an MLM is not going to solve these problems.
It’s not going to boost your confidence.
It’s not going to make you more money.
An MLM will just take advantage of an already vulnerable situation.
To make money in an MLM, you’d have to be near the top of the pyramid. Everyone underneath that level is paying into it. And by the time you are invited to join from an upline, you’re already doomed to fail.
5. You need to add more income.
Another compelling MLM promise is that it will be “an endless stream of income.”
It’s true that diversifying your income streams is a wonderful way to cover all your bases. If you’re acquiring money from different sources, you’ll be able to withstand a shift in the market or an unexpected drop in consumer interest.
If you’re a practitioner, you could
- offer both direct patient services and virtual services.
- receive insurance payments, as well as cash-pay options.
- offer workshops and group sessions
- provide e-books and online courses
When you offer a multitude of ways to generate income, even if each one doesn’t bring in much, this can really augment your total revenue. It’s also an insurance policy for “rainy days” when your main income has a temporary setback—or if one source dries up completely.
Consider offering services or products that don’t require you to be physically present, such as
- video series,
- paid membership group,
- virtual training,
- books and materials, and
- elite access to your expertise.
Joining an MLM is not a safe way to make more money.
MLM income is never guaranteed; it’s all based on commission.
The MLM system often requires you to purchase products—a LOT OF PRODUCTS—in order to maintain your status and get that coveted discount for products.
This doesn’t even make sense mathematically. Spending money to make money doesn’t make any sense. But that’s the thinking method that MLMs ingrain in their reps:
“You have to buy new products to stay in the know!”
“You need to test them to know how they work!”
This is very similar to cult behavior. The company perpetuates a belief that you’ll be better off, and it will help you, and your life will be wonderful, and people will want to join your team. But the reality is that this becomes a rote process where you spend increasing amounts of money, and you don’t have a lot to show for it at the end (…if anything).
6. You expect it to benefit your patients or customers.
Many people join MLMs because they believe in the products. For healthcare practitioners who want to enhance the lives of their patients or customers, this can seem like a good fit.
Maybe you are a die-hard user of MLM products or services. Some of them can work, although Idon’t support any MLMs for any reason because I believe their predatory practices make them unsafe.
Products that are just as good, or sometimes better than their MLM counterparts, are available in the larger marketplace at competitive prices. The retail cost of MLM products is extraordinarily high, because they have to make up for the cost of paying commissions for their reps.
But if you really believe in products that are provided ONLY through an MLM company, and you’re a healthcare provider, you might be interested in joining so you can make it available to your patients.
This sounds great.
The problem is: What happens if you change your mind?
What happens if you decide not to promote the products anymore?
As a contractor, you agree to promote the products no matter what. You agree to promote ALL of the products, do it in a certain way, and to promote new products even if you don’t like them.
The MLM company will often retire old products that you were excited about.
As an MLM distributor, you have no choice over any of this.
You don’t have a choice about the ingredients that are included, or whether they do animal testing, or where they source the materials.
And that’s not what a true business owner is about.
A business owner has lots of options, choices, and control. An MLM distributor has no control or opportunity to make changes as they see fit.
7. You want a support system.
The final reason why MLMs are tempting to a business owner is because you get to join a team. You are welcomed into a group of people who respect and admire you. They promise to support you, encourage you, and help you succeed.
Running a solo business requires a huge amount of sacrifice: financially, mentally, emotionally, and socially.
Business owners (especially healthcare practitioners) are often at a disadvantage. They’ve completed years of school and specialty training, licensing, and registration. They have an extremely high level of education, are very intelligent, and have the ability to solve very specific health problems for their patients.
However, they may not be as comfortable solving business-related problems, marketing issues, and figuring out profit margins. These types of problems may feel confusing or frustrating. So it’s tempting to take advice from people who can solve these problems for you, in a group where people are supportive.
That’s something that MLMs promise to provide.
But there are many ways this can turn out badly. Just like a cult, it can suck you in. Your friends won’t stick around once you decide to leave. The focus of any MLM is to generate sales, not to benefit the people who join.
To avoid getting lured into a scheme, start by evaluating the pros and cons of the opportunity.
Determine whether it will Move the Needle of your primary goals.
Rant About Inflated Titles
As a side note, I get really frustrated when people use terms that don’t describe what they are actually doing.
A business owner provides services or products to serve a need that buyers have, with full financial control, and from which she or he receives a profit.
An entrepreneur does this in a new or inventive way that has never been done before. She or he creates a system that can operate without their direct involvement. They can replicate this system and sell it if they want to.
Most business owners are not entrepreneurs.
And no MLM distributor is a business ownerif all of their income comes from reselling products that are controlled by a parent company.
If they don’t have control over the future of their business, or of the inventory, of the quality of products, of the ingredients, of the shipping time, of the policies and procedures, of marketing and sales rules… if they are TOLD WHAT TO DO, then they are a contractor; not an owner.
I’ve also heard a lot of MLM reps (and small business owners) call themselves “CEO.” A Chief Executive Officer has the senior-most position in a corporation—a chief of an “office” of people. If you don’t have employees and don’t report to a Board of Directors, you are not a CEO.
People will use a number of terms that sound glamorous, but there are parameters about how these titles should be used.
