Network marketing (a.k.a. multi-level marketing or MLM, consumer
direct marketing, purchasing or gifting network, etc.) developed
from pyramidal concepts, which initially led to pyramid schemes,
chain letters, and chain selling.
While pyramid schemes are illegal, many MLM programs have managed
to
circumvent Federal Trade Commission (FTC) rulings and applicable
state laws.
Legislation and court cases have defined pyramid schemes as plans
which concentrate on commissions earned for recruiting new
distributors and which generally ignore the marketing and selling
of products and services. However, many MLM promoters, even with
good products, emphasize recruiting simply because of a
compensation system that rewards recruiting much more than
retailing.
An MLM program that some enforcement agencies may not classify as
an illegal pyramid scheme may for all practical purposes still be a
product-based pyramid scheme (PPS). Strong pyramidal elements
remain for most MLM programs, leaving participants with little
chance of financial success (usually resulting in losses), except
for a tiny percentage at the top of a hierarchy
of distributors.
The following tests should help you avoid programs in which you
will only be wasting your money, time, and effort.
THE OPPORTUNITY TEST
Were you approached primarily on the basis of the actual value and
need for the productsor for the opportunity? If the latter, the
program may be actually a pyramid device for enriching the company
and a small group of upline distributors.
Another red flag to look for is promoters who talk of getting in
on the ground floor or riding the wave of opportunity. Usually,
the bulk of the income in these cases is already locked in by the
founding distributors in the pyramidal hierarchy.
THE MARKET REALITY TEST
May MLM recruiters point to the huge growth potential of their
programs without considering the normal dynamics of supply and
demand. Without adequate controls, saturation in any given market
may soon be reachedat least in peoples minds.
Are numerous levels of distributors allowedmore than is needed to
get the products out to customers? Also, ask if the company allows
unlimited recruiting of distributors in an areawith no territorial
protection or other provisions for preventing market saturation? If
so, you may be buying a ticket for a flight that has already
departed. You could be left holding a bag of empty promises
and a worthless ticket.
THE PRODUCT TEST
Review the products offered and ask yourself:
Is it likely the products could be sold successfully on their own
merits without going through a MLM distribution system? If nothing
comparable is on the market, find out why.
Does the MLM company focus on legitimate products of value to
consumers, or does it emphasize fleeting trends and timing, and
exotic or secret formulas? Are products of consistently high
quality, and do they carry a buy-back guarantee? Can all product
claims (such as health claims) be backed up by reliable research?
Are orders filled and shipped promptly?
And are manufacturing and expiration dates printed on consumable
products?
THE COMPENSATION TEST
Can you as a distributor make a good income for the time you spend
selling the productswithout recruiting a single person? Or is the
commission paid by the company for selling the products so low that
you have to recruit a downline in order to earn a significant
income?
Would distributors several levels above youwho had nothing to do
with the salereceive as much or more total payout per sale
(including commissions and bonuses) from the company as you would
get for selling the product or providing the service?
If the latter is the case, the emphasis is on income from a
downline of distributors (that you would have to recruit), not on
the sale of products. Even though such a MLM program may have
escaped prosecution as a pyramid scheme, it may still be a de facto
pyramid scheme (or PPS).
Your odds of success in such a program will not be favorable. While
a few distributors at the top of the pyramid will be rewarded
handsomely, as many as 99% (over 99.9% in some programs) of
distributors beneath them will come away emptymost actually losing
money, after subtracting expenses and product purchases. Also, in
some programs, your quitting merely enhances the income of your
uplinebecause income from your downline rolls up to those above
you. Dont fall for the line that it takes months or even years for
most businesses to show a profit and that if you just work hard
and hang in there you will make lots of money in this MLM
program.
Be aware that in other comparable settings, sales distributors
usually show a respectable income within a couple of months, or
they turn to something else. Ask distributors who have been with
the company for two or three months if they are turning a
respectable profitafter operating expenses and product purchases
are subtracted. If not, they are only fattening the pockets of
their upline.
THE INCOME DISCLOSURE TEST
If an MLM recruiter touts huge income figures of top distributors,
request that the company disclose average payout to distributors by
percentiles (highest 1%, second highest 1%, and so on to the lowest
1%), so that you can determine your chances of success.
Ask for net payout (after subtracting product purchases) for all
distributors who ever signed up, including those not now active. If
they fail to furnish such data, they are not providing the balanced
information you need to make an informed decision.
Estimate the operating expenses for building your distribution
network. For anyone serious about building an MLM business, a
significant amount will be spent on telephone costs, travel,
samples, sales materials, office supplies, mailing costs, printing
and duplication, and (when friends and family dont respond) some
advertising.
