Multi-level marketing plans systematically flawed
Filed under: Entrepreneurship, Ripoffs and Scams, Fraud
I've been studying multi-level marketing for several years, and Robert FitzPatrick has been studying the industry even longer. He's been qualified as an expert witness in MLMs and knows a whole lot about the industry. He recently released a report on 11 large MLMs which demonstrates that a full 99% of participants lose money.I've believed for a long time that any business venture which boasts 99% failure rate is one to avoid. Quite predictably, the supporters of multi-level marketing plans exclaim that those who don't succeed (i.e. turn a profit) have not worked hard enough or have not done the right things. Really? Could it really be that all 99% of the participants in MLMs are lazy losers who don't try hard enough? I seriously doubt it.
Sure, any business venture carries risk along with it. But FitzPatrick wrote recently on his blog that multi-level marketing is systematically flawed, and I agree with him. There's no such thing as a "good" MLM. People will suggest you "just haven't found the right one." Yeah. Ask the people who are on their eighth or ninth MLM and still haven't made any money.
The sad truth is that multi-level marketing companies are designed for consumers to lose money. The owners of the companies get rich, and a very small handful of people are able to profit handsomely at the expense of the 99%+ below them in the recruiting chain.
Failure is all but guaranteed in MLMs because they are based upon an endless chain of recruitment. The money is not generated by a robust business of selling products and services to legitimate retail customers. It's generated by recruiting new people into the scheme, who pay fees to sign up and also purchase expensive inventory and supplies. These members make ongoing purchases (even though they're usually not selling much to customers) in order to stay "qualified" to receive commissions from their downline.
Robert FitzPatrick has this right: The 99% loss rate in multi-level marketing companies is built into the plan, and the owners of these companies are well aware of it from the start. 99% of members will never be able to recruit enough new people into the plan to recover the money they've "invested" in fees and minimum purchases. That, my friends, is a flaw in the design which will never be overcome by most.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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Reader Comments (Page 1 of 1)
8-07-2008 @ 12:26PM
Steve said...
So it took a study of 11 pyra(MLM)id schemes to reinforce what anyone with common sense knows within the first five minutes of interacting with an Amway Krishna?
Wow ... that's either diligence or boredom.
Then again, a lot of people apparently don't get it -- because they're still signing up to be fleeced.
I wonder if this guy's study didn't address the MLMers' biggest ploy -- getting the marks to invite them over to "talk." We're conditioned that it's rude to kick someone out. It's all fine and good, when you're in someone else's space, to say "Oh, look at the time," and leave. But even when someone is trying to rip us off, it's hard to say, "Oh, look at us opening the door and telling you to take your pointy-on-the-top-wide-on-the-bottom 'network' on out of here."
Side note: Fire your headline writer. "Multi-level marketing plans systematically flawed" = "Sun comes up in the east."
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8-07-2008 @ 1:16PM
JB said...
I am NOT involved with any MLM organization, but in looking for ways to earn supplemental income in the past I have researched the industry. The only reason I did not end up pursuing it was my circumstances changed and I did not have the need anymore for the extra income. However, I have continued to make many purchases from direct selling companies because I have found many of the distributors to be more knowledgable and customer-centric than their retail counterparts.
With that said I take some exception to the broad brush used by Ms. Coenen and Mr. FitzPatrick to paint that ALL MLM's are "systematically flawed". At least 6 of companies represented on Mr. FitzPatrick list offer a minimum of a 90% (some offer 100%) refund of any purchases (including the "start-up kit") a distributor may make whether for personal or resale use if the distributors decides to leave the business. Many of the companies offer exceptional training tools that can benefit the distributor in many aspects of their life beyond the business. These include time managment, presentation and budgeting skills.
However, what I find most insultanting is that Mr. FitzPatrick is charging $49.95 for his report. That fee alone is more than many Direct Selling companies charge to sign up to become a distributor.
There are disreputable companies in every industry and I do acknowledge that includes direct selling , but any individual can find out the information in Mr. FitzPatrick's report with the click of the mouse for free.
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8-07-2008 @ 1:23PM
Tracy Coenen said...
Although these companies offer a 90% refund in theory, the reality of distributors collecting these refunds isn't anything to be excited about. There are, of course, catches and time limits. And many of the things distributors have "invested in" aren't refundable. So it sounds good, but it's really not.
And I have no problem with Robert selling his report. He deserves to make a living, after all. In fact, I think his price is too low!
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