Multi-level marketing? Really?

[amphora]

 

There are many ways to align incentives between the company and the sales staff other than MLM. For instance, you can pay commissions for each sale. In MLM, you effectively incentivize recruiting more salespeople.

The John Oliver clip is great and really gets to the heart of the matter.

[Lithium]

If it's really a good product, recruiting salespeople should be a breeze once it is established that the product can sell.  If there is $10 of profit in every skin product that's sold, the salesperson could keep $7 and the developer can keep $3.  If you add a third level to that, where everyone gets 30% of the take of the person they recruited, then the salesperson gets $7, the next one up the scheme gets $2.10, and the developer only takes home $0.90.

you can play around with those numbers all you want, but it doesn't make sense for the developer to give the "cut" away to more middlemen... unless the product is garbage and doesn't sell, and the only way to make money is by duping and exploiting the salespeople and then encouraging them to cut their losses by finding the "greater fool."

[Donnie]

Lithium wrote:

If it’s really a good product, recruiting salespeople should be a breeze once it is established that the product can sell.  If there is $10 of profit in every skin product that’s sold, the salesperson could keep $7 and the developer can keep $3.  If you add a third level to that, where everyone gets 30% of the take of the person they recruited, then the salesperson gets $7, the next one up the scheme gets $2.10, and the developer only takes home $0.90.

you can play around with those numbers all you want, but it doesn’t make sense for the developer to give the “cut” away to more middlemen… unless the product is garbage and doesn’t sell, and the only way to make money is by duping and exploiting the salespeople and then encouraging them to cut their losses by finding the “greater fool.”

Click to expand...

This isn't right.  Even if you have a great product, you still have to take a capital risk in the form of inventory purchases and investment in sales and distribution to get the product to market.  A growing company may not be cash flow positive for a long time.

Many people may not want to put a lot of capital at risk to build a business this way.  They may start an MLM to offload some of the risk (and the reward) to salespeople who have to buy and sell their own inventory and manage their own sales distribution network.

As probably the only person on this forum that has actually looked at investing in MLMs and performed due diligence on them, you can usually quickly determine whether an MLM is likely a scam or not by investigating:

(i) whether the product is being sold significantly above a market rate, and

(ii) whether most of the revenues of the company come from (A) fees from salespeople either in the form of initiation and ongoing dues and/or forced product purchases or (B) sales to non-MLM agents that are actually consuming the products.

[G]

Donnie wrote:

Lithium wrote:

If it’s really a good product, recruiting salespeople should be a breeze once it is established that the product can sell.  If there is $10 of profit in every skin product that’s sold, the salesperson could keep $7 and the developer can keep $3.  If you add a third level to that, where everyone gets 30% of the take of the person they recruited, then the salesperson gets $7, the next one up the scheme gets $2.10, and the developer only takes home $0.90.

you can play around with those numbers all you want, but it doesn’t make sense for the developer to give the “cut” away to more middlemen… unless the product is garbage and doesn’t sell, and the only way to make money is by duping and exploiting the salespeople and then encouraging them to cut their losses by finding the “greater fool.”

Click to expand…

This isn’t right.  Even if you have a great product, you still have to take a capital risk in the form of inventory purchases and investment in sales and distribution to get the product to market.  A growing company may not be cash flow positive for a long time.

Many people may not want to put a lot of capital at risk to build a business this way.  They may start an MLM to offload some of the risk (and the reward) to salespeople who have to buy and sell their own inventory and manage their own sales distribution network.

As probably the only person on this forum that has actually looked at investing in MLMs and performed due diligence on them, you can usually quickly determine whether an MLM is likely a scam or not by investigating:

(i) whether the product is being sold significantly above a market rate, and

(ii) whether most of the revenues of the company come from (A) fees from salespeople either in the form of initiation and ongoing dues and/or forced product purchases or (B) sales to non-MLM agents that are actually consuming the products.

Click to expand...

Guest post, Donnie?

