It is possible to make money with MLM, however we believe it is highly improbable. In his free e-book 'Multi-Level Marketing Unmasked', Jon Taylor found that 99.7% of people will lose money in network marketing. So for every 1,000 people who join a network marketing team, 3 will earn more money than they spend. So if I want to have 5 successful people in my first down line, I have to recruit 1,665 new members, so that 5 of them will be successful.
This may be a system that 'anyone can do', but it's also a system in which, only 1 in 333 people are successful. To try and understand why it is so difficult for network marketers to turn a profit, we looked at the compensation plans for Amway, USANA, Herbalife, and Nu Skin. As expected the system for earning money with each, are congruently unique and similar.
Each MLM has their own version of paying commission, and they are all share similar characteristics. Unfortunately we believer that they are structured in a way that makes it very difficult for anyone to turn a profit in network marketing. For example:
You have to 'qualify' to earn any commission - You are awarded 'points' when you buy products. This creates what we view as 'synthetic demand' for the products. Network marketing members are ordering product in order to remain 'active'. They order in excess of what they would personally use or what they can on sell at a retail margin, which causes them to stock pile the products.
Most of the money spent is by members - Network marketing companies acknowledge that very little of their sales are due to retail demand. Most of the product being ordered is by members for personal use (or to satisfy volume quotas). Sales are not driven by market forces, they are driven by members buying for volume targets. If very little money is coming from outside the network, then the only way for people to profit, is at the expense of people in their own down line.
It is a zero sum game - In the absence of organic sales, your up-line can only make money, if you spend money. The stories you hear about the struggling single parent who is now a millionaire might be true. However they leave out an important detail, which is: Every one of those million dollars came from other members of the network who are below them in the MLM hierarchy (which is not pyramid regardless of how closely it resembles one). Money made by one member of a MLM team, has been lost by another.
A System Prone to Negative Incentives - As we previously noted, the only way most people make any income in network marketing, is from signing new members below them in the system. Once you are in the system, your up line will receive commission on any money you spend. It is in their best interest to tell you to 'you are perfect for the team' and to 'keep spending that monthly quota'. The more you spend, the more they earn. They may believe that you can succeed in multi-level marketing, but in reality, they need your money coming into the system in order for themselves to to succeed.
Multi-Level Marketing Does not remove the middle man - Direct marketing companies will tell you that their companies are 'selling directly to you'. At best, this is a misconception, at worst it's an intentional misrepresentation. You can order products directly from the company, but they will pay a commission to the person who recruited you, and several others above you in the chain. They will tell you that you have the potential to 'earn commission' from your down line. In reality you are becoming another middle layer in the distribution chain between the supplier and your down line.
What the numbers tell us
To analyze the numbers, we looked at the compensations plans as well as the annual reports and income disclosure statements of Amway, Herbalife and USANA. Unsurprisingly, our findings suggest that only people who are very high up the network marketing structure, are making any profit. Below is our interpretation of the data we read for each company:
Amway
Your earnings in Amway are based on a combination of PV (points based on how much you and your down line spend) and BV (the dollar value assigned to how much you and your down line spend). The amount you earn, is based on the amount that you spend, as shown in the table below:
Primjedbe
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