Multi-Level Marketing - The Maths Behind the Sales Pitch

carbayon

Lately I have been looking at the MLM (Multi-Level Marketing) companies that “say” you can make money working from home while building “teams” of people.

These companies sell their products, in some cases real products and in some cases licenses to sell (or give free) the product on a way in with each “distributor” has to create a team by “recruiting” 2 or more people, those who joined as “distributors” have themselves to the same, thus creating different levels.

From here on, I am going to make some clear assumptions to explain the maths behind the system. These are going to be my assumptions, I just want to make sure they are clear an open, as not to mislead anyone.

1. Each distributor will have a 10% sales rate, in other words, 1 on 10 people will sign as distributor
2. Each distributor will have 5 people on their team, this is to ensure the math is simple

Done!! Those are my main two assumptions.
Level 1 – 1 (me)..................................50 – I have asked them to join, only 10% (1 in 10) did so.
Level 2 – 5 (my team).........................250 – Each member asked 50 people (50 x 5) to join, again 10% did so
Level 3 – 25 (5 x 5)..........................1,250 – Each member asked 50 people (50 x 25) to join, again 10% did so
Level 4 – 125 (25x5).........................6,250 – Each member asked 50 people (50 x 125) to join, again 10% did so

---

Total – 156 on my team....................7,800 – Where asked to joined

IMPORTANT: If the sales rate ½ to just 5%, the people contacted would have to double to over 15,000

The first problem is the amount of people you have to contact; in just 3 levels, you have contacted each individual in a small town, the farther down the levels, the more people you have to contact. By the next level the team would have to contact over 30,000 people to achieve the numbers.

The second (and most important!!) problem is located with “distributors” on adjacent levels (Level 1 and Level 2, Level 2 and Level 3 and so on). As a stating “distributor”, I will always ask friends and family to join on this new “business” where money can be made from home. The 45 people that rejected my offer will be asked again by the next level as the “distributors” in adjacent levels will share common friends. On the best scenario, people will say no few times (each “distributor” on the next level could ask the same ‘common’ friends); on the worse case, a person may signed after being asked multiple times. This could create tension as s/he signed for the third (or forth, or more) person that asked; therefore, the “distributors” that asked first may felt betrayed, creating tension among once friends.

To overcome this problem, Multi-Level Marketing companies are exploring the Internet and the new Social Networks that have been created. At firs this seemed OK, but then they go on saying that you (as the top level on your group) must work closely together with your group to increase the amount of “distributors”, this is the first flaw, on my opinion on the system, how are we going to managed this?, some team members may be in other countries (different time zones) and further more may speak little or no English.

The second problem with using the internet and Social Networks is that most connections on those sites are people we don’t really know, or people we don’t talk to frequently enough. Most people on Social Networks is in a race to see how many contacts they can have; in most case s over 80% of the contacts in the site are people we either don’t know that well, or are people that we are avoiding on real life. Jet, this people are being added to our contacts just to increase the amount of “friends”.

In conclusion, before joining a Multi-Level Marketing company, think about these 4 flaws with the system. Remember that in the real world we don’t all have over 600 friends just because a Social Network website says so; we only have few friends and some acquaintances. In my opinion, they are more important that the money you could make by asking them to join what is a flaw system.

DubTony

I've read some articles on MLM over the years, and this one holds as much water as a Dublin City Water Main. Sorry.

Every system has its' flaws. Buying houses has flaws. Building them certainly does. Starting a bricks and mortar business has a bunch of flaws. Take a look at the following list - and that's just my experience.

Flaw 1. I opened a grocery store with a six figure bank loan.
Flaw 2. I joined a franchise who insisted I buy 95% of my goods from them at slightly higher than market prices
Flaw 3. I worked 70 to 80 hours a week while trying to establish my business.
Flaw 4. The recession came and now I'm out of business with huge debts because of Flaw 5 - I gave personal guarantees.

I could go on for ever. Every business model has pitfalls. You simply need to learn to work around them.

The figures you give, whether made up by you or somebody else, are purely a representation of how the system can work. I've seen people make 100 presentations and recruit nobody, and I've seen people recruit the first 5 people they contacted and build a huge team from it. While the presentation you saw may have told you that getting 5 who get 5 etc. will make you rich in 2 to 5 years, I put it to you that you were also told that it will require effort, learning some new skills and a large amount of perseverance on your part.

