The Likelihood of MLM Success
Success Rates and Tips for MLM Businesses
You'd have to be living under a rock to never run into someone involved in multi-level marketing (MLM) (sometimes referred to as direct sales or network marketing). Maybe you've been to a party where a host does a presentation about makeup, cookware, or jewelry. Perhaps an old acquaintance has shown you a plan on how you can "leverage your time and money."
If you're like many, you may be skeptical of MLM businesses. Some of the leeriness is based on myths and misconceptions about network marketing, and fears of scams. And yet, according to the Direct Selling Association, millions of Americans are involved in direct sales, adding $36 billion to the economy in 2015. Those aren't small numbers.
So what's the truth about MLM? 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. (PDF) 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, which are posted on the FTC website, are pretty sobering:
What Are MLM Success and Drop Out Rates?
According to Taylor's research:
- 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.
He contrasts these statistics with the failure rates for traditional small businesses, using the Small Business Administration’s statistics for 2008 that found that 44% of small businesses survive at least four years and 31% at least seven years, 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 in MLM?
Taylor researched the investment required to launch an effective business-building campaign for a recruitment-focused MLM (a company that places compensation and incentives for recruiting a "downline," as well as selling a product). He estimates a minimum of $25,000 in total expenses that include incentives, products, phone, internet, giveaways, computer supplies, advertising, and travel etc. To come up with this figure, he joined a recruitment-focused company and worked full-time with the business for a year.
Apparently, he did everything he was asked, from buying monthly training products to attending conferences, which can get expensive. Today, those costs are greatly reduced. The Internet, online training, flat-rate long distance and/or cell phone service, and free and affordable online marketing have made building any business, including MLM, much more affordable.
For a product-centered direct sales company, where the product is the focus for compensation and bonuses, expenses include the cost of a starter kit, marketing expenses, party-hosting expenses, Internet, phone, office supplies, and travel expenses, etc. For a properly launched campaign, this could run anywhere from $1,000 per year on up.
Are MLM Businesses Doomed to Failure?
The above information might be scaring you away from a direct sales business; however, there's more to the story than Taylor provides in his report. The data isn't encouraging and it appears to put all the blame on MLM as a business model. However, there are few things to consider before you dismiss MLM as a home business option:
- MLM is less expensive than other business opportunities. While Taylor indicates large sums of money are required for MLM, compared to many other businesses, the investment is small. Franchises and business opportunities run in the thousands just for the start-up, whereas many direct sales businesses can be started for less than $100.
- The low cost often lures people in without doing their research. People make many mistakes when starting in MLM. Some don't research the company or product. Others don't read the contract they sign. Many newbies rely on the information provided by their sponsor. This is a problem because even the best sponsor won't be able to cover every little detail, and of course, some sponsors fail to disclose everything (in which case, you don't want that sponsor). Problems people experience in MLM due to failure to research or study the contract is their fault, not MLM.
- People quit MLM easier than other ventures. Because the start-up investment in MLM is much smaller than in traditional small business, it's also easier to quit. It's easier to walk away from a $100 than $5,000 or $25,000.
- Many reps struggle because they don't treat their MLM like the business it is. For some reason, many MLM businesses are viewed and treated differently than a traditional business, which is a problem. It doesn't matter what business you start, if you don't market, sell, and do the activities that make money on a consistent basis, your business will fail.
- You, not stats, dictate your success. Like most things in life, success or failure mostly relies on the individual. Certainly, the MLM industry has a vast sea of reps who don't make much money or who quit, but there are reps who are meeting their income goals and some (a small few) are rich. The same could be said about bloggers and most other entrepreneurial ventures.
Can I Be Successful Building and MLM Business Part-Time?
There are many factors that go into MLM success, including:
- Your goals. It's possible to become rich in MLM if you choose a good company and do the work. However, most MLM owners are looking to make a little extra to pay off debt or stay home with the kids, a goal a good many reach. A part-time direct sales business can help you reach modest goals. And once you start building your business, and learn the ropes, you can build it bigger if you want.
- The company. Too many people get lured by the hype, without stopping to consider the company or its product/service. What does the company sell and can you get excited about it? What are the compensation plan, marketing system, and policies, and can you work with it? Is it a member of the DSA, and through your research, been found to be a legitimate company?
- Your work ethic. Every goal requires action. MLM is no different. Success comes from doing the work that needs to be done.
Can You Really Make Money?
Can you really make the big money? The short answer is yes. However, most people don't. According to an Inc.com article on direct sales, the median income for an MLM rep is about $2,400 per year. That same article profiles a mom who makes $300,000 per year. Taylor researched Nu Skin and cited a 2008 case study which showed the number of people achieving Blue Diamond status (the highest level of earnings) 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 MLM promotional materials and at meetings. Some say the big earners got in early and are positioned at the top; however, like other MLM data, this is misleading. First, it suggests that getting in early is all you need to do to be successful, which of course is false. Success comes from work. Second, many companies have been around for over 30 years, and some of their top selling reps joined last year or five years ago.
In essence, their top earners aren't only the ones that joined 30 years ago. Finally, yes, of course, the people positioned on top make the most, but that's not because they came in early. It's because they built a business that put them on top.
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)."
That sounds dismal unless you're the 1 in 545 or the top 1 percent working your business. Further, it blames MLM without considering any of the individuals who joined.
To be clear, MLM is a viable home-based business opportunity. Anyone interested in selling a product to generate income has the ability to achieve success. With that said, it is crucial to research and investigate the company and products thoroughly to make sure that it's not a scam, and also, that it's a product and system you feel you can promote. There are many single-level marketing (selling products without a recruiting component) companies where the likelihood of generating income is much higher than typical MLM statistics.
This is because compensation comes solely through selling products (no downlines, minimums or recruitment tactics). Additionally, some MLM companies are product-centric and have compensation plans designed around richly rewarding product sales.