What is network marketing, also known as multi-level marketing, or MLM? Can you really make money with this business model? Or is it a scam, like some people claim?
Part of my purpose here is to help you find financial freedom, because when you have that, you life becomes much more simple, and it’s much easier to move into your dream life. One of the ways that is frequently acclaimed to be a solid way to obtain financial freedom is by starting an MLM business. So I want to get into that topic today so that you can have a fairly comprehensive view as to what it is, and what it is not.
Before I go on, a disclaimer: I am a distributor in a network marketing company. However, this is not going to be your typical MLMer blog post telling you how great the business is and how wonderful the products are. This post is born out of several years of observation, study, and personal experience with network marketing, and my purpose here is to present the concept in as objective light as possible so that those who are considering joining an MLM company will be able to make a decision with their eyes wide open.
What is network marketing?
Network marketing is a business model set up so that a distributor, as long as he is purchasing a certain amount of product from the company each month, can make commission from everyone in his downline who is also making monthly purchases. Companies that set up a business in this way depend on word-of-mouth, rather than media, advertising.
How is a downline built? John talks to everyone he knows about the products or income opportunity. Eventually, five of them sign up as distributors, and five as customers. From the customers John will make a set retail profit, something between ten and twenty percent of the retail price.
The distributors, however, have a chance to share the product and business with others. If they all go out and each sponsor five people, then those five sponsor five, and so on, that organization started by John’s original five distributors is his downline. Over time, the organization has the potential to grow quite large and therefore pay John a handsome commission every month.
There are several myths surrounding the network marketing industry, most of which discourage people from getting involved. I’m sure I have not thought about every single possible myth; however, the following five are probably the most well-known.
**1. Only the people at the very top make any money.
The truth is, assuming they continue to make monthly product purchases, the people at the top will make the most money. Obviously. Their downlines, assuming the company keeps going, grow to astronomical proportions.
However, to say that “only the people at the top make money” is misleading. Many people have joined large, established companies and eventually built a downline large enough to make a full-time income – in some cases, a five- to six-figure monthly income.
**2. It’s a pyramid scheme.
A pyramid scheme is one in which the person at the top always makes all the money, and the people in the next level make a certain amount, but have no opportunity to make any more, and so on down.
A corporation is a pyramid scheme. The CEO has the biggest salary. VP’s, CFO’s, executive VP’s, etc. will have the next biggest salary of anyone in the corporation, but unless they get promoted to CEO, have no way of earning the same amount of money she does.
The employees in marketing and administration make a set amount, and can never make as much as one of the VP’s, let alone the CEO. The maintenance men probably have the lowest salaries, and have no opportunity of making a VP salary unless they actually one day get hired on in that position.
In network marketing, everyone has the same opportunity to make money – and in many cases, someone further down a matrix indeed makes more than their upline who is two levels up. Say that someone is named Jane. Maybe Jane’s upline, Bert, doesn’t purchase product for a few months, or gets discouraged and quits altogether without leaving the matrix. Or, Bert has only ever sponsored two people, and therefore only qualifies for a commission two levels down. Jane, on the other hand, has worked hard and sponsored six people. She now has a four-level deep organization and qualifies to make all the available commission.
**3. It is a Ponzie scheme.
A Ponzie scheme is one where members put money into a thing without receiving a product or service in return. This is illegal, and any “company” set up like this is not a true network marketing company – and will probably eventually be found out and shut down.
**4. Network marketing is a get-rich-quick scheme.
Many people certainly treat it like that, and I will be addressing that issue in a bit. However, the intention of an MLM company is not to offer a road to quick wealth, but to advertise its products via word-of-mouth. Often, it takes months for even the hardest network marketer to begin to make any amount of money worth talking about.
**5. The MLM business model ultimately fails.
I once read a blog post that explained how MLM as a business model is a failure because no company in its right mind hires an unlimited number of salespeople. Eventually, everyone in the vicinity would be a salesperson, so that the last few salespeople hired on would have no one left to try to sell the product to.
The idea has merit; however, since not everybody joins an MLM company, and since so many people give up relatively early in the game, this scenario just doesn’t happen.
Besides, sales have been up the past few years in the network marketing industry:
It doesn’t look like the model is failing, does it?
So much for the network marketing myths. What are some of the advantages of starting a business with an MLM company?
Pros of network marketing
- Deductible expenses. The IRS counts an MLM distributor as a business owner. As such, on her income tax she can claim the usual business expenses to receive a deduction: office supplies, training materials, advertising, and so on. If you have a blog, you can also deduct the web hosting fee, domain name cost, and e-mail marketing service.
