With hundreds of multi-level marketing (MLM) companies touting MLM success and pushing everything from make-up to home utilities to weigh-loss juices, the average American will likely to come into contact with an MLM either as a customer or representative.
So what is the real picture of MLMs? Are they all just big scams? Can you actually make money doing it? How much time and money is involved? What is the actual likelihood of MLM success? Jon M. Taylor, Ph.D conducted comprehensive research and analysis of the compensation plans of over 400 various MLM companies and presented his findings in his e-book, “The Case (For And) Against Multi-Level Marketing”. His findings are pretty sobering:
What Are MLM Success and Drop Out Rates?
- In the first year of operation, a minimum of 50% of representatives drop-out.
- After five years of operation, a minimum of 90% of representatives have left the company.
- By year 10, only those at or near the top have not dropped out – making it safe to say at least 95% of representatives have dropped out.
To contrast these statistics, consider the failure rates for traditional small businesses. The Small Business Administration’s statistics for 2008 found that 44% of small businesses survive at least four years and 31% at least seven year, and 39% of businesses are profitable over the life of the small business. Only 64% of small businesses fail in 10 years.
How Much Time and Money is Involved?
What kind of expenses are required to launch an effective recruitment campaign for a recruitment-focused MLM (a company that places compensation and incentive on recruiting a "down-line")? Jon Taylor estimates a minimum of $25,000 in total expenses (including incentives, products, phone, Internet, give-aways, computer supplies, advertising, travel etc.). To come up with this figure, he joined a recruitment-focused company and worked full-time on the business for a year. Obviously this figure will differ based off a number of factors including personal commitment and the company's requirements.
For a product-centered MLM, where the product is the focus for compensation and bonuses, expenses will include the cost of a starter kit, marketing expenses, party-hosting expenses, Internet, phone, office supplies, travel expenses...etc. For a properly launched campaign, this could run anywhere from $1,000 per year on up. The chances of being able to start a successful MLM business with little or no upfront income is slim to none.
Can I Be Successful Doing This Part-Time?
It all depends on what kind of success you are looking for, and how the MLM sets up its incentive and compensation plan. In a product-centric MLM, success may come from acquiring free or reduced product (which is great if you love the product and your goal as a representative is to acquire as much product at as little cost as possible).
However, if it is cash you are looking to generate, the chances of making a decent part-time income are slim. Despite many MLMs promoting their company as a great way to work part-time for a little cash for Christmas or hard times, a full or part-time MLM business doesn't come cheap or easy. As is indicated above, starting an MLM can be very costly and time consuming. Additionally, some MLMs require you to generate certain levels of income or recruitment levels in order to even start qualifying for compensation plans. It is very likely that anyone trying to do an MLM business for a short period of time will find themselves in the hole financially because of products and supplies purchased upfront.
Can You Really Make Money?
Can you really make lots of money? It is hard to decipher on every company. But in his research, Jon Taylor poured over the public MLM Nu Skin, and cited a 2008 case study which shows the number of people achieving Blue Diamond status (the highest level of earning) was 0.14% - not even a half of a percentage point. The reality is, only a tiny percentage of representatives actually realize the high earnings advertised in marketing materials and meetings. It is usually only those few who joined the MLM at the very early stages of the business and who are positioned at the very top of the entire recruitment chain who are making the big bucks. If you come in to a well-established MLM expecting to make a large income, you'll find out sooner or later that the opportunity train has already left the station.
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 are likely to have profited after subtracting expenses and 997 out of 1,000 individuals involved with an MLM lose money (not including time invested)."
To be clear, selling a product out of your home (also referred to as direct sales), is a viable home-based business opportunity. Anyone interested in selling a product to generate income has a high probability of success. Having said that, however, it is crucial to research and investigate the company and products for which you want to represent. There are many single-level marketing companies where the likelihood for generating income is much higher than typical MLM statistics. This is because compensation comes solely through selling products (no down-lines, minimums or recruitment tactics). Additionally, some MLM companies are product-centric and have compensation plans designed around richly rewarding product sales.
Disclaimer: This list is in no way an endorsement or formal recommendation by About.com Home Business for or against multi-level marketing opportunities. It is imperative that each Reader conduct his or her own thorough research before making a business decision.