Why Multi-Level Marketing Companies are the Wrong Choice for the Aspiring Entrepreneur
A lot of the topics I discuss on this site involve ways to effectively spend and allocate your money, whether that be though repaying student loan debts, choosing investments, or buying a new home. One thing that’s not talked about enough, though, is how to actually make more money. Increasing your income is arguably the most important factor in your “financial equation”, and one that is often minimized by many in the financial industry. Recently I’ve received a lot of questions about how to increase income, whether that be through your current career or starting a side hustle. One question stood out and brought up some points that may be important for you to consider:
“I’ve noticed some of my friends leaving their jobs to start selling makeup or skincare products for a well-known Multi-Level Marketing (MLM) company. I always thought these types of businesses were unreliable, but more and more people I know are joining them and they seem to be doing well. A friend has asked me to join her team…should I?”
Now, this may sound like an appealing offer — to be your own boss and make money on your own hours — BUT…
I would recommend staying far away from these MLM sales organizations. I completely support the entrepreneurial spirit, and wanting the work freedom these types of businesses claim to offer, but you’re much more likely to find success and fulfill that spirit in other ways. The best way, in my opinion? Get involved in or even create your own bona-fide startup!
What’s a Multi-Level Marketing Company?
Before going in to why I’m so pessimistic about these “businesses”, it’s important to talk about what exactly they are, because most people aren’t entirely sure. Unfortunately, the opportunities most companies depict couldn’t be further from the truth for the majority of their “business owners”; their business models make it hard to identify the full job responsibilities on the surface. To add to the confusion, this type of business goes by many names, including Multi-Level Marketing, Direct Selling, and Network Marketing. If you find a brand that identifies as any of these things, consider that your first warning sign.
What’s the difference between a “normal” company and an MLM? In a “normal” company, the company makes its revenue (for the most part) in one way: by selling products or services to customers. MLMs, though, are different. If you “build your business” by working for an MLM, you make money in two ways. Some of your revenue comes from selling their products… but most of your income comes from recruiting salespeople to work below you. MLM companies are common in industries such as makeup and skincare, haircare, nutrition, and sometimes even insurance. (Fun fact — if you look back and some of my more controversial posts about the insurance industry, you will find some comments from one of the biggest MLM insurance companies out there.)
Before making the career change to an MLM, or any career change for that matter, you should be sure that you are fully prepared to do so. Just like any other transition to a new career, jumping in to join an MLM requires planning. You need to make sure you are financially ready for whatever may come with the change — because sometimes it can bring on more financial hardships than expected. If you are unsure how to do this, take a look at my free Quit Your Job guide, where I break down the steps on how to prepare and how to know when you’re ready to make the shift.
How Do I Know if a Company is an MLM?
With so many different business structures out there today, it can sometimes be difficult and confusing to identify which companies actually operate with an MLM business structure. If you see these things in a company, they are most likely an MLM:
Advertising opportunities to “be your own boss” or “work few hours but get big pay”. These types of companies love to highlight that their independent distribution structure means the distributors have huge freedom in when and how they work. While this may be true, using it as a selling point is slightly misleading; working few hours and earning big pay only comes for a small few in the company.
Their products are not sold in stores. Oftentimes the products these companies are selling are not available for purchase anywhere else, making them the sole distributor. Most of the time you will not even see these companies on Amazon, which is shocking in this digital age where so much of our shopping and purchasing is done online. These products are typically purchasable through distributors (yes, these are those people in your Facebook feed posting about buying the latest, most innovative nutrition supplement).
They don’t just want you as a customer; they want you to sell it as well. This is probably the biggest giveaway of an MLM company. When those selling the product are asking you to join their team and sell as well, know that their motivation comes from the ladder structure I mentioned earlier. Any company where your ability to recruit new employees has an effect on your income is one you should probably avoid.
