Direct Sales companies, also known as Multi-Level Marketing (MLM) and Network Marketing, are growing exponentially. (Check out a list with hundreds of MLMs around the world.)

But despite their popularity and far-reaching impact, the MLM business model is often predatory, unethical, and at times illegal.

In this post, I want to evaluate the Disclaimer of one MLM company to shed some light on how this model works, how these organizations view risk, and why you should proceed with caution.

The Direct Sales Model: Hype and Recruitment

First, a bit of background about how this type of company operates.

Multi-Level Marketing (MLM) and Direct Sales companies are really, really good at one thing:

Marketing.

They are successful because instead of focusing on distributing products in a traditional method (like Brick-and-Mortar and Brick-and-Click), they instead focus on marketing as the product.

MLMs use the power of influence to generate hype and recruit consumers who will promote and purchase their products/services. In turn, promoters are incentivized to sign up more people to join the company, which is called their “downline.”

While required to sell physical items or services (in order to avoid getting the dreaded “Pyramid Scheme” label), many MLM companies take advantage of this by

• inflating the price well above market value,
• instructing reps to over-purchase product (which we call garage qualified and front-loading), and
• encouraging reps to get into debt (using the Lottery Mentality belief that their luck will soon turn around).

The Pyramid Myth

A common MLM retort is that “every company is shaped like a pyramid!” While the shape may be similar, with fewer people at the top, healthy companies do not put their employees or contractor at huge personal risk. A healthy organization does not encourage people to purchase and hold inventory in order to be successful.

Here is a graphic that shows the structure of an MLM or Direct Sales business, compared to a traditional business:

Predatory Tactics

In many countries, Pyramid Schemes are deemed illegal. Government leaders are starting to see the dangers of the MLM model due to the harm it causes to desperate and financially vulnerable people.

Tens of thousands of people experience financial, emotional, and mental harm after “working” for an MLM. They were led to believe that the MLM company would fulfill the promised dream of financial success and happiness, something that rarely happens. Yet very few safeguards are in place to stop these predatory practices from continuing. (Read more: Helpful Info About MLMs)

Unfortunately, they may promise freedom, a no-risk investment, and a team of supporters… but the reality is that the MLM model makes it easy to prey on people in vulnerable situations.

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Now that we’ve discussed the basics of how Multi-Level Marketing and Direct Sales companies operate, let’s take a look at how they protect themselves from risk. By analyzing the wording, you can enhance your level of risk intelligence and recognize how to communicate more clearly with your customers (or make sure you aren’t using predatory tactics like those mentioned above).

 

Analysis of a Disclaimer

I am going to analyze an actual disclaimer from a popular top-50, multi-million-dollar skincare Multi-Level Marketing company. (Some details have been changed to protect their privacy)

A disclaimer is a declaration of intention to give up a right, claim, or privilege. It is often used as a way to deny legal recourse and to define the limits of that company’s responsibilities to the consumer. Most businesses (like mine) use a disclaimer to inform potential customers of the risks involved, and to protect themselves from legal repercussions.

In the case of a dangerous business model like Direct Sales and Multi-Level Marketing, the warnings about their predatory practices are written right in their disclaimer.

 

Here is the disclaimer of a Direct Sales company, taken straight from their website:

“[MLM] makes no promises or guarantees regarding income. The success or failure of each [MLM] Independent Contractor, like any other business, depends on your skills and personal effort. You should not rely on the results of other [MLM] Independent Contractor as an indicator of what you will earn.”

Let’s analyze this line by line.

 

Part 1 of the Disclaimer

“[MLM] makes no promises or guarantees regarding income.”

And yet… every rep signs up with an extremely rosy picture of how successful they will be, right?

To succeed, MLM must sell a “fake it till you make it” attitude. The image each rep presents must be one of extraordinary positivity. In fact, the positive thinking tactics promoted by MLMs are similar to those used by cult leaders.

Should you decide to quit the MLM, it is very difficult to extract yourself. Several systems are in place to discourage the IC from leaving. They are put under tremendous pressure to remain “active” for as long as possible using psychological control techniques like

• groupthink (the power of agreeing with what the majority of people will do),
• sunk-cost bias (not wanting to admit that what you’ve already spent was in vain),
• intimidation, and even harassment and bullying. 

Leaving an MLM is very hard to do, especially when the rep has cut off family and friends who weren’t “supportive” of their new opportunity to be a business owner (although technically anyone who signs up with a Direct Sales company does not operate their own company, but I digress).

 

Part 2 of the Disclaimer

“The success or failure of each [MLM] Independent Contractor, like any other business, depends on your skills and personal effort.”