- Financial leverage. No other business model provides the earning potential based on hours worked. For example, if your downline consists of 5,000 active distributors, and they each work one hour in a given month, you get paid for 5,000 hours of work – even if you only worked ten hours that month.
- Time leverage. No other business model offers the potential for time freedom that network marketing does. Working at a nine-to-five job, you might work fifty hours a week and earn $4,000 in a month. Working some other kind of micro-business than MLM, you might work twenty hours a week and make $10,000 in a month. But in network marketing, once your downline is large enough you could make five figures a month working only four hours a week.
- You can work on an MLM business in your spare time.
- Working a network marketing business causes you to learn new skills. For example, if you’re bad at looking people in the eye when talking to them, or have an annoying habit of interrupting people, you change such behavior to be a better communicator. If you decide to build your business online, you learn a whole lot about Internet Marketing, setting up blogs, and the whole nine yards.
But every Pro has its Con. Following are some of the disadvantages of working an MLM business.
Cons of network marketing
- When you first begin, it takes most, if not all, of your free time away.
- You need to talk to a lot of people in order to succeed. The industry average is three people signing up for every one hundred you talk to. (Remember that when a company compensation plan promises you an increased bonus for every three people you sponsor.)
- Companies sometimes suddenly decide not to be multi-level anymore. This is painful for people who have built even a moderately-sized downline. On a similar note…
- Companies sometimes shut down. And it’s not just “young” companies. The very first MLM company I joined was over fifteen years old. How could I forget it? They bragged about it on every doggone training call! “We’re not going anywhere!” the company presidents would say. A couple of years later, the company went bankrupt.
- Distributors who choose to build their business the traditional offline way get a lot of rejection. This is one reason many people quit after only a few months. Rejection is no fun.
- Network marketing is not for everyone. *GASP!* “What did she say? But the opportunity video said that anybody could do this business!” Listen, not everyone is a salesperson, and not everyone wants to learn to be one. And some people’s calling require too much of their time to take on a side business.
Those are the basics of what the industry is and is not, as well as the pros and cons of network marketing. Now let’s dig a little deeper, and talk about the ethics.
I know, that’s so not sexy. If I didn’t know it before, I knew it when I promoted my Kindle book, Ethical Network Marketing for the first time and fewer than one hundred people downloaded it. People don’t care about ethics. They want to know how to build their business – and fast!
Okay, since people want to talk about that first, then let me switch gears. Instead of talking about company ethics first, I will talk about…
You want to learn how to build an MLM business fast. Why?
Because you want to start earning a lot of money right away. Why?
You are either greedy, or desperate. Neither reason is a good foundation for long-term success. If you are greedy, you have a deeply rooted fear that needs to be addressed if you are serious about being a fulfilled, happy person. Greed comes from fear of lack. Ask Ebenezer Scrooge.
And greedy people manipulate other people. Manipulation is not ethical. And when you try to manipulate friends and relatives, the smart ones shut you out. You lose relationships, you lose your integrity.
Is that $100 quick-start bonus worth it?
If you are desperate, you are more likely to fail than not. Of course, we’ve all heard the story of Jack who went from being homeless to earning five figures a month in six months. If that story is true at all, it is not common. Most desperate people sign up for whatever appears to be a solution out of their situation – in this case, a big problem with their finances. They don’t think, they don’t count the cost, they don’t analyze every angle. They just jump in with both feet – and usually come to regret it.
The thing with desperate people is, they don’t need to start a business. They need first to learn to manage their finances. Why? If they think that getting more money is the answer, they are going to run over everybody as heavily as the greedy people do in order to try to build their business. In short, they are going to do it all wrong.
The truth is, everyone who joins a network marketing company, joins because they hope to make at least a little money on the side. Wanting to make an extra $200 a month is not wrong, nor is wanting to making $20,000 a month. But you need to have a reason for earning extra money. Are you behind in your children’s college funds? Do you hate your job, and know you’ll live longer if you can get rid of all the stress it causes? Are you trying to help your favorite overseas charity build a hospital?
Wanting more money is not evil in and of itself, as long as more money is not the ultimate goal.
Beyond the income factor
An ethical network marketer is going to be patient, and is going to want to help others. If patience is a virtue, it is the difference between radical success and utter failure in the MLM industry, so let’s start with that one.
Most businesses fail within their first five years. Most network marketing distributors quit much sooner than that. Statistics differ from source to source, but even a seasoned, successful network marketer has to admit that the numbers are dismal.
He can also probably tell you why: people these days are bad at persevering. In this fast food, instant-download world, people expect results yesterday. Especially when they have watched an MLM opportunity video that seem to imply that building a business with the company would be a piece of cake.
