Multi-Level Marketing expert Robert FitzPatrick debunks the myth of earning money in MLMs in his article, The Myth of “Income Opportunity” in Multi-Level Marketing.
Multi-level marketing companies live and die by the claim that participants can make money. From some extra part-time money to complete financial freedom, MLMs promise you can have it. Robert Fitzpatrick notes:
The claim by multi-level marketing (MLM) companies of offering consumers a viable “part time income” or an “extraordinary income” greater than most other businesses or occupations is their hallmark attraction. It is also their greatest defense against persistent charges of pyramid scheme fraud, mind control and deceptive promotions. The question is whether MLM is a social and financial blight or a benefit to consumers. Legitimacy of this business ultimately hinges on the truthfulness or falsehood of its income claims. It is a question that affects the fate and fortune of more than five million new recruits in North America every year and countless more in other countries.
This report reveals that 99% of all sales representatives each year in the sample of companies analyzed earned less than $14 a week in rebate income. This figure is before all business expenses, inventory purchases and taxes are deducted. The figure therefore represents a significant financial loss for virtually all that join these schemes. Additionally, the report shows that on average no net income is earned on average by MLM distributors from door to door “retail” sales.
MLM companies seek to obscure their devastating failure rates by disclosing the number only of “active” participants and limiting the income figures to a one-year or even shorter time frame, thus concealing the factor of the ongoing and mounting losses of new investors. Most MLMs do not reveal any data at all on actual average incomes.
If all the participants over a five-year period are included in the calculations, the failure rate rises even further. Less than one in one-thousand will be shown to have gained any profit at all. The so-called successes in MLM are in the same small group positioned, year after year, at the top of the recruitment organization.
The business model and business practices of most multi-level marketing companies directly cause the financial losses suffered by millions of consumers, not normal competitive factors orthe levels of efforts or talents of the participants. The collective losses represent an enormous transfer of money from several million people in the US each year to a handful of owners and recruiters. Like any other force that contributes to general impoverishment, this income transfer damages credit worthiness, breaks up marriages, ends friendships and degrades communities.
Of the two categories of the MLM income opportunity, rebate income and retail sales income, the most publicized are the rebates, commissions and bonuses paid out on the purchases by “downline” recruits. This is the source that the companies claim has “unlimited potential” based on the opportunity to derive payments from an “endless” chain of recruits. MLM allows all distributors to recruit others and qualified distributors to receive rebates on the purchases made by multiple levels of recruits that recruit more recruits.
This report analyzes data from eight representative MLM companies. Seven of the companies that are analyzed are major and very well-known MLM companies and are members of the Direct Selling Association. One is newer and growing and not a DSA Member. Charts are provided showing the actual commission payouts on a per-10,000-sales-representatives basis for seven companies. The data show not only that virtually no recruits earn rebate profits but also that the MLM payout schemes transfer the lost investments of the great majority of participants to a tiny number of organizers at the top of the recruitment chains.
FitzPatrick also discusses how little actual retail selling goes on in MLMs:
The Disguise of Direct Selling
The second element of the MLM “income opportunity” is the claim of profit from retail sales by MLM sales representatives to consumers. The retail sales opportunity is the basis for the industry’s claim that it is a form of “direct selling.” Additionally, the retail sales potential is held up as a defense against pyramid scheme charges since the payments to the upline are based on the product purchases of new recruits, not chiefly on entry or membership fees.
This report exposes the myth and refutes the claim of MLM as a “direct selling” business that is based on retail sales. Due to factors outlined in the report, the MLM sales force seldom carries out retail selling. 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.