Is Network Marketing (MLM) a Business Opportunity or a Scam?
"Of the MLM companies surveyed, the least successful was Amway/Quixtar where 99.99% of their distributors lose money, and the most successful was Herbalife, where 99.42% of its distributors lose money." — Consumer Awareness Institute
What Is Network Marketing?
Lured by the promise of "passive income", "multiplier effect", and more, I joined Amway in 1982, after being persuaded by a friend. Personally, for me, the magic was the multiplier effect where I would not only be compensated for sales that I personally generate, but also for the sales of people whom I recruit, as well as the people whom they recruit. Amway would pay me up to 3 levels of compensation. The proposition sounded so good! However, I did not put in much effort then, as I was planning to go overseas for my Master's degree. I joined merely to please my friend, as well as to find out more about what network marketing is all about.
In the late 1990s, I joined Enrich International and thought I would put my best foot forward this time round. At that time, I still believed that network marketing was a sound business concept. I tried to recruit an ex-colleague who, instead of joining me, persuaded me to join him instead. Since he had been doing multi-level marketing for a long time, I was convinced by what he had said and soon joined SkyBiz 2000.
In 2000, Enrich International was acquired by Royal Numico N.V., just as I was about to be 'promoted' to "manager level". Royal Numico changed Enrich's commission structure to 2 levels of compensation, and my stockist closed shop within a few months.
In 2001, the Federal Trade Commission instituted legal action against Skybiz 2000 and subsequently shut it down for operating an illegal pyramid scheme wherein earnings were derived primarily from recruiting other participants into the program, and not from the retail sale of products or service.
Since then, I've been very wary of network marketing, not only because I don't know the law, but also because MLM companies can change its commission structure at any time. In 2001, for example, Amway closed down Amway North America and transferred its North American marketing activities to Quixtar, a new company that it had formed, with the Quixtar business model differing significantly from the earlier Amway business model in many aspects. However, in 2007, Amway announced that its Quixtar brand would be phased out over a period of 18-24 month, and would be replaced by Amway Global, a unified Amway brand worldwide. Were the pioneer-distributors shortchanged, as a result of all these manoeuvres, I wonder.
Amway Business Plan
Is Network Marketing a Scam?
Since multi-level marketing has been touted as a lucrative home-based business opportunity, the best way to answer the question, "Is Networking a Scam?", is to find out whether their distributors are really making a reasonable income for their efforts.
Analyzing available data published by the MLM companies themselves, the nonprofit Consumer Awareness Institute notes: "Of the companies surveyed, they reported the least successful was Amway/Quixtar where 99.99% of distributors lose money, and the most successful was Herbalife, where 99.42% of distributors lose money."
In a 1979 ruling, the Federal Trade Commission (FTC) found Amway "guilty of [retail] price-fixing and making exaggerated income claims". The FTC further pointed out that more than half of Amway's distributors did not make any money, while the average distributor made less than $100 per month.
"In 1980, as part of a suit against Amway, an investigation was undertaken by the Office of Attorney General for the State of Wisconsin, led by Assistant AG Bruce Craig. Out of approximately 20,000 distributors operating in Wisconsin, state tax returns were obtained for all of the Amway “Direct” Distributors in Wisconsin, which numbered about 200, which approximately represented the top 1% of distributors. Attached to the returns were the federal forms, which revealed a breakdown of revenue and expense information.
Though these were supposedly the top distributors in the state, with an average gross profit of about $12,500, the average net income after subtracting operating expenses for these 200 top Amway distributors was approximately minus $900. This information was reported on the nationally televised “60 Minutes” show."
Pyramid Scheme Alert (PSA) says: "Pyramid marketing schemes disguise themselves as "direct selling". All such scams operate as "multi-level marketing (MLM)... They employ mass meetings to entrap consumers. They falsely promise income to all that join, based on the trick of "geometric expansion" of an endless chain. They claim to offer viable income opportunities, while inflicting losses upon 99% of all participants each year."
Why I Quit Amway
Why Network Marketing Cannot be a Viable Home-Based Business Opportunity
Have you ever thought that it doesn't really matter how much commission or rebate an MLM company compensates you for the sales that you personally generate? The reason is very simple. If your prospective customers want to buy your company's products, they might as well join the company as your distributor and keep the distributor rebate for themselves. Is it any surprise, then, that "on average, no net income is earned by MLM distributors from door to door 'retail' sales", according to Robert L. FitzPatrick in his article, "The Myth of "Income Opportunity" in Multi-Level Marketing".
This, by itself, would not have posed a serious problem (as you can still earn overriding commissions), had it not been for the fact almost every consumer is already a distributor and it's so hard to recruit. The chart on the right shows how multi-level marketing (MLM) schemes can become impossible to sustain. The jump from Level 6 to Level 7 is from 46,656 to 279,936 and from then on, each jump is mind-boggling. Is it any wonder, then, that the market gets saturated very fast?
A survey conducted by MLM-TheTruth.com in Utah County, United States, where MLM is most concentrated, showed that only 1.1% of households actually made purchases from an MLM company and 4.6% actually joined. What does these figures mean? It means that in a city of 1 million people, only 46,000 will join an MLM network. Even assuming that your company is the only MLM operating in the city, this means that your city will be saturated by Level 6, possibly within 6 months. And if you have to split the total MLM distributor market among 3-4 companies, saturation would be reached even faster.
To top it all up, MLM products are almost invariably overpriced. Because of product differentiation (differences in product features, real or imagined), it is not possible to compare apple to apple (i.e. the prices of its products with other products), unless you are an expert in that particular field. Since MLM companies require every of its distributors to maintain a certain minimum sales volume every month, it has a ready captive market. As such, prices are set well above market value, such that after rebate, it is still usually more expensive than what you can get for similar products in the supermarkets. It is a lose-lose proposition for distributors all the way.
So is network marketing a scam? To me, it doesn't matter whether it is legit or it is not. Point is you won't make much money, if any, out of it.
"On average, 99.95% of network marketers lose money. However, only 97.14% of Las Vegas gamblers lose money by placing everything on a single number at roulette. So if you're thinking about joining a network marketing plan, and aren't dissuaded by the facts I've presented, consider instead going to Vegas and placing all your money in a single pile on number 13. Sooner or later you're going to have to take my advice and just stop now."
ADDITIONAL READING: What's Wrong With Multi-Level Marketing?