Now, it is possible, if you know enough people and work as hard as you can to communicate with every single one of them as soon as you can, to be making five figures a month within six months. It is possible, but not probable. You might sponsor ten people your first week in the business, but you can’t control how fast those new distributors get busy – if they ever do at all.
Here is a graph illustrating the average annual income per number of people sponsored:
Look at it carefully. If a network marketer sponsors ten people, their average annual – annual, not monthly – income is $2,796.
Don’t quit your day job.
If you want to make the average income of $50K a year, you need to talk to enough people to sponsor close to 200 of them.
Now, I happen to know that David and Barb Pitcock, who own the MLM company Youngevity, were well above average when they were new distributors in a wellness company. They only ever sponsored twelve people, yet were making five figures a month within their first six months. Dave says it’s because they paid $1,000 to join and desperately needed to make that money back ASAP, so they got busy. They invited everyone they knew into their home to watch a slide show presentation. Then, when they had a few people sign up, those newbies invited people to the Pitcock home to watch the presentation.
Dave and Barb were tired of their current lifestyle – juggling five small businesses and caring for (I think) three small children at the time – and not making much to show for it. So they got busy. And made sure that the people they sponsored, sponsored other people. They became leaders, and trained the people in their organization to be leaders.
In other words, they maxed themselves out (Dave was shy at the time and terrified even to show the slide show), kept the vision, and did what they needed to do. This is what is needed to make a full-time income in MLM. It is possible, but as you can see from the graph above, most people don’t do what it takes, because doing what it takes is hard.
The Pitcocks aside, most network marketers who make a full-time income, whether it’s $3,000 a month or six figures a month, went through month after month of rejection and discouragement before beginning to break even for their monthly product purchase, let alone make back what they had spent on their distributor kit.
Why? Most people say “no.” It takes time to talk to enough people to get enough “yes’s”, and then for them to talk to enough people, and so on. Even if you beat the industry average and sign up ten percent of the people you talk to, that still takes time.
And then, whenever you sponsor someone, you have to take time to help her along until she’s sponsored a couple of people.
Don’t think using the Internet will make you the exception to the rule. If anything, trying to build an MLM business online is slower, not faster, than the old-time belly-to-belly method.
If you join a network marketing company thinking that you’re going to be able to quit your job in six months, think again. And if that second thought irks you, you would be better off staying with your day job.
Speaking of getting irked, let’s talk about a distributor’s attitude toward other people. If she is willing to be patient and persevere, she is not going to manipulate people. Instead, she will make strides to help people. She will have a genuine desire to help others see a way out of their financial dire straits, or – if she belongs to a wellness company – help them to be healthier. It is a lot nicer to care about people than to manipulate them.
If you are still considering joining an MLM company, I want to play the devil’s advocate. Whichever company you join, you are going to hear about how wonderful it is and why now is the right time to become a part and other claims to entice you. To make a more objective decision, you need to hear a different point of view.
Three statements many companies make, and my rebuttal:
- “Our products will improve your health.” Many “health” products sold by wellness companies contain unhealthy ingredients. You need to study ingredient labels before deciding you want to commit to a product line.
- “Everybody needs this.” Not everyone needs to have this company’s particular product – or even a similar product.
- “Our product has no equal.” There are always other options for whatever service or product the company provides. And often, the options are at least as healthy, and are usually less expensive.
Whatever company you join, make sure it is not in debt. As far as that goes, make sure it’s not in any legal problem. In either situation, the company will eventually not be able to pay out commissions…and perhaps even be forced to go into bankruptcy.
Most companies are on the up-and-up both financially and legally, but you need to do your due diligence.
Is network marketing for you?
If the idea of building a residual income through multi-level marketing still appeals to you, understand this: actually doing it is going to take a lot more work than you might think. It certainly takes a lot more work than the average company opportunity video will let on. However, if you go back and look at the increase in profit for the direct sales industry, you might think that more people these days are saying “yes” to opportunities, or at least are more willing to try the products. Either way, this trend should be encouraging.
I only ask that you do three things: first, research whatever company you are considering before you commit to it. Do searches such as “complaints about [company name]” or “legal problems with [company name].”
Second, be nice when you’re talking to people about the business. No arm-twisting allowed. Third, tell the truth. No hype. Keep your personal integrity at all costs. “Everybody” doesn’t want to do the business, and “everybody” doesn’t need the product.
****Want more great info like this to help you increase your wealth while simplifying your life? Be sure to click here to sign up for blog updates, plus a couple of great bonuses to help you on the journey!