Massive Failure Rates in MLM

Robert FitzPatrick of Pyramid Scheme Alert has conducted extensive research on multi-level marketing companies (MLMs). The research can be difficult with companies like Mary Kay, which are privately owned and therefore don’t release hardly any information about the dismal earnings of the sales force.

On the other hand, certain companies using MLM models that are similar to Mary Kay’s way of doing business, do release public information about their representatives. Robert studied figures for Amway (Quixtar), Nuskin, Nikken, Melaleuca, Reliv, Arbonne, Free Life International and Cyberwize.com.

Robert’s research has revealed that 99% of sales representatives in these MLM companies suffer significant financial losses. The research further revealed that on average, no net income is earned by MLM distributors from door-to-door retail sales (direct selling of products).

The research was complicated ever so slightly by the fact that the MLMs generally report figures for only active participants. Naturally, this excludes all participants from throughout the year who may have also failed. Robert determined that if all participants over a five-year period were to be included in the calculations of earnings, the failure rates would be even more devastating.

The success stories in MLM systems lie within a very small group of people, positioned year-after-year on the type of the pyramid. Those people with high earnings are included in a company’s figures each year, while “failures” from years past aren’t reflected in the current year’s statistics.

The report is available as a free download on the PSA website, but I warn you that it is a lengthy report. Here are some of Robert’s general comments on MLM, based upon his years of research into multi-level marketing and direct sales companies:

  • Another element of maintaining the MLM myth of legitimacy and a viable income opportunity is based on the claim that, regardless how it operates, MLM is still “legal.” As a legal enterprise, “success” in the business is then said to be the result of “hard work” and “following the system” recommended by the organizers, as would occur in legal businesses. Failure rates and financial losses among those recruited into MLM, regardless of their scale, are then treated as an outcome of normal business risks and markets forces or the fault of the individuals who lose.
  • The big numbers, which are cited by the scheme’s promoter as providing “extraordinary income potential,” are based on overrides from the deepest level of the “downline.” Only a tiny few can ever recruit to this level. This is mathematically predetermined from the start by the MLM structure and pay plan. The pay plan itself dooms the vast majority to financial losses, not factors of “hard work” or “following the plan.”
  • The trick of the scheme is to cover up this reality and to convince each and every enrollee that he/she can succeed by building this large and deep downline. Recruits are told that the program is a formula for wealth that “anyone can do.”
  • Though virtually none of the “sales representatives” ever earns a profit or has any “customers,” a pyramid scheme can be made to appear as a “sales company.” This is because each new recruit makes a purchase of products and the commissions are all based on the purchases of products by other recruits. There may be virtually no end-users, just a long chain of “distributors.”
  • Such a scheme can never stop recruiting. It can never stabilize since it has no true customer base. For as long as the scheme operates and expands, the opportunity for recruiting declines, thereby further reducing the opportunity for income. Profit in such a scheme is not true profit but only a transfer of money from the latest recruits to the earlier ones.
  • Yet, the laundering of money through product purchases can camouflage the entire operation as a “sales company” based on “products,” not fees. The product sales in a recruitment scheme are induced by the false promises of income tied to ongoing inventory purchases. No purchase may be required to join the scheme, but monthly purchases are required to “qualify” for the unlimited income” opportunity.
  • Even as millions of consumers are solicited into MLM and then quit after losing money, most do not understand why they lost. They are shown the luxurious lifestyles of the top promoters and are told that “anyone can do it.” The promoters convince them that they personally “failed” and that it was “their own fault.” Most have no idea of the sheer scale of people joining, losing and then quitting. They are led to believe that they are unusual in their “failure.” Consequently, they not only do not complain to the government authorities but they do not even warn friends or relatives to stay out of MLM. Shame and disappointment are covered up with silence. The recruitment program continues largely unabated.
  • As has been previously illustrated, the massive failure rates among those who invest in MLMs have almost nothing to do with the individual recruit. These multi-billion-dollar consumer losses are due to the pyramid business model. Retailing is unfeasible and the recruitment-based income plan is designed so that most will lose. It cannot be otherwise. For a few to win, basic mathematics requires all others to lose. “Anyone” cannot do it.

