I love business, especially small businesses and I love aspiring entrepreneurs but I hate to see my relatives and friends trying to offload ridiculously priced items which they know next to nothing about on unsuspecting people. MLM – or Multi-Level Marketing – is a form of sales where a company tries to sell a product by recruiting distributors who will also recruit distributors, who will also recruit distributors (etc.) and promises that each level recruited can make money through the sales of the level beneath.

MLM products are usually sold as being of very high quality, at least as far as the advertising goes, which is how they justify high costs. The idea is that by “people power” alone, an efficient distribution network can be set up and you can cut out all the middlemen. Well known MLMs have products that they claim are unique, all charge bucket loads of money for their products, all promise that you can make a significant extra income by becoming a distributor.

But note well:

Usually, only those who join the company early make any money from MLMs, like a pyramid scheme. The only difference is that MLMs have a product as different from a mere Pyramid Scheme. When you attend the initial seminar you are presented with a picture of huge potential based on your downline. In reality only the people at the top of the pyramid stand a chance of making any serious money. The rest will pay their joining fee to find that there is no market for their products and be faced with trying to either enrol new recruits or lose their joining fee.




If you remove the product from an MLM scheme all you are left with is a pyramid business model which is definitely going to collapse at some point leaving only the very few that joined in the beginning with any chance of making money. They have a secondary market of training, entry fees, administrative fees, etc. MLMs promise great wealth, based on geometric arguments about how many people you end up with under you if you successfully recruit 5 people who each recruit 5 people who each recruit 5 people.

It is easy enough to get dazzled by the figures until you start to realise that by the time you are just a couple of generations down you would need the entire population of your city, just in your branch. “Easy,” say the promoters, “We’re off to launch in Ikeja in a few months.” Along with the promise of wealth, they say the product is so great everyone will want it, usually claiming the product is so concentrated that even this high price is justified, and insisting that you get all of your friends involved.

But the business reason why MLMs are always bad is because by the very mechanism employed, the organisation recruits far too many sales staff. Can you imagine if Dangote recruited everyone who walked into the doors as salesmen? Maybe the store might do well initially, but what of the salesforce? It is hard enough to compete against a few dozen competitors in a tight market, what about thousands? The core of multi-level marketing is creating a long down chain. Close to 90% of the people fail to go beyond the first level and wound up their business in the first three months.

MLM requires great interpersonal and communication skills and not everyone is blessed with one which leads to business failure. This form of marketing has a saturation point beyond which the rate of business growth is marginal. It is impossible for everyone to get a lion’s share of profit. Niche products and services are usually promoted through multi-level marketing which fails to attract buyers often. In multi-level marketing you need to have a wide social network to create a down chain.

Would you not rather buy your coffee from a supermarket, your fuel additive from the petrol station, your pharmaceuticals from the pharmacy than from say, your teacher cousin, who’s trying to boost his salary by promoting things she’s barely qualified to talk about? The poor lady will also probably preach to you to join her downline!

Stop being gullible!

 

Debo Kayode Ogunranti is a business/financial advisor. Connect with him on Facebook and Twitter to ask questions about this article and other business issues.