We talk a lot about the 99% failure rate in multi-level marketing. (Yes, Mary Kay is an MLM.) Where does that failure rate come from? Robert FitzPatrick of Pyramid Scheme Alert has conducted extensive research despite the difficulties. Companies like Mary Kay, which are privately owned, release little to no information about the dismal earnings of the sales force.
Some MLMs do release information about distributor earnings, and those figures were the basis for a study done by Robert. He studied figures for Amway (Quixtar), Nuskin, Nikken, Melaleuca, Reliv, Arbonne, Free Life International and Cyberwize.com. The study was done more than ten years ago, but you should know that nothing has changed. You can see financial disclosure statements for a bunch of companies here.
So what did Robert’s research find? 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 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 who failed during the year and weren’t considered active at the time of the report. Robert determined that if all participants over a five-year period were 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 top 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.
Let me give you a few more important comments from Robert’s lengthy report:
- 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 Robert’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.
In summary… 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.
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.