Check out my MLM Definitions page for more terms and their meanings.
Although I had originally designed this to be “7 reasons,” in the video I stated “10 reasons” because I was thinking about my 10 Business Models article.
So here are 3 bonus ways an established business owner might consider joining a Multi-Level Marketing scheme.
Bonus Reason 8: You expect to remain objective
Selling MLM products as a contracted rep comes at a steep cost.
A contractor can’t be objective. As an MLM contractor, you are not able to step back and evaluate a variety of perfectly good options. That’s because as an MLM rep, your priority is to push products and to positively represent the brand.
Healthcare practitioners who resell products for one particular company cannot be truly objective about the value of other equally beneficial products. You’ll have to make a choice between thinking like a salesperson (by trying to promote specific products), and giving patients or customers options that are of most value to their particular need.
MLM reps are usually required to make a monthly or quarterly purchase to stay “active.” Thus, they are strongly incentivized to purchase and promote products from the company with which they are contracted.
When I hear from a practitioner who has joined a Multi-Level Marketing company, it’s hard for me to understand how they can remain objective. I’m especially wary if this individual tries to “sign me up” as a distributor in their downline… or if they start to recruit their own patients. This gets into a very murky area that crosses boundaries. In my opinion, it is ethically questionable for a healthcare practitioner to recruit patients using their professional platform.
When you are part of an MLM company, most of your income comes from signing people up under you. There is a lot of pressure to recruit people in your social circle. And if that group includes patients who are already vulnerable, the practitioner’s objectivity is suspect.
Bonus Reason 9: Your business will stay separate
MLMs have been plagued in the past few years by lawsuits that call into question their legal status. Due to the nearly imperceptible distinction between a Pyramid Scheme and Multi-Level Marketing, and the financial damage that many MLMs have on unsuspecting victims, there has been a huge effort to stop predatory practices and unsubstantiated claims.
Read more about this on my Helpful Info About MLMs page.
Currently, Herablife is embroiled in a number of legal battles, as well as Advocare, Arbonne, Nerium, Jeunesse, Kyani, Monat, Rodan + Fields, and many others. (source: Truth In Advertising)
Hair care products have allegedly caused scalp burns and hair loss.
Makeup products are said to cause skin inflammation.
Eyelash extender products often lead to pretty nasty eye infections (Rodan + Fields is in a class-action lawsuit regarding its eye serum).
Essential oils are alleged to cause skin burns and other terrible side effects when used improperly, and these dangerous practices are actually encouraged by a number of (medically unqualified) MLM reps.
- Essential oils should only be applied after diluting them with a carrier oil; applying pure oil directly to the skin can cause severe burns. (Source: WellnessMama)
- Ingesting it can lead to poisoning or esophageal irritation. (Source: Empowered Sustenance)
- Giving it to babies can lead to organ damage and failure. (Sources: Soaplab Malaysia and Empowered Sustenance)
- Using it on household pets can lead to toxicity and death. (Source: Vet Street)
It’s amazing how far people will go to promote healthcare products in an unsafe way. Most MLM products are not regulated very carefully. Add to that the unsubstantiated promises by pushy distributors, and it becomes a danger to the public. Making medical claims of how their product will “rid you of cancer!” or “eliminate the symptoms of diabetes!” or solve any number of health issues is irresponsible and dangerous.
Making false medical claims is also illegal.
The unsuspecting public has a difficult time telling the difference between a legitimate product and one that is used incorrectly or under the wrong conditions.
That’s how MLM reps can cross the line and become “snake oil salespeople”: when reps make claim like “This products that is only available through me will solve ALL of your problems!”
“No matter what your ailment, this will help!”
The self-aggrandizing that many MLM companies promote is directly in contrast to the transparency and trust expected of a healthcare practitioner. If you want to build credibility with patients and customers, promote products and companies that are trustworthy and transparent. Linking your business with a company that promotes unsafe practices is not the way to go.
Bonus Reason 10: You won’t be impacted by negative press
Lawsuits and claims of harm are quickly piling up on MLM companies, and this can have a direct effect on their reps.
If you promote or resell products from an MLM company that is facing allegations of impropriety, illegal claims, or sub-standard products, it will impact your ability to build a customer base or recruit a downline.
As a contractor, you will be harmed by whatever the parent company does—even if it has nothing to do with you. If the parent company starts to fail, your “MLM business” will too.
For a more in-depth description of MLMs, Pyramid Schemes, and other non-predatory business models, check out What’s the Difference Between Brick-and-Mortar, Franchise, Direct Sales, and MLM?
Information and truth about the dangers of Multi-Level Marketing is available in the following resources:
If you have any questions or feedback about this information, please comment below or contact me directly.
And if you’re looking for clarity on how to get more profit from your existing business, or are wondering whether to join an MLM, contact me. I would love to talk to you more about your options. Sign up for a free 30-minute consult so we can discuss your concerns.
Grace LaConte is a Strategic Risk Expert who helps service business owners find and fix organizational vulnerabilities. Using her experience as a Risk Officer in the healthcare and technology fields, Grace shares a refreshingly honest approach to uncovering hidden risks and opportunities. Learn more at http://laconteconsulting.com, or connect with her on Twitter @lacontestrategy.