And here are some of the numbers that come out of Patrick’s research in this study:

  • A statistical review of twenty-one (21) MLM companies representing 5 million sales people and “projected” retail sales of $10 billion reveals that even if retail sales are assumed to be occurring, the average MLM sales person is not earning a net profit from retail sales.
  • Yet, even using the MLM industry’s own restrictive method of accounting, analysis of available data reveals that more than 99% of all “active” consumers who invest money and time in multilevel marketing never earn a profit. Some lose hundreds, others thousands of dollars.
  • MLM companies sought to make the figures appear more favorable by limiting the calculations only to the sales representatives who stay “active” for a year, or only counting those that are active during one selected month or several months.
  • The income numbers are not “profits.” The costs of doing business (buying inventory, car expenses, phone charges, purchase of marketing materials, training seminars, etc.) are not deducted, nor are taxes. Actual net income, where any exists, would be much lower than the numbers presented.
  • A review of the payouts of six of the larger and best-known multi-level marketing companies and one other more recently formed MLM reveals that more than 99% of all distributors do not earn a profit from company rebates [commissions].
  • The actual retail sales levels of the vast majority of MLMs is exemplified by Amway/Quixtar, the oldest and largest of all multi-level marketing companies. Amway was compelled by government order to provide its retail sales data. It disclosed that less than 20% of its products are purchased by anyone other than its own sales representatives.

So there you have it. Almost none of the participants in MLMs are making a profit from product sales. Almost none of the participants in MLMs are making a profit from commissions. If you read the actual report, you may be sickened at the grossly huge amounts of income paid to a teeny-tiny fraction of one percent at the top of the pyramid. It’s sick. Really.

Especially when you again consider that those at the top aren’t really making profits, they are just being paid money by the lower levels of the pyramid. Those lower level people are paying their money for an opportunity to potentially be at the top some day. Some may say they’re paying money in return for products that they could/should sell at a profit, however the fact is that almost no one turns a profit from product sales. So they are in essence just paying money to the pyramid-toppers.

Probably the most common argument I hear against these facts is “Mary Kay is different”. NEWSFLASH! Mary Kay is not different from the companies in the study. Mary Kay bases its business on the exact same chain of endless recruitment, minimal retail sales, and loading new recruits with inventory packages.

MLM is MLM is MLM… You can dress it up and give things different names, but it’s all the same scam. And that, my folks, is why nearly everyone who particpates in Mary Kay loses money. Anyone who can’t see Mary Kay written all over the above research has her eyes closed.

5 Comments

  1. Lazy Gardens

    From the 2014 Mary Kay Canada’s legally requires earnings disclosure: Of the 491 of those who were Mary Kay Independent Sales Directors, the top 50% earned commissions during the year of $19,832 to in excess of $100,000.

    Unspinning it … the bottom 50% earned less than $19,832 in commissions (and that’s before expenses and chargebacks).

    If you account for inflation, the news from Canada is even worse. To match the $19,000 that was the middle of the pack in 1999’s disclosure, a 2014 director would have to make $25,555.

  2. morningstar

    “For a few to win, basic mathematics requires all others to lose”.
    When you think sales barriers can be broken, that you will propel yourself to the next MK level. Do what it takes – in our minds we create the perfect sales/re- order (reinvestment) situation. It will not manifest under the conditions/constraints of the consultant agreement and MLM criteria – they coexist. The monumental amount of energy generated by the hopeful (lower) sales force is really to squeeze out a small number of successful sales reps. (according to MLM structures). Using blind hope of the masses is really marketing for the successful 2 or 3, at the top.
    Re-read this article to realize MLM / MK statistics prevail.

    There was a small window (in time) when MK could have up’d the game in product quality made it a easier to sell for everyone’s prosperity and ultimately MK corporate’s bottom line. Now I am day dreaming……

    1. Lazy Gardens

      Exactly … Mary Kay Inc.’s global wholesale sales are $4 BILLION DOLLARS. Sounds impressive, doesn’t it.

      But, unfortunately, there are 3.5 million Independent Beauty Consultants in the world.

      $4,000,000,000 / 3,500,000 = $1,143

      That means that each consultant’s share of the sales is $1,143 per year. If any IBC sells more, some IBC is selling less, because that number doesn’t stretch.

      The only way for the average per consultant to increase is for there to be FEWER consultants, or the sales to increase.

  3. Cindylu

    As morningstar said blind hope. At one point being with other consultants made it seem that I was with a company that cared. I soon learned it was all a bunch of nonsense. All those foolish meetings which we paid for with bogus directors top checks. I did enjoy being with women I thought were my friends. I think part of the MK allure for women is making an executive income and working with positive women. Little by little that original hope is eroded with lies, the realization that nothing is free in MK, there is no where to advertise, classes are impossible to book and hold. Also the ever changing products are this companies mostly male overseers way of exploiting thousands of women. Getting out and returning the products before the trap of debt is the only option.

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