For what it's worth, I know nothing about MLM; I wouldn't even know what it stands for if it weren't for the title at the top of the page.  Never heard of Roper or whatever.

If there are multiple layers of a "cut" isn't this by definition a pyramid scheme (n.b. "scheme" not necessarily "scam")?  Particularly if the cut is coming from people that are paying into it?  (ii, above)

As for PIMD and MLM...after a quick lookaround at his website (agree with Complete Newbie about vagueness) it would seem that this is one piece of a portfolio.

[Dicast]

I don't care for MLM simply because I don't like stuff being pushed on me. I can see where direct demonstrations of some products would be an improvement over internet reviews but I don't think that is the way most MLM works. I can also see the strained relationships, easy money loss,  etc. I've had a nurse relentlessly push a travel MLM company on me and I was pretty happy the day she left our hospital.

Here's what I found on the internet. https://www.thebalance.com/the-likelihood-of-mlm-success-1794500

"So is it possible to make any money doing an MLM? After finishing all of his analysis and research on various MLM data, Jon Taylor concluded, “In every case, using the analytical framework described, the loss rate for all these MLMs ranged from 99.05% to 99.99%, with an average of 99.71% of participants losing money in an MLM. On average, one in 545 is likely to have profited after subtracting expenses and 997 out of 1,000 individuals involved with an MLM lose money (not including time invested)."

[docnews]

Hate MLM but will love to learn more behind these schemes.

Once noted a Monat person bragging about how much the company had paid out and then bragging about how many people had joined on. So I did a little math: ~$2500 over 3 years was the average. They exclaimed that an average is not a good indicator due to the exponential growth of those selling, which is true. But this gives a ball park figure and it assumes no costs to run your business / deliver product. And as a moonlighter in my field I could possibly make that in a day plus keep my friendships.

MLM is not passive yet it truly makes one passive aggressive.

[Zaphod]

G wrote:

Donnie wrote:

Lithium wrote:

If it’s really a good product, recruiting salespeople should be a breeze once it is established that the product can sell.  If there is $10 of profit in every skin product that’s sold, the salesperson could keep $7 and the developer can keep $3.  If you add a third level to that, where everyone gets 30% of the take of the person they recruited, then the salesperson gets $7, the next one up the scheme gets $2.10, and the developer only takes home $0.90.

you can play around with those numbers all you want, but it doesn’t make sense for the developer to give the “cut” away to more middlemen… unless the product is garbage and doesn’t sell, and the only way to make money is by duping and exploiting the salespeople and then encouraging them to cut their losses by finding the “greater fool.”

Click to expand…

This isn’t right.  Even if you have a great product, you still have to take a capital risk in the form of inventory purchases and investment in sales and distribution to get the product to market.  A growing company may not be cash flow positive for a long time.

Many people may not want to put a lot of capital at risk to build a business this way.  They may start an MLM to offload some of the risk (and the reward) to salespeople who have to buy and sell their own inventory and manage their own sales distribution network.

As probably the only person on this forum that has actually looked at investing in MLMs and performed due diligence on them, you can usually quickly determine whether an MLM is likely a scam or not by investigating:

(i) whether the product is being sold significantly above a market rate, and

(ii) whether most of the revenues of the company come from (A) fees from salespeople either in the form of initiation and ongoing dues and/or forced product purchases or (B) sales to non-MLM agents that are actually consuming the products.

Click to expand…

Guest post, Donnie?

For what it’s worth, I know nothing about MLM; I wouldn’t even know what it stands for if it weren’t for the title at the top of the page.  Never heard of Roper or whatever.

If there are multiple layers of a “cut” isn’t this by definition a pyramid scheme (n.b. “scheme” not necessarily “scam”)?  Particularly if the cut is coming from people that are paying into it?  (ii, above)

As for PIMD and MLM…after a quick lookaround at his website (agree with Complete Newbie about vagueness) it would seem that this is one piece of a portfolio.

Click to expand...