Here’s Why Joining an MLM is a Mistake
Now that we have a clearer image on what exactly this type of company looks like, let’s address why joining one might not be the right move.
These companies have a very dubious business model. A business structured so that your earning potential stems from recruiting people to sell below you is not sustainable. The relevant regulators in the US haven’t come out and outright said that MLMs are pyramid schemes… but they’ve come very close to. Additionally, these companies usually have a “minimum monthly spend” amount for their employees to maintain an inventory of the product. They must purchase a specified amount each month in order to stay eligible as a distributor. Any company worth working for will not force you to spend money to buy products each month. And indeed, these spending requirements are one of the primary reasons that so many people drop out of MLM organizations after only a few months.
The economic rewards promised are highly unlikely. In fact, the majority of MLM workers actually lose money (oftentimes due to that pesky minimum monthly spend mentioned above). The median MLM distributor often only makes around $2,500 a year, rather than the big bucks these companies advertise. And (not to give you horrible flashbacks to 10th grade math class), if the median employee only makes about $2,500 per year, that means that half of the distributors make less. The people who are making hundreds of thousands of dollars a year are the 1% of the 1%, and usually got into the company very early. It’s highly unlikely to have the same success as you see in the testimonials on their sites.
Along with that, there are only a tiny percentage of people that stick it out long enough to even get to a point where that would be possible. 50% of people drop out of MLM businesses in the first year, and only 10% stay longer than 5 years. To put that in perspective, it’s been found that 50% of small businesses last 5 years or more; that is a significantly higher success rate, and is even more meaningful when considering the fact that small businesses often have a reputation of being hard to maintain in the first few years.
Don’t Quit on Your Entrepreneurial Goals… Just Don’t Join an MLM!
It is highly commendable to want to pursue a more do-it-yourself career, or position yourself in a job where you have flexibility and entrepreneurial abilities. If being your own boss appeals to you, do it, just don’t do it by selling makeup or overpriced energy drinks and by recruiting other salespeople to join you.
A little personal blurb…I had an experience recently at a networking event with an independent distributor for a major energy drink MLM. This woman was very knowledgeable not only on the product, but on health and wellness in general. She knew her stuff and had a lot of great ideas, but everything she said was brought back to the energy drink she wanted to sell. Eventually, I looked right at her and said “ This product really isn’t going to fix the problems you just identified. But, I’ll hire you on the spot, right now, to be my health and wellness coach”. She immediately shook her head, and continued to insist that taking XYZ product would solve my issues. I explained to her that I wasn’t interested in the company, I was interested in her, but she would not budge. Her final statements to me included “Well, why don’t you take a few samples and think it over.”
Here’s the thing. She had a lot of great health insights, and is someone I gladly would have worked with as a health/nutritional consultant, or even a personal trainer. How much would I have been willing to pay her for that kind of service? A lot more than what she would have gotten paid for the energy drinks. Probably 10 to 15 times more. But, she couldn’t see it. I told her, multiple times, that I’d pay her more to have a different type of work arrangement, but it didn’t go anywhere.
What’s the Point?
This situation highlights the fact that for every MLM out there, in any industry, there is a business you could start with an equivalent skillset. Looking into health and wellness? Become a nutritional coach or personal trainer. Want to work in makeup and skincare? Be a makeup artist or skincare consultant. From interior design to hairdressing, ultimately you can become a “consultant” in whatever industry it is you are looking into. And while starting any type of business involves taking some risks, the odds are very good that you’ll be better set up for long term success than you would be by joining the equivalent MLM. Take it from me – being your own boss for in a real business is awesome. It’s a lot of hard work, but if you have the drive and passion, I have all the faith in the world that you can make it happen for yourself. If, that is, you prepare appropriately.
If you’re still unsure of how to start a transition like this, you can download my (brand new!) guide on How to Quit a Job You Hate to help you be as ready as possible to take the leap. Still have questions? I am more than happy to chat with you. Feel free to contact me and we can set up a call!