The exchange begins innocently enough. An old friend sends you a Facebook message, a former coworker invites you to lunch or an extended family member calls you out of the blue. Under the vague pretense of “catching up,” they ask if you can meet face-to-face. When you do, the small talk feels normal, but something else hangs in the air.
At a pause in the conversation, your associate turns to you with bright eyes and makes an exciting reveal. They have a new job, they’re their own boss and they’re making a ton of money. Furthermore, your trusted acquaintance wants to offer you an incredible opportunity: get in on the ground level with them. Invest in their business, become a partner, rise to the top together.
The rest of your conversation is a flurry of pamphlets and buzzwords; promises of early retirement and vacation homes abound. “Catching up” feels more like sitting through a time-share seminar and when you finally stumble away from the interaction you are left with stacks of material and a final appeal to, “just think about it.”
The opportunity that your friend offers goes by many names. “Network,” “multi-level” or “referral” marketing make up the most commonly used euphemisms. These vague terms thinly veil a deceptive and entirely unsustainable business model. Your friend has been duped – or is in the process of duping you.
Multi-level marketing (MLM) is a sales strategy in which a company’s representatives don’t just sell a product; they also market the rights to sell it. Marketers earn a commission for each member they recruit into the company’s sales-force, with the rewards for enlisting new salespeople far outweighing incentives to sell the actual product.
Network marketing strategies distinguish themselves from illegal recruitment scams in one key way: they market an existing good. While traditional pyramid schemes only create revenue by selling “memberships” with the promise of commission for recruiting others, MLMs purport to engage in “direct selling.” Unlike their illegal counterparts, referral marketing systems can’t be proven to fail. If recruited members make enough sales, the scheme is theoretically sustainable.
While the existence of a product makes MLMs mathematically feasible, the nature of the goods they sell quickly illuminates the products’ irrelevance. Network marketing companies deal in useless cleaning solutions, spiritual sleep-aids and phony health products. Think “ion emitters” that beep when you’re stressed and “energy decanters” that bear a striking resemblance to Brita pitchers.
The products represent little more than a legal necessity to create faux legitimacy. The only people who actually buy these wares are the company’s sales-representatives themselves. Upon entering the company, policy requires members to purchase a “demonstration kit” that costs hundreds or even thousands of dollars.
With no one else actually buying the company’s useless goods, newly recruited marketers quickly fall under pressure to enlist more salespeople. Without gaining commission from enrolling new members, marketers are unlikely to escape a MLM without losing money from their initial investment. Desperate to make their new venture worthwhile, marketers begin to work their personal connections in search of commission.
With no one else actually buying the company’s useless goods, newly recruited marketers quickly fall under pressure to enlist more salespeople.
The hunt for new members often takes the form of “recruitment parties,” a trademark of the MLM industry. The gatherings take place at a current member’s home, where they’ve convinced friends, family and coworkers to learn about their new enterprise. At further personal cost, the marketer creates the atmosphere of a true party, with food, drink and plenty of chitchat. When their pitch begins, however, the gathering’s jovial tone shifts to one of cult-like fervor.
Aware that skeptical questions can deflate any sales pitch, referral marketing companies provide their members with a captivating script to use at gatherings. Performed with a balance of enthusiasm and conviction, the presentation uses priming vocabulary to artfully construct a vague promise of unlimited financial success. Members who passionately desire to, “be their own boss” and feel prepared to, “commit hard work through the system” are guaranteed to thrive.
The pitch can sound awfully convincing, but scholar Robert Fitzpatrick says that the industry’s financial disclosures reveal a sea of red flags. Fitzpatrick works with a team of lawyers and academics to conduct research and assist in court cases against network marketing firms. He contests that only founders and a few elite members can actually profit from a MLM.
“Companies say, ‘we pay out x millions in commissions’ and that sounds very impressive, but who gets those millions?” Fitzpatrick asks in an online interview. “Well, our analysis shows that 50 to 80% of all the commission goes to the top 1%.”
MLMs’ unorthodox pay plans explain this imbalance in commission earned. Representatives who make a sale or recruit a new member earn less for the transaction than the person who recruited them. This practice continues up the ranks, so that the representative actually generating a sale earns a mere fraction of the commission earned by the organization’s top members.
In order to earn more substantial commission, representatives have to assemble a vast network of recruits below them. The likelihood of enlisting this many additional salespeople is slim – the market of individuals interested in joining a local MLM quickly becomes saturated, leaving few recruits for lower-level members. Without recruits, the scheme is unsustainable for new salespeople, who never reach a higher commission bracket. This explains why most network marketing firms report that 60 to 80% of their employees leave the company within their first year.
Even if a salesperson does manage to reach a level at which they earn substantial commission, they do so on the backs of misguided chumps, and over time that base will erode and fail.
With their imbalanced sales structure still intact, MLMs simply turn to a new batch of members when discouraged salespeople quit. Confused grandparents, naïve college kids and other easy prey continue to sustain the top of the pyramid. Driven by a genuine belief in the company, these members destroy personal and professional relationships in their scramble to earn commission.
The limited benefits of network marketing will never justify this sacrifice of connections and reputation. Even if a salesperson does manage to reach a level at which they earn substantial commission, they do so on the backs of misguided chumps, and over time that base will erode and fail. Much more likely, the process simply costs a member more than it ever earns, wasting precious time and money until they acknowledge their mistake.
So when a friend wants to tell you about their exciting new venture, listen closely. They might really be on to something … and they might be on the bottom level of a scheme that’s doomed to fail.
Matthew Meyer doesn’t want to sell your bullshit or sell the right to sell your bullshit.