Multi-level marketing companies will never tell you the truth about how many people lose money in their schemes. Some provide “income disclosure statements,” but those are massively deceptive. They omit important information such as the churn rate of distributors and the definition of an “active” distributor. Even more deceptive is they purposely omit data on tons of distributors who earn zero commissions, which makes the earnings numbers look better than they really are.
Two in-depth studies were done by academics who wanted to know the true failure rate of distributors involved in MLM. Robert FitzPatrick and Jon Taylor did separate studies using different methodologies, and both concluded that over 99% of of distributors lose money. The MLM companies try to explain this statistic away, saying most people don’t really want to make money anyway. But at the same time, the most common tool used to recruit people into multi-level marketing is the income claims. Recruiters defend their schemes by saying that there is an extremely high rate of failure across all small businesses. That’s not true. Depending on who you believe, probably 50% of small businesses fail within 2 to 4 years. But that’s a far cry from the 99% failure rate in MLM in the first year!
Below I discuss the details of the FitzPatrick’s findings. The two reports can be downloaded here:
- FitzPatrick Report: Myth of Income Opportunity in Multi-Level Marketing (conclusion on page 24)
- Taylor Report: MLM’s Abysmal Numbers (conclusion on page 25)
The FitzPatrick report included an analysis of 11 MLMs , including Arbonne, Cyberwize, Free Life, Herbalife, Melaleuca, Nikken, Nuskin, Reliv, Usana, Your Travel Business, and, Amway/Quixtar. Why only eleven companies? Because these were some of the few who distributed income disclosure statements. He focused on some larger ones, including five which were publicly traded companies. The annual revenue of these companies collectively exceeded $12 billion, and about 9 million people around the world were recruited into them each year.
The most important results of FitzPatrick’s work were the following:
- 99% of all distributors in these companies earned on average less than $13 a week in commission income. (In 10 of the 11 companies, the commissions were less than $10 a week.) This isn’t even enough money to cover the minimum purchases they’re required to make in order to “qualify” for commissions.
- Recruitment into these companies is largely based upon the offer of an “income opportunity,” yet these statistics show that the income opportunity is essentially non-existent and falsely promoted.
- Recruitment into these companies creates billions of dollars of losses to consumers each year.
- The losses of 99% of the distributors are transferred to less than 1% of the people at the top of the sales chain as “commissions.”
- The companies studied have essentially non-existent or unfeasible retail sales opportunities (i.e. participants can’t make much money selling the products because they’re overpriced).
- The promise of profit from retail sales by MLM sales representatives to consumers is the basis for the industry’s claim that it is a form of “direct selling,” yet virtually no multi-level marketing companies sell significant amounts of their products to the public and are therefore not in the “direct selling” business.
- The sales forces are churned (lost money/quit/replaced) at rates between 60-90% each year. Nearly all these churned sales people stop purchasing the products when they quit the schemes, indicating that they had made purchases primarily as part of the MLM income proposition in which they inevitably “failed.”
- The massive losses among MLM recruits are explained away by MLM’s lobbying organization with the claim that the great majority of MLM participants don’t want to earn money. They only are interested in buying the MLM goods at a “discount”, the Direct Selling Association claims. The explanation does not address the impossibility of broad-based profitability – regardless of time commitment, intention, motivation or levels of talent – in an “endless chain” recruitment model. The claim of “discount buyers” also does not account for the extraordinary churn rate among MLM participants, the majority of whom quit the schemes within a year and stop buying the MLM goods forever.
- The lack of broad-based and profitable retail selling is the single most telling sign that MLM companies are merely pyramid recruitment scams, not direct selling businesses. They have no “customers” and they have no profitable retail salespeople. A business in which almost none of its sales representatives earns a profit and almost none has a sustainable retail customer base cannot be called “direct selling.”
- In virtually all cases, MLMs require monthly or annual purchase quotas by the sales people in order to qualify for the promised “commissions and rebates” gained from new recruits. The required purchases gained by making false promises of future income account for virtually all of MLM “sales,” not consumer demand or legitimate marketing.
- Commission pay plans in these companies send most of the money to the very top levels:. One of the largest MLMs in the world sends 84% of all commissions to the top 1% of its distributor chain. What chance would the newest recruits at the bottom have to earn a profit?
- In half of the 10 companies, 70% or more of participants earned no income at all. For example, 96% of Arbonne’s sales representatives never earn any commissions at all. 80% of YTB’s “agents” also earned no commission at all. In other cases, the same pattern may exist, however, the companies hide that information by only counting the “active” participants or those “active for
What does all of this mean for Mary Kay? After all, won’t the Mary Kay supporters claim that Mary Kay is different from all of these companies and these aren’t their numbers?
They’re right… Mary Kay’s numbers aren’t included here because they don’t release them. Why don’t they release them? Because the numbers are so fabulous and support the claim that MK is a fabulous income opportunity? Or are these numbers hidden because they would be proof of the dismal opportunity Mary Kay really is? (I’ll guess the latter.)
Mary Kay may not be directly represented here, but you can bet their numbers are no better than these. We have former directors from all levels who can attest that these numbers are true for Mary Kay. Women are not making a living with Mary Kay. The very top distributors earn mostly small incomes (not real career earnings) and a very tiny number of distributors earn big money. Everyone else earns next to nothing… with most everyone else actually losing money.