I'll try to counter some of your points when I have more time.

edit: I've just glanced at some of the anti-MLM posts you've made on other threads across boards.ie. It seems you have an issue with MLM in general. I've no choice but to call you on it. It seems to me you're slating something you have no experience of ... or are these just veiled gripes from a disgruntled former networker who feels he was sold a pup?

carbayon

DubTony;

As I said on the article, I ASSUMED the numbers for the simplicity of the maths. At the moment there is a MLM company doing presentations all over Ireland and they are giving their side of the MLM company.

I wrote the article to offer my side (the other-side) of the business, the side that the MLM company promoters don't want to talk about on seminars and/or presentations.

I do agree with you that ALL business have flaws, but in some you enter the business knowing the risk (or you should know them); in others you are only presented with one fact and you have to believe what you are told.

On your example, I know before I get the loan to build the business that I am going to pay a mortgage for life on the building, I know (or I should know) how many distributors I can buy from, in your example you joined a franchised. I even know before I start the business that I am going to open and close the shop 6 days a week. I have done (or should have done) a Business Plan, so I know my income and my expenses and I have done calculations.

On most MLMs presentations you are told that the business is simple, that you work from home on your spare time, that once the products are sold, there will be residual income, that once you have a team, monthly checks arrive without you working.

I do have other articles that talk about how much a person is paid when working for an MLM, see MLM (Multi-Level Marketing) – My personal view based on a real life story. On this post also I was told that like you pointed out, people that run their own business work for cents and hour while the business starts.

I am very confused about your opening statement;

DubTony wrote: »

I've read some articles on MLM over the years, and this one holds as much water as a Dublin City Water Main. Sorry.

Isn't that a lot of water? Or are you referring to the leaks on the pipes?

Lastly, on your edited comment;

DubTony wrote: »

It seems to me you're slating something you have no experience of ... or are these just veiled gripes from a disgruntled former networker who feels he was sold a pup?

How can I be both? How come I can't have a clue? or on the other hand, be a disgruntled former networker? May be, and only maybe, I could be a former network that had no clue about MLM?

To be clear, I am neither of them. I have a "regular" job, I go to an office do my work and I get a pay-check. I have never joined a MLM company, as I can see that what I am being told by those presenting can't be supported by the maths behind the system.

If you own a shop, you need customers, simple. On an MLM, they are telling you that your team will give you residual income, they work you earn. The residual income will depend on the size of the team. The bigger the team the more money, the maths prove that a big team requires a lot of effort and a lot of sales pitch.

What I am trying to do is (as I said before) present another view and start a discussion about these companies.

noxqs

MLM is just legal pyramid schemes. The math behind them are identical.

People who promote MLM are usually poor, in debt, unemployed or desperate to get "rich quick". Usually all of them at once. Then it is easier to understand why they are so insistant that "this particular MLM works" or "their products are really good".

As far as I know not a single MLM company has been successful based on the merits of the products they peddle, but are successful on the inertia of the poor fools who enroll. This never lasts forever and unless youre the guy on top, you wont make a thing. This is a mathematical fact.

The criticism of MLM is not bad, it doesnt even have to be biased. The people have a right to know the facts behind MLM.

http://en.wikipedia.org/wiki/Multi-level_marketing

Criticism has focused on their similarity to illegal pyramid schemes, price-fixing of products, high initial start-up costs, emphasis on recruitment of lower-tiered salespeople over actual sales, encouraging if not requiring salespeople to purchase and use the company's products, potential exploitation of personal relationships which are used as new sales and recruiting targets, complex and sometimes exaggerated compensation schemes, and cult-like techniques which some groups use to enhance their members' enthusiasm and devotion.

MORE IMPORTANTLY

"UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] population of 33,000, 'only about 90 made sufficient incomes to cover the costs of actively building their business.' That's a 99.7 percent loss rate for investors."

Nobody makes any money on it. FACT.

DubTony

I'll address this one first to get it out of the way.

noxqs wrote: »

MLM is just legal pyramid schemes. The math behind them are identical.

Wrong. Any pyramid scheme worth it's salt will have no product to sell, or will require new people to buy huge amounts of the product manufactured simply to sell on to the people they recruit. There is generally no end user in a pyramid scheme and the people who "come in late" are usually the ones that get stung due to the (quite right) negative publicity the scam has attracted. The guys who make the money are usually long gone.