The difference is the key point Donnie mentioned above, where sales come from. If the sales come from other sales people and not true customers, its a pyramid scheme.

Its not that an actual MLM type model cant exist, its totally possible and for it to be on the up/up. However it just doesnt seem to do so that often. These types of companies end up being just a smidge of grey on the legal side of pyramid scheme. HLF (herbalife) was just recently judged by the government and while they used every description and euphemism out there, said everything short of they were a pyramid scheme. They forced some changes and are following their books so it will be interesting to see how that ends up.

Now with the internet, there is really no excuse to need such a person to person MLM type structure. Make a website, sell on amazon, ebay, etc...etc...build a blog, kickstarter and generate some interest. MLM while totally possible to be legit, just seems to attract scammers.

The Amway crowd was really strong here a couple years ago, was always getting accosted in parking lots and such, so annoying.

[Donnie]

 

G wrote:

Guest post, Donnie? For what it’s worth, I know nothing about MLM; I wouldn’t even know what it stands for if it weren’t for the title at the top of the page.  Never heard of Roper or whatever. If there are multiple layers of a “cut” isn’t this by definition a pyramid scheme (n.b. “scheme” not necessarily “scam”)?  Particularly if the cut is coming from people that are paying into it?  (ii, above)

Click to expand...

I'd consider writing a post about MLMs if there were interest.  An MLM is not a pyramid scheme in the usual sense of the term if products are being sold to people that actually want and use them.  In many sales organizations, people higher in the sales chain make a cut of the sales from the people they manage, so that by itself doesn't make an MLM a pyramid scheme.  The hallmark of a pyramid scheme for an MLM is when most of the "cut" is from recruiting or other fees that are not based on real consumer demand for the product.

I have looked into MLMs as an investor because MLMs cash flow very well with very low fixed costs, but I do not want that to imply that I like the business model for people looking to diversify income streams.  I would absolutely not recommend joining an MLM a side hustle.  Diecast's numbers seem overstated (maybe include people who drop out very quickly), but I agree that it is very tough to make money in an MLM.  Most people lose money.  If you are able to make money, I certainly doubt it is passive.

 

 

[Gamma Knives]

It is pretty difficult to get a good behind the scenes look at MLM. Those that actually make a significant amount of money in these companies are those that successfully recruit and develop multiple levels of people under them. If you look at how you gain levels/status/rank in these companies it is primarily based on recruiting more salespeople to work under you. The defenders focus on the fact that you are selling product but that's not passive income is it? And it isn't really where the money is.

Since monat was mentioned and my facebook had recently been flooded with pictures of hair, here is a link I found that shows their levels: http://monatglobal.com/wp-content/uploads/2017/05/Compensation-Plan_US_052017.pdf The emphasis is all on ranking up by having enough lines and sales below you. Note the bonuses for your market partners purchasing "product packs." Sounds like they are trying to get people to buy the products to resell (hope they don't end up in the garage) rather than just being a salesperson on commission.

It should be obvious that a model that depends on you recruiting people who then recruit people who then . . . is not going to be sustainable. If you happen to get in early and sit at the top of the pyramid you can make bank but if the market is already flooded you will not be making enough money if you consider the time you are investing. I have seen many well research reports that show how few people succeed but the only support I have seen is based on anecdotal evidence (I do well and so my friends). There is also selection bias; the people who don't do well drop out and are embarrassed that they failed or were taken in.

Naturally, you can find success stories (those at the top) but you can find people who have made lots of money picking a few individual stocks but that doesn't make it a wise decision.

 

[CM]

Donnie wrote:

As probably the only person on this forum that has actually looked at investing in MLMs and performed due diligence on them,

Click to expand...

Was your interest in the Herbalife duel?

https://nypost.com/2017/10/07/bill-ackman-takes-a-hit-from-herbalife-short-as-stock-soars/

https://brontecapital.blogspot.com/2016/07/herbalife-and-end-of-world.html

[MPMD]

The wife and I were on a cruise with her parents in 2015 and were on a biking excursion with some other relatively young people like 30s/40s. This is a cruise line more for older people but we like the chill factor.

