Most people have heard about Multi-Level Marketing companies. In other words, MLMs.
Some friends claim that they have made a fortune joining MLMs, while others claim that it was nothing but a scam. Which is the truth?
The Definition Of An MLM
An MLM stands for a multi-level marketing network. Strictly speaking, multi-level marketing is just a sales strategy.
According to Investopedia, “Multi-level marketing is a strategy that some direct sales companies use to encourage their existing distributors to recruit new distributors by paying the existing distributors a percentage of their recruits’ sales; the recruits are known as a distributor’s ‘downline.’”
How Do MLMs Work?
A multi-level marketing network works by incentivizing people who join MLMs to continuously recruit more people into the network as distributors or “partners” so they could stand to earn passive income. This is because they get a progressive cut of the sales generated by the people they have brought in as well as subsequent members brought in by their recruits.
From a business perspective, distributing a product via a MLM network is a smart but controversial way of selling a product. In essence, it is an alternative to spending millions upfront on ads, television commercials and marketing to educate consumers about the product and enticing them to purchase the product via their stores or retail outlets.
Instead, the money that would otherwise have been spent on marketing and advertising is being paid to members of the MLM network who work tirelessly to promote and sell their products to their network one person at a time while also recruiting them into the network.
That way, sales of the product would grow exponentially as the size of the network grows with each new recruit. Such a strategy is especially effective with selling products that could be packaged as part of a lifestyle (products that a user would use every day such as supplements, household appliances or FMCGs).
It is also a great way to launch a product in a new and untested market. This is because the upfront costs would be minimal without the need to spend on marketing and advertising to educate the market as well as setting up retail outlets.
Legitimate MLMs Vs Pyramid Schemes
Before you join one, it is important to distinguish between a legitimate MLM and a pyramid scheme. To the untrained eye, it is easy to mistake one for the other.
Legitimate MLMs are legal and sustainable ways for one to sell products and make money while pyramid schemes are illegal scams designed to cheat people of their money by leveraging on people’s greed.
Product Driven Vs Recruitment Driven
The primary difference between a legitimate MLM and a pyramid scheme lies in their business model. For any business to be sustainable, compensation and bonuses must be tied to the amount of sales generated by shipping actual product and not purely by recruitment.
This is because the underlying business of a successful MLM company is measured by the number of products it could sell through its network.
A House Of Cards
A giant network full of people who don’t consume or sell any products is just a house of cards waiting to collapse. That is what happens in a pyramid scheme.
Pyramid schemes would usually require a new member to cough up a substantial amount in “membership fees” or “joining fees” so that the money can be passed on to earlier members of the network.
Going forward, members of pyramid schemes make money by solely relying on recruiting more members instead of putting added emphasis on selling products and a lifestyle that would facilitate the regular consumption of products like legitimate MLMs do.
The Con Job
In the case of pyramid schemes, the founders of the scheme would eventually come to point where their cut of the total amount of money collected from new recruits reaches a dizzying amount (an amount they intend to run away with). At that point (usually a couple of years from the time they started the scheme), they would simple run away with the money and leave the entire network wondering what has happened.
Only then would members of a pyramid scheme realize that they have been cheated, with the newest members suffering the heaviest losses (because they were the last to join and have yet to recuperate their investment by recruiting newer members).
Hence, if a network seems to be more recruitment-driven than product-driven, beware.
On the other hand, if the network you are joining seems to be compensating members based on the monthly sales of reputable products rather than recruitment, then it is probably legitimate.
Do You Have The Right Network?
If you do the math and make sure you are joining a proper company selling reputable and useful lifestyle products, joining an MLM is indeed a good way to make a fortune.
This is because monthly sales from your group is set to grow with each new member that is being converted into the lifestyle that regularly consumes products from the MLM company. The size of your group would also grow exponentially as each new member introduces new friends to use the product, joining the network to reap rewards and offset the costs of paying a premium for consuming the lifestyle products supplied by the MLM company.
Since you get a cut from the total monthly sales of your group, your monthly income is set to keep growing as long as your group keeps growing and continually consume more products.
However, this would only work if you have the right network of friends and acquaintances who have the spending power necessary to make the switch to consume the products offered by the MLM company regularly. They would also need to be of the right demographic who would be interested in the products being offered.
If You Don’t, Are You Willing To Lose Friends?
Without the appropriate network, it would be a tough sell.
For it to work, you would either have to reach out to an entirely new network who could afford to make the lifestyle switch and would be interested to do so or force your friends to join by selling them the dream that they could achieve financial independence and a steady stream of passive income.
The Danger Of Selling A Dream
The danger of doing the latter, however, is that you would lose a lot of friends in the process. Furthermore, without the right network, people you recruit from your network are likely to not have the required network to recruit more consumers of the product as well.
With time, people whom you’ve sold on the dream of achieving financial freedom would start to resent you when things do not work out as expected (which is often the case).
This usually happens when students who don’t have the network with the earning power and disposable income required to make the lifestyle switch to premium products being offered by MLM companies are recruited in to the network believing that they stand to make a fortune.
Make Sure You Join The Right One
If you ever decide to join one, make sure you join a legitimate and reputable MLM company which are offering a product you genuinely believe in. Also, make sure you put in the hard work necessary and have access to a network that can afford to buy those products and would be genuinely interested in using them regularly.
It is indeed possible for you to make a fortune through MLMs, provided you have the right network, join the right ones and do it the proper way (sell lifestyles and products, not dreams).
However, note that it is ultimately a sales job and is not for everyone.
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DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.