People who promote MLM are usually poor, in debt, unemployed or desperate to get "rich quick". Usually all of them at once. Then it is easier to understand why they are so insistant that "this particular MLM works" or "their products are really good".

This is ill-informed nonsense and obviously just your opinion.

As far as I know not a single MLM company has been successful based on the merits of the products they peddle, but are successful on the inertia of the poor fools who enroll. This never lasts forever and unless youre the guy on top, you wont make a thing. This is a mathematical fact.

Check out the following publicly listed companies first of all.

Avon Turnover in 2009 of almost $10.5 billion
Herbalife Turnover of almost $2.5 in 2009
Tupperware Sales of over $2.15 billion in 2008
Nu-skin 2009 Sales of $1.33 billion

That's just 4 companies who operate as Network Marketing companies.

There are many more.
Amway - $8 billion; Mary Kay Cosmetics $2.4b; Forever Living Products $2.1b

Nobody makes any money on it. FACT.

Jeff Roberti made $60 million with a company called NSA. He's been with that company for over 25 years. There are thousands of people worldwide who make a good living from MLM.
Kenton Worthington makes over a million and a half a year in Nu-Skin.
Ian Orford makes over £200,000 a year with Virtual World Direct.

I had an employee leave his job as his wife's Avon business was bringing in more than his job and she wanted him to stay at home with her.
To say that nobody makes any money is simply showing ignorance of the business.

DubTony

carbayon, I don't really know where to start, and I'm starting this way too late in the night to think too hard about it, but for some reason I feel I need to address some of the points you make. I'll address your comments as I read each one. My comments in blue.

carbayon wrote: »

DubTony;

As I said on the article, I ASSUMED the numbers for the simplicity of the maths. At the moment there is a MLM company doing presentations all over Ireland and they are giving their side of the MLM company.

I appreciate that, but really, the numbers you see at a presentation are simply to give potential distributors a simple and basic understanding of the growth that can occur. I've never seen a network grow 5 * 5 * 5 etc. The numbers will, in fact, bear no resemblance to anything like that.

The average you decided on can never be truly representative of anything like the actual results achieved. The fact is that most people who join the business will never actually approach 50 people. It's just the way of the world. Many, many people take the rejection as a personal rejection, and find themselves unable to carry on. Some will recognise this and put it down to experience, but human nature being what it is many of those will then blame the business model itself for their failure. So instead of taking personal responsibility for their actions, many feel that someone should have looked out for them, and look for someone to blame. Those that can and do carry on, and take on board the training provided by their sponsor or upline will eventually, with practice, become extremely proficient at recruiting (although this comes down to being more selective about who they approach as opposed to having a greater recruiting skill)

I wrote the article to offer my side (the other-side) of the business, the side that the MLM company promoters don't want to talk about on seminars and/or presentations.

What you're doing isn't necessarily a bad thing. But as you've never been in a NWM company, it is disingenuous to present your opinions in a factual way, when they are simply your opinions.

I do agree with you that ALL business have flaws, but in some you enter the business knowing the risk (or you should know them); in others you are only presented with one fact and you have to believe what you are told.

OK, I don't know how many presentations you've been to, or how many people you've spoken to about NWM, so I've no idea what you've been told. The good ones I've looked at generally present the business in a professional and honest way. Admittedly, for simplicity, many facets of the compensation plan will be left out of the main presentation, but surely anyone with common sense will research the company and the complete compensation plan before making a decision whether to get involved or not.

On your example, I know before I get the loan to build the business that I am going to pay a mortgage for life on the building, I know (or I should know) how many distributors I can buy from, in your example you joined a franchised. I even know before I start the business that I am going to open and close the shop 6 days a week. I have done (or should have done) a Business Plan, so I know my income and my expenses and I have done calculations.

On most MLMs presentations you are told that the business is simple, that you work from home on your spare time, that once the products are sold, there will be residual income, that once you have a team, monthly checks arrive without you working.

Well, in fairness the business is simple. But I feel that what you're representing here is a simplification of what people are told. Again, the research that one needs to do is no less important than if one was borrowing tens or hundreds of thousands of euro to start a business. If a person makes the decision based on what they perceived the business to be, and doesn't ask the questions, or doesn't research the company, is that a fault of the business itself?

I do have other articles that talk about how much a person is paid when working for an MLM, see MLM (Multi-Level Marketing) – My personal view based on a real life story. On this post also I was told that like you pointed out, people that run their own business work for cents and hour while the business starts.