Group of probably 10 people all wearing matching company gear and I asked casually what the business was. Definitely was a fitness supplement MLM can't even remember the name.

Interesting thing about the experience:

1. They didn't really try to sell us very hard. One lady asked me for my email because "you're a doctor who understands the importance of health" so I gave her my wife's email. Not in the biz of handing out my contact info to other women in front of my wife's parents.    That makes it sound like I am in that business when they aren't around, which I'm also not.

2. They were all in individual suites on the cruise paid for by the company, and this was a very nice line. The suites were like $25k/person.

3. Observing the rest of the cruise they did not seem to be hustling for new biz.

My conclusion was that every pyramid does, in fact, have a peak.

[wideopenspaces]

I swear Utah is like the capitol of MLM schemes. I know SO MANY people here hawking crap from MLM's. I dislike them because the company makes money convincing people they will get rich selling their products from home. Most of those folks (often stay at home moms) lose money. I don't care how much money could be made by starting an MLM, I would not want to make money that way. I also think using your MD status to sell health products is pretty shady. Just my opinion.

[Donnie]

CM wrote:

Donnie wrote:

As probably the only person on this forum that has actually looked at investing in MLMs and performed due diligence on them, 

Click to expand…

Was your interest in the Herbalife duel?

https://nypost.com/2017/10/07/bill-ackman-takes-a-hit-from-herbalife-short-as-stock-soars/

https://brontecapital.blogspot.com/2016/07/herbalife-and-end-of-world.html

Click to expand...

It wasn’t Herbalife.  I did find it pretty funny that Herbalife stock rallied 25% during Ackman’s “death blow” 3.5 hour speech though. Apparently Ackman got choked up in the middle of the speech, likely as he realized that just spouting out the same concerns that have surrounded MLMs for years was going to cost him tens of millions of dollars.

I was looking at a similar type business led by a well-known “doctor” who had built an MLM selling drinks, supplements, and other garbage.  Speaking of spit takes, I am pretty sure the doctor did a spit take when after 30 minutes of talking about “superfoods” I asked him what in the world a superfood was.  His jaw literally dropped and he stared at me.  Seemed like a reasonable question to me.

We ultimately passed on the deal.  The company had major “bus factor” risk and was highly dependent on the charismatic CEO.  It’s also hard to get too excited about investing in things with no value proposition to the consumer other than a placebo effect.  Years later the doctor was found to have misrepresented his education (not a real MD) and misrepresented the efficacy of of the supplements / drinks.  It’s probably a good thing we didn’t invest .

[The White Coat Investor]

Rose Boy wrote:

The White Coat Investor wrote:

Rose Boy wrote:

WCI, I’m not sure what you’re trying to get at. However, there isn’t much of a thought experiment needed – Amway has shown us that MLM can be used to “successfully” sell just about any product.

 

I think it’s a bit beside the point, though. What I and others object to is the morality of MLM. Numerous studies have shown that 99% of people lose money in MLM schemes, while those that do make money are essentially doing so at the expense of those lower in their chain of distributors (not to mention the morality of hitting up your relatives, friends, neighbors, coworkers, etc. to support your “business”). Everything I’ve read on your blog so far has been pretty legit, so I’m not sure why you are putting yourself out there to support MLM?

Click to expand…

Now I’m a supporter of MLM? Are you kidding me?

Look pal, I’m learning about this right along side you. I have no MLM business experience whatsoever as a buyer or seller.

But here’s the deal as I understand the business structure. Let’s compare it to a more “standard” structure.

Let’s say you have a product. You want to sell it. You think it’s an awesome product. So you have some options. First, you could hire employees to go out and sell it. Pay them a salary and benefits. There’s some risk there. You don’t know how much you’ll sell. Plus you don’t have much start-up money because you blew your life savings on developing the product. But at any rate, you hire the employees. Luckily, every one else thinks the product is great so you quickly start bringing in revenue and can pay the employees.

