| Here is another great article by our long lost and forgotten friend
"Lawdawg". In light of all the hub-hub in Amway/Quixtar today the article
is as true as ever. Enjoy. Lawdawg can be found still on Archive.org. 
MLM is really an
advertising and marketing concept, not a
distribution concept.
Distribution is the manner in which goods are moved
through the market from manufacturer to end user. For example, many MLMs
distribute products by drop-shipping them directly from a distribution center to their
customers. Many non-MLMs also do this. In the past it was not
unusual for MLMs to ship a customers’ orders to an authorized distributor and have
those products either picked up by the customers (or other downline distributors) or
delivered by the authorized distributor to the customers. This is the most
common basic distribution method in retail. For example, Sony delivers
pallets of CD Walkmans to a Wal-Mart distribution center. Wal-Mart delivers
them to its stores. Customers come to the store to pick up their Sony
Walkman. Or, if they prefer, they can pay the shipping and order that same
Sony Walkman from Walmart.com and have it shipped directly to them. So it's
not distribution that distinguishes MLM as a different category of retail business from
non-MLM retail ventures.
The difference is in the
manner of marketing and advertising. Specifically, the
difference is in who bears the cost and risk of advertising and marketing expenses. In
MLM, the concept is that products can be efficiently marketed on a one-to-one basis, with
each customer being reached personally by an MLM distributor. There is rarely
any centralized marketing of the products such as mass media advertising. The
reason is that the MLM company chooses this method of distributing products to save itself
from incurring advertising risk. When
a product is advertised, the expense is incurred by the advertiser before the sale is
made. Thus, if there are no sales or if the profits from the sales generated
from the advertising or marketing do not exceed the cost of the marketing or advertising,
the advertiser actually loses money by marketing/advertising the product. MLM
companies don't want to take that risk. They shift it on to a group of
independent distributors who, with varying degrees of sales skill and training (read
"usually none") they attempt to market products on a face-to-face basis. This
is time consuming - especially for distributors lacking real sales skill or experience.
All of that time (and its monetary value) collectively spent by distributors to
"build their business" makes up the advertising and marketing expenses in an
MLM. The fact that these expenses are not borne by the MLM company does not
mean they aren't advertising and marketing expenses. They are what they are.
So the question becomes,
"do these aggregate advertising and marketing expenses (including the value of lost
time) incurred by the MLM distributor force exceed the total retail profit from the
products or services sold as a result of this aggregate expenditure of time and
money?"
The MLM company has very
little incentive to care, because it does not bear the cost of the advertising and
marketing - its "independent distributors" will though. That makes
MLM a particularly good marketing concept for new products that might be kind of "sketchy."
It allows the MLM company to see if its products will be accepted and at what price
without incurring the cost and risk of advertising and marketing those products itself.
But
there's a problem.
By and large, face to face marketing is
a horribly inefficient way to market products - especially products such as orinary
household consumables that are generally mass marketed and mass distributed, allowing them
to be sold in large volumes and with razor thin profit margins. This means
that the MLM's independent distributors (unless they find a way to niche market
"unique" (often "sketchy")
products), will not be able to recoup the value of their time by selling products even if
they sell at prices that compete with the thin margins made possible by mass marketing.
The advertising and marketing expenses exceed the profit from the sale of products
and services. Whether they add up their bottom and line and recognize it
consciously or not, MLM distributors will quickly "understand" that this deal is
not good for them.
Will some really
good salesmen still be able to turn a profit? Sure - especially if they
"niche market" unique products that carry higher profit margins. That
generally requires a real talent for sales, though.
How does the MLM company
motivate the rest of its distributors to continue even though their sales efforts are not
rewarded with enough profit to compensate the distributors for their time?
The answer: The
myth of leveraging your time through recruiting.
The MLM company includes in its compensation an override for the sales made by those
distributors recruited underneath each distributor, giving each distributor the hope that,
although they aren't really making a net profit on their own sales, they can eventually
earn a net profit by recruiting enough distributors to make sales beneath them and collect
the MLM override. All the company needs is a few early "success" stories - and a whole lotta hype - and then sit back and let the
pyramid magic happen! The result, inevitably, is that almost all efforts are expended on
recruiting more distributors than on selling products, because the only real, net profit
for most participants is in recruiting more distributors, and so on, and so on . . . . It
also means that in most cases, the people buying most of the products are the
"distributors" themselves.
This creates
a strange incentive for the MLM company. They could price their products at
competitive levels and increase their outside sales, but it would not make any difference
because there is still very little incentive to sell to retail customers because the
advertising and marketing costs to the distributors exceed their commissions - even more
so as the margin drops. Alternatively, they have a perverse incentive to
RAISE their prices over fair market value because that allows them to pay back a higher
percentage of each "sale" as part of the override and fuels more
"success" stories to motivate the distributor force. The more they
do this, the more difficult it becomes for even the real salespeople to sell the company's
products and services to outside customers.
And the end result is entirely
predictable. The "customers" for the MLM's products are mostly the
so-called "distributors" themselves. Most are losing money on their own sales
efforts (if any) in hopes of offsetting those losses through the myth
of recruiting.
Oila. You have a pyramid scheme in which only those who recruit a
large number of participants have a realistic opportunity to realize a net profit.
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