I've read your posts in that thread, and there are a lot of inaccuracies in your arguement. I may address those later.

I am very confused about your opening statement;

Isn't that a lot of water? Or are you referring to the leaks on the pipes?

Yeah, leaky pipes. I guess your sarcometer isn't turned up enough

Lastly, on your edited comment;

How can I be both? How come I can't have a clue? or on the other hand, be a disgruntled former networker? May be, and only maybe, I could be a former network that had no clue about MLM?

I think you may have misunderstood what I said. I'd rather not get into an "I said, you said" argument, but experience in any industry, I feel, does give one the privelege to express his or her views of that industry. I certainly wouldn't feel qualified to start a thread about the "scam of tech support and equipment support costs in the IT industry" in order to "protect" others from the nasty men selling POS systems. So I guess this is my main point. Your lack of any experience in the business shows me that all you've posted is simply your opinion and has no basis in fact.

To be clear, I am neither of them. I have a "regular" job, I go to an office do my work and I get a pay-check. I have never joined a MLM company, as I can see that what I am being told by those presenting can't be supported by the maths behind the system.

If you own a shop, you need customers, simple. On an MLM, they are telling you that your team will give you residual income, they work you earn. The residual income will depend on the size of the team. The bigger the team the more money, the maths prove that a big team requires a lot of effort and a lot of sales pitch.

Developing a big team does require a lot of effort, and it requires a certain skill set as well (a skill set that can be learnt over time). But then so does working in a grocery store for 80 hours a week. I've never heard anyone say that the business is easy. In fact, I've heard the phrase "It's simple, but it's not easy" spoken by a presenter from the front of the room. Any business that's going to give a worthwhile income will require effort. To believe or assume otherwise is ridiculous.

As for a lot of sales pitch? well, this will depend on the company that one joins and what type of support tolls are available.

What I am trying to do is (as I said before) present another view and start a discussion about these companies.

I'll address some of the comments in your opening post at a later time.

carbayon

DubTony;

As I said before, I am not in a MLM myself, but I know people that is on one. This person is on one of the good ones with real products to sell and customers no so willing to buy. I may not talk about this first hand, but I am talking about it second hand. (Second had smokers die too)

In my opinion MLM are like religion and politics, once you are in a camp, it is difficult to change. I am in the sceptics camps, that is well known but now. I am guessing you are in the believers camp. My guess (and this is a wild one), is that you lost your grocery business and owe money to the bank and other people, now you are seeing MLM as a way out, a way to earn money to pay your debts.

I know people make money, but those are the ones on the top. The lower you go, the less you are able to make. Most people joining now are "too" late. I also half-agree with noxqs. The people at top, the first people joining are intelligent business people, the ones being recruited (your word) at the lower levels are desperate people, people with no job that are unable to pay bills and they see this as a way out. They are offer this as a way to ear money while on the dole.

The MLM maths are the same regardless of the company; but as you said, each company has a different compensation scheme, so I didn't want to go onto that. I too know people with teams of over 100 people and people with teams of two.

The main thing about MLMs is that they work on two ways, you earn money by recruiting (again, your word) and you ear commission on the sales. Thus you need a big team (5 or more), this means that each of your team members will also need a big team. You could work for less money and built a team of 2 people, but people join MLMs to make money, not to make friends. 5 seemed to me a reasonable number. Attrition rate will increase with time (as you said, through mentoring and experience), but that will not (in some cases) increase your team, it will help you keep the team as is, as people will get frustrated and leave.

Edition:
I forgot to talked about the POS over inflated prices. I too despite those people, as they give a bad name to the rest of IT people that are trying to do an honest job. As a person who had to purchase a POS, I am sure you have an opinion and you are more than welcome to express it. I will agree or disagree with you on what you say. But my point on this topic is simple - "Customer care earns the money and the business".

As an ex-POS person myself, I kept the prices of the hardware low and maintain a great relation with my customers. I made my money on the support calls and the support contracts and broke even on the initial sales.

Unlike other companies, I maintained equipment older than 3 years and I replaced anything that broke at no cost (as long as there was a contract in place) to the shop. I never (and I know companies that do it) told a customer that the equipment is over 3 years old and is not cover in the contract. Forcing them to buy a new one, and then sold it at 3 times the retail price.