Or, alternatively, you decide to share some of the risk with the sales staff. You say, I’ll teach you about this product, provide you this product, and teach you how to sell. I’ll mentor you along the way. Instead of you paying me for that expertise and work, I get a small percentage of your profit. If you’re not successful, I’m not successful. Our incentives are aligned. The more of this awesome product you can sell, the better we both do. But wait, you can even do the same thing I’m doing once you’re successful. You can teach someone else about it, provide the product, and teach them to sell. Then you get a percentage of what they make. Of course, you still have to pay me a small percentage of the profit passed on to you since I taught this to you, but if that third person sells like crazy, we all stand to win.

This is not a pyramid scheme. If the product sucks and nobody buys it, there’s no money for anyone at the end of the day and the business does terribly.

Now, I think the problems come from the set-up being abused. The new recruits are told this is easy. The new recruits are made to pay for the seminars where they are taught to sell. Or they have to buy a certain amount of product themselves. Or they have to pay for training materials and the training materials are actually the product because nobody ever actually buys the product. That’s just a bad business.

But I don’t think I’m entirely convinced the underlying business structure is amoral or bad in some way. You give me a no-brainer product and eliminate abusive practices and I could go gangbusters with this set-up. You don’t HAVE to have meetings in people’s houses. You don’t HAVE to pressure your friends and family. You could start a website, put up billboards, or knock doors to sell it.

At any rate, I’m looking forward to learning more from someone doing this successfully. Apparently there are a lot of doctors and doctors’ partners out there doing this and I’d like to learn more.

Click to expand…

As far as “learning about this right along side you,” I’m sorry, but I don’t buy it. There’s tons written about MLM out there, you don’t need to have first-hand experience to know it doesn’t work like the fairy-tale version you laid out. You seem to have a keen sense of bad products when it comes to whole life insurance, for example, so I still don’t get why you approach MLM (and hiring, or partnering, or whatever your arrangment may be with PIMD is tacitly supporting MLM as he writes about it) with such wide-eyed enthusiasm. You’re motto is preventing “doctors from doing stupid things with there money,” and MLM seems pretty clearly to be a stupid thing to do with your money.

Click to expand...

You know the business I bought part of, Passive Income MD, LLC ,isn't involved in MLM, right?

You know the other owners of the business aren't involved in MLM, right?

One of the other owners is related to someone who is involved in a MLM company whose name I don't even know. That relative also happens to be a doctor. And apparently does pretty well with it. I thought that was kind of interesting and was looking forward to learning more about it.

That's literally all I know about it. You can bet I regret putting those three letters in that announcement post now though. Because now a half dozen people are hyper-focused on those three letters rather than all the more important stuff. Totally missing the forest not just for the trees, but for some dandelion growing at the base of one of the trees.

 

My only other experience with MLM is I have two relatives who do it as a very minor side hustle. One with Mary Kay and one with some essential oil company. It doesn't produce any significant income for either of them currently, but I know the Mary Kay was providing significant support to her family doing it for a while. She just cut back when her husband's income went up and she eventually got a better job. Neither of them feel scammed. Neither has ever tried to sell me anything. My wife has bought products she likes from both of them.

And I don't really care if you buy any of that or not.

At any rate, it sounds like you've done lots of research on MLM. How about a guest post on it? Guidelines are here:

https://www.whitecoatinvestor.com/contact/guest-post-policy/

[Zaphod]

wideopenspaces wrote:

I swear Utah is like the capitol of MLM schemes. I know SO MANY people here hawking crap from MLM’s. I dislike them because the company makes money convincing people they will get rich selling their products from home. Most of those folks (often stay at home moms) lose money. I don’t care how much money could be made by starting an MLM, I would not want to make money that way. I also think using your MD status to sell health products is pretty shady. Just my opinion.

Click to expand...

I dont remember why but Utah does have a very high concentration of these types of structures. Its been a while since I looked into them, but you're correct that its prevalent there.