Most distributors wind up spending far more money on products
and
operating expenses than they bring in. The best source for expense
information is ex-distributors, not current distributors who are in
denial about how much they are actually spending. If less than 1%
of all distributors earn the equivalent of a minimum wage for their
time (after subtracting all expenses and MLM products purchased),
you might want to consider a more profitable use of your money,
time, and energy. (Some researchers estimate that for most MLM
programs, less than 1% of distributors ever turn a profit.)
Another acid test of the profitability of an MLM distributorship is
to ask the person recruiting you to show you his/her last years
tax return. It has been found that it is extremely rare for network
marketing participants to show a profit for their networking
efforts on their annual tax returns.
THE PAY TO PLAY TEST
Find out how high the expectation is for you to purchase products,
services, training, etc., over a period of time, in order to be a
serious participant. In other words, what will it cost you to play
the game? Dont be fooled by a simple request for a small sign-up
fee, soon to be followed by endless invitations for specials on
purchases of samples or inventory, accelerating bonus levels for
higher sales plateaus, paid seminars, and training sessions or
retreats.
This requirement (or strong suggestion) that you make large
purchases of products over a period of time to qualify for
increasing bonus levels or purchasing discounts is one sign of a
product-based pyramid scheme. After months or years of fruitless
effort and a garage full of products, some participants come
to
realize they have merely been paying into a pyramid scheme in the
form of payments for unneeded products.
THE PRICE TEST
Are the companys wholesale prices low enough to allow a
respectable profit when marking up for resaleat a retail price
that is still competitive with comparable products through other
sources? Or are retail prices so high that they must be sold at
wholesale to achieve any volume?
If products are priced at a premium to support a large network of
distributors, then the premium portion of the price could be
considered the pyramid portion. So if a MLM product sells for $40
and a comparable product would sell for $20 at a typical retail
outlet, the $20 premium may be deemed the pyramid portion of the
price and would flow to top distributors in typical pyramid
fashion.
THE GOLDEN RULE TEST
How did you feel about the way you were recruited to do the
business, and how do you feel about approaching your family and
friends in the same way? How important are your relationships to
you?
Are you offended when they attempt to exploit your connection with
them for monetary gain? Would you want to do the exploiting?
THE TIME FREEDOM TEST
The perennial dream of those with a pyramidal mentality is to be
successful at recruiting a downline that will bring in enough money
to support them so they wont have to work themselvesthus giving
them time freedom. They can then leverage their time by living
off the efforts of others.
If a recruiter promises that by working hard for a brief time
period you will never have to work again, ask what percent of their
top distributors are no longer actively involved with the
companyand never attend opportunity meetings.
Ask veteran distributors when they last took an extended vacation.
Were they able to do so without significant losses for not tending
their downlines? And did any of them quit or scale down without
experiencing major financial losses?
Better yet, ask for a copy of the recruiters downline and upline.
Contact distributors at several different levels to see if any have
achieved time freedom.
And if you know the spouse of any of the distributors, you might
ask what problems the family has experienced due to MLM
participation (intrusive phone calls, untimely visits to the home,
and neglect of family and other duties by
the distributor).
THE HONESTY TEST
Has the recruiter been devious or up front in his or her inviting
attempts? And can the products and opportunity be sold without
making exaggerated product and income claims? Ask for validation of
each of the claims made.
If you find the truth frequently distorted, powerful and escalating
incentives may be driving the recruitment. If normally honest
persons feel the need to exaggerate
claims to sell the products and the program, you may find yourself
having to do the same.
THE CREDIBILITY TEST
MLM promoters who dont command respect themselves may lean heavily
on the credentials or character of others involved in the
opportunity. If such references are used to excess, watch
out.
Such credibility links can be deceptive. Why? Because the ethics of
MLM are so tricky to sort out that respectable and high level
people have been drawn into the most problematical of
programs.
THE SUPPORT TEST
Does the company offer an adequate support infrastructure to handle
a temporary burst of volume? Will your upline be there when you
need them, or do they have a history of jumping ship when the next
hot MLM deal comes along?
Are conferences and training programs, audio and video tapes, etc.,
free of charge (as is the case elsewhere for company sponsored
programs), or are you expected to pay for themas another revenue
source for the company and upline?
A FINAL WORD
If you have found this helpful in deciding about participation in
MLM, you could be doing your friends and family a favor by sharing
this information with at least five of them. Then ask each of them
to share it with five more persons, and suggest they tell each of
them to share it with five more, and . . . ....:-)