I know plenty of companies that think customers are made of money and they are computer illiterates, so lets charge them the more we can and make the most profit. Given that I disagree with this, I left that company and moved on.

DubTony

Just to clarify, I am not currently working with any Network Marketing company and my first exposure to the business was in 1987.

Re: "My Word - Recruit". What would you call it?

carbayon

DubTony;

Your answer leads me to believe that you were in the MLM business. If you were, I wonder why you are no longer on it.

Personally I would use lure, but to be neutral I would go with "sign".

tedshredsonfire

Guys surprise surprise there are some mlm compnaies tha work same as there are some franchises that work. personally I think business any business is hard enough without having to worry or understand the different levels involved and i need to set up this person as a dist and this person as a rep etc etc. I usually run a mile as soon as I hear that. Some work some don't but if its too good to be true and seems so easy etc.
It would be interesting to see how many sales or sign ups are of friends and family members of the rep rather than pure sales but I would guess it would be rather high.

carbayon

Romalda;

Could you please let me know what Universities (and or colleges) are teaching MLM?

I would like to take the course to learn more, so please let me know where I can study this subject.

carbayon

Romalda;

Firstly, nice way to avoid the question, all I want to know is what college is offering the module.

Secondly, I have never said that people don't make money. If you read the post it says that the ones on the top make money.

Lastly,Tim Sales is not a valid example. He is the HEAD on some MLM companies, he is so good at MLM that he is making a business about training people on how to succeed as a MLM employee. If you are the HEAD you will make money. Sean Fitzpatrick and Michael Fingleton made millions being the CEO of banks, would you buy training books from them on how to make money working on banks? Does everyone that works in a bank make the money they did?

Tim Sales is the person preaching about home life and about making money from residual income. I have seen his videos and read his material, so I know about Mr. Sales (great last name!!)

DubTony

re - why am I no longer in network marketing.

In the 80's I joined a company and worked with them for 2 years. I built a nice business that paid residual income that equalled about one and a half times the national wage at the time, so I retired - yup retired. Residual income and all. (You don't need to be making millions to retire in MLM). The company changed it's comp plan 2 years later, reducing my income by about 35% and went out of business shortly afterward.

I foolishly took the opinion that they were a bunch of crooks, and at the tender age of 25 I swore I'd never get involved with a network marketing company again. That was the stupidest mistake of my life - until I made the next one almost 20 years later.

Anyway, that's the excuse I have for being an MLM hater for a long time - what's yours?

edit: You needn't answer that. I've re-read the thread you linked to earlier and it seems pretty obvious what your gripe is. You have a problem with other people making money from your efforts. Your distaste for the industry is almost palpable, and it seems the reason you have a problem with it is quite pathetic.

The fact is that almost every time you do anything somebody gets paid. When you turn on the light you're making a contribution to the wages of the employees of the electricity company. When you get on a bus you're paying a small part of the drivers wages. The same is true when you buy petrol, go grocery shopping or put your bin out.

dormant_co_acc explained in very simple English how the business works and what is attractive about it. You failed to come back with anything, and instead, a few days later, opened this thread. You come across as former distributor for an MLM company who couldn't make it work, but unlike contributors to the other thread, you won't take responsibility, and look for somebody to blame. You can't pinpoint a single individual so you're blaming the industry as a whole. That's how it looks from where I'm standing.

dormant_co_acc admitted that he felt that he had failed in the business and your reply was typical of somebody who has failed and won't take responsibility.

" Believe me when I say to you that you failed not because anything you did or failed to do, but because the system is design for you to failed from the start." This is a simple catch all used by people who create anti-MLM websites, purely in the hope that it will make them feel better about their dismal performance. They blame their sponsors, they blame the industry leaders and then blame the business itself. It would be like me starting a thread about "How Convenience Stores are the dregs of the retail world", simply because one of the stores I owned went to the wall.

Your rhetoric about people making money from your efforts shows a serious misunderstanding of the business and how it actually works. It has been explained on that thread. I suggest you read it again.

Anyway, I'm pretty disappointed with myself for getting into this so I'm going pass on the opportunity to comment further. It seems to me there's a bee hanging around you somewhere and you aren't going to let go until you've either killed the thing or exhausted it entirely. I won't hang around to find out which.

Tib

Hi DubTony,

could you please contact me on my email! It is on my profile.

Thank you!

Tib

dudara

Thread closed due to age.

dudara