The MLM fallacy

I really dislike Multi-Level Marketing (MLM) schemes. I also really dislike their cousins who call themselves Network Marketing schemes or Affiliate marketing schemes. Actually they’re not cousins, they’re just clones, they’re all basically the same thing, all selling the same false promises.

I’ve been approached by a handful of people over the years, usually people I don’t know very well but have met socially or through business, who me phone out of the blue saying that there’s something important they need to discuss with me. Knowing that it’s probably not going to be compliments on my good looks or irresistible charms, I’ve listened patiently. I now know that as soon as they use the word “opportunity” that they’re trying to recruit me into a MLM scheme like Amway or Herbalife. That’s when the conversation ends.

The trouble with the MLM industry is that it simply doesn’t do what it suggests. Despite all the aggressive marketing suggesting that these systems offer you the chance to make a fortune, it’s simply not true. And the evidence for this comes, ironically, from the industry itself.

Amway are required in the UK to publish an annual earnings disclosure statement outlining how much (or how little) their "Retail Consultants" make from their businesses. It’s important to know that they don’t publish this information because they want to, they do it because they’ve been forced to by the authorities in the UK as part of a deal that allowed them to continue trading if they started following some rules.

The figures they published (pdf download) for the year from October 2010 to September 2011 show that the average "Customer Volume Rebate" paid to their 16,287 Retail Consultants was, wait for it, a massive £41. About P450. In an entire year.

It's important to note that this is an average. The highest amount paid was £556 and the lowest was £20. It's even more important to understand that this wasn’t their profit, it was just their income and it takes no account of the costs needed to generate that income. That average figure of £41 was before they deducted the cost of their phone, internet connection, power, stationery, petrol, coffee, transport, booking hotel meeting rooms and anti-depressants.

It’s similar with the other great international MLM, Herbalife.

According to their Herbalife’s income disclosure statement (pdf download) for 2011, their "Supervisors" (a third of all distributors) in the USA had average annual "earnings compensation" of $475 (about P3,500) That’s less than P300 per month. Again, note that this is earnings, not profit, it’s before they paid their bills. Note as well that these are the figures for the USA, a country with considerably higher average than ours.

When you drill down a little further into their figures you discover some more fascinating facts. For instance, the top 6% of their US “leaders” earned 89% of all the compensation that was paid out. Herbalife's "supervisors", who constitute 33% of the pyramid, shared the remaining 11% of the compensation. No compensation data was provided for the 60% of distributors who don't get to "supervisor" level so it’s probably safe to assume they earned nothing. Or more likely they earned less than nothing, making an overall loss.

I think it’s fair to assume that if the biggest and most successful MLM schemes actually make most of their recruits poorer than when they joined then you can hardly expect better from all the new ones that are cropping up all over the place.

More importantly, the whole industry is based on a series of lies. Even most of the very few “successful” people involved aren’t actually making money.

The New York Post recently reported (thanks to my friend Kasey Chang for the lead) that one of Herbalife’s apparently most successful salespeople, Michael Burton, had to concede defeat. Having allegedly turned himself from an overweight slob into a muscular hunk using Herbalife’s products he then rose through the pyramid to become, so he claimed, one of their most successful advocates. Having once claimed to earn over $25,000 every month (an annual income of over P2½ million per year) he recently had to declare himself bankrupt. In fact, rather than being fabulously wealthy, he owed over P60 million, including over P8 million in tax.

Although he claims that this is nothing to do with Herbalife I think we have a right to be very skeptical indeed. That’s because the other truth about MLM schemes is that they bear a remarkable similarity to religious cults. Critical thinking within them is forbidden and relationships with outsiders, people not also involved or who refuse to be recruited, are distinctly frowned upon.

I recently read a moving account by an anonymous man whose partner was a “Regional Director” in a MLM scheme and his account of the money she repeatedly lost and her descent from affluence to poverty is deeply saddening. Her refusal to see the reality staring her in the face was eventually tragic. What he describes about her behaviour is very close to what we see in the less reputable evangelical churches. Adoration of the leadership, blind acceptance of empty promises, endless amounts of money being contributed for worthless tuition, expulsion of critics and the abandonment of family and friends who refuse to be recruited. Eventually she had lost so much money that they couldn’t make ends meet. He says:

“Finally, unable to gain her cooperation in formulating a household budget and rationalizing her business involvements, I reluctantly told her she would soon be faced with having to choose between me and her continued MLM involvement. Without hesitation, she replied that given that choice, she’d stay with MLM. Several months later, after she spent an afternoon exploring yet another MLM ‘business opportunity’, I left the partnership.”

The truth about MLMs is that they aren’t just a harmless way of buying some pots and pans, toiletries and useless health products. The truth is that the lucky recruits just lose a bit of money. The unlucky ones lose everything.