 This is partly true.

The majority of people do not have the unique combination of skills, temperament, personality type, and tenacity to make it in the high-pressure world of direct sales.

The only requirement to sign as a Contractor with a Direct Sales or MLM company, all you need to do is sign an agreement form and purchase an Introductory Package containing product samples.

But many people who sign up as a Direct Sales distributor are told they will definitely succeed. They are not warned about the challenges in this type of position, or the high likelihood of failure. Their upline promises that the products will “sell themselves.”

MLMs are dependent on a constant inflow of new members, due to the frequent turnover (reps who quit). And since an MLM cannot sustain itself without a constant stream of new reps, they are constantly on the lookout for potential converts.

This constant need for recruitment means that MLMs have to lower the bar. They do not require any sort of formal interview or weed-out process to see if the candidate has the qualities that will actually help them succeed.

Here are just a few things you need to be a successful salesperson:

• sales skills (not everyone can sell, and the best salespeople have extraordinary natural abilities),
• influencing skills (the ability to convince others to listen to you, and to act in a way you suggest), and
• the mental toughness to accept constant rejection.

Most MLMs do not explain that REJECTION is a normal part of the sales process. If you ask any sales professional about their daily routine, they will tell you that most of their time is spent hearing “Sorry, not interested.” The very essence of selling is getting in front of people, enthusiastically sharing the value and benefits of your products, and hearing rejection nearly all the time.

Take a look at my articles on Failure and Fear: What Happens When We Avoid Pain in Decision-Making? and The 4 Responses to Fear as a Leader

In addition, MLMs do not warn new recruits of the financial requirements to succeed. Nearly everyone who joins an MLM must invest hundreds, even thousands, of dollars in inventory that they will “resell” to potential customers (often to family members and friends). Yet this inventory is often stored in their garage as new  products are launched (garage qualified), or they go beyond the expiration date and are unusable.

In a previous post (Examples of the Sneaky Promises MLMs Use to Attract New Reps), I shared the clever wording used by MLM companies to lure recruits into their network.

But to say that the failure is dependent ONLY on the rep’s abilities is cruel. Direct Sales/MLM representatives have very little control over their destiny. The MLM company may present a (false) sense of security and a rosy picture of success, but they are pulling all the strings. Leaders who own the MLM are in charge of all the:

• policies,
• pricing,
• distribution,
• market saturation,
• product offerings,
• product quality,
• return policy, and
• customer service.

Independent Contractors have no control over any of these things. They are completely at the mercy of those who run the company (who are the true owners).

When an Independent Contractor fails, she or he is blamed for their failure… even when most of the problem is due to the MLM company’s business model. When a company relies on generating sales in an unsustainable way, over-saturating the market with too many representatives, and encouraging reps to sign up their own competitors, then it’s a flawed model. MLM companies sabotage their own reps by creating a system that cannot sustain itself.

 

Part 3 of the Disclaimer

“You should not rely on the results of other [MLM] Independent Contractor as an indicator of what you will earn.”

Most MLMs make a huge deal out of promoting the “amazing success!” of their top earners. But in reality, very few Independent Contractors make any money.

In a study of the largest MLM company in the world (Amway), top distributors earned an average gross profit of just $12,500 a year. After subtracting expenses, the top earners’ net income was negative $900. (source: FTC report)

So the fact that there are “no promises or guarantees” puts tremendous pressure on the rep to feel totally responsible for her or his success… even though the chance of making a profit in an MLM is very, very slim.

This statement also directly contradicts the “fake it till you make it” concept that is strongly encouraged by MLM companies. This means that you need to pretend to be successful and happy, even if the reality is that you’re struggling and unhappy. The contrast between a fake façade (outward appearance) and actual numbers can lead to cognitive bias, where we truly believe that everything is fine even when it’s obviously not true.

Faking success is so common that many MLM reps use creative titles to add to their credibility. Here are 199 such titles used by actual representatives.

Conclusion

I hope this analysis gives you an idea of how dangerous the Direct Sales/Multi-Level Marketing model can be.

By their own admission, Direct Sales companies make absolutely no guarantees of success (despite the constant exhortation to the contrary.

They also admit that if you do not have the sales skills to constantly face rejection and keep going day after day, you will not succeed.

And finally, they don’t hide the fact that only a tiny percentage of reps become top earners, and that this is not the norm. The average MLM reps should not expect to make a profit, since the very nature of this business model relies on recruiting more buyers to support the income of those at the very top.

 

For more resources about Direct Sales and MLMs, visit the Helpful Info page.

 

If you want help figuring out the best way to make more profit in your company, find out more here.