Multi Level Marketing and Network Marketing explained - vital information for the potential new MLM recruit.
A First-Hand MLM Account
By Peter A Blood
In May 2000, after weeks of thought, I made a decision to join a Multi-Level Marketing company in the health and nutrition industry. Like many others, I invested nearly $AUS7,000.00 in product and promotional tools and joined as a "business builder", the 2nd rung up on the company's corporate "ladder".
Once I was committed I found myself to be a reluctant starter. In hindsight I suspect I was suffering from negativity I'd picked up from the many discussions I'd had in my life with people who had not succeeded in various MLM enterprises. I didn't know exactly why, but I certainly wasn't proud to be an MLM-er and I felt strongly that I should at least confirm for myself that the products lived up to the claims made for them. I did little more than dip my toe in the water for almost 5 months.
I found the reason for my decision to move ahead in the results I personally gained from the products. I lost 12-13 kgs bodyweight between May and October and I'd never felt better. (I went on to lose a total of 26 kgs by the end of the following January. I was actually more excited with this result than I was with the business potential! These products were dynamite!)
So, by November 2000 I was convinced I was on to a good thing and I was ready to "get involved". I spent $AUD600.00 to promote my opportunity online and almost immediately brought in a new recruit living in America. I earned myself over $AUS1,100.00 for this, from company commissions and from an incentive bonus provided by my upline for successfully recruiting a new "business builder" like myself. The money put things in a better perspective for me.
I put a lot of time into preparing my US people for their MLM career as I planned my next advertising assault. Early January, 2001 I placed another $600.00 worth of advertising in local weekly newspapers here in Queensland. I brought in a new group of three new business builders and found myself elevated to the next rung up on the corporate ladder. Wow! I was on my way!
Following the system...
I was doing just as I was told to do - following the guidelines set out in the recruiting system that was developed by my upline. I was putting flyers in letterboxes, posters on power poles, signs on street corners and I was advertising regularly in newspapers at a cost of around $600.00 a month. I was also promoting widely on the net. I was retailing my products aggressively.
I was also putting in 15 to 18 hour days, pretty much seven days a week. Most of this time I dedicated to helping the members of my team - the people I had recruited, and for whom I felt an enormous responsibility. As I understood it, it was my job to help them succeed at least as well as I was succeeding. I was excited, proud and enjoying the challenge enormously.
Clouds on the horizon...
It was a reasonably easy task for me to convince others to join me, but as time progressed, I found I was unable to get them in turn to successfully duplicate what I was doing (i.e., bring people into their own groups at a good rate), to succeed. I couldn't work it out. They had the same tools as I had. They had the same opportunity as I had. And they had me and my upline to help them wherever and whenever they wanted. What was I doing wrong? Or what was it that all of them were doing wrong?
My upline had opinions about this. It was obvious that my people were not following "the system" as they should. Basically it came down to the fact that if these people weren't good enough to succeed, I should leave them aside and find some more who could!
My concern grows
I began to get very concerned. I re-doubled my efforts to help, but to no real avail. A few started dropping out of my group. What was it I was missing? Of these "failures", thankfully, only one actually returned his business builder product order. Oddly enough, refunds were unusual.
The question of refunds
The big question here is why is it that people can accept business failure in my MLM and NOT, in the main, refund their product? There are several psychological factors that seem to be involved.
The first factor: Distributors LOVE my MLM's products... My MLM does sell a wonderful range of products. To become a successful distributor, it stands to reason that you must use the products yourself and become a "product of the products" so that you can demonstrate to others just what the products are capable of doing. Because your success as a distributor is tied to your success with the products, a new person's attitude towards using the products properly can be very positive indeed. Generally speaking, a distributor's "love" of the products is cemented in place well before they even begin to get their business off the ground.
The second factor: Distributors LOVE buying at a big discount... Once someone has established that the products work and that they can be bought at 50% discount, why would that person want to go back to the distributor buying level of just 25% off, even if he has chosen NOT to continue doing the business? If the business "doesn't work for me", so the logic goes, "...at least I'll have something good that's cheap to use for the next year or so!" Prophetic words for so many...
The third factor: Others can do it successfully, why not me?... From the moment that people first see the marketing plan demonstrated, they understand that their upline sponsor is a "successful" person - even if their sponsor has been in the business only five minutes longer than they have. The catch-cry of MLM is "...do as successful people in your upline do, and you CAN'T fail to be successful". It is only when the bank account is empty and the credit cards are maxed out that a person must face the reality that they have failed financially. When that point is reached most will unconsciously accept that it was their own fault. (The products are great, my upline is doing well - it must all be MY fault!). By returning the products, a failed distributor is actually admitting to himself and admitting publicly, that he has failed. People hate admitting failure. They would rather fade into obscurity than be seen to fail. And that is exactly what so many people do.
Pushing on - the leadership issue
Despite my misgivings, I kept pushing forward with my recruiting in a stop/start sort of way and my personal situation gradually improved. Twelve months later, it was time for me to advance to the 4th level on the corporate ladder! I wanted success and my upline wanted LEADERS! How else were my downline people going to succeed unless they followed a leader?
The recruiting pitch said anyone could do this business and make money. I'd believed that whole-heartedly, but by now I clearly understood that only leaders made it to the upper echelons, where the real money seemed to materialise. A leader, I'd come to understand, was anyone who managed to recruit other leaders. These people, in turn, had to recruit leaders to be leaders themselves, and so on...
I just had to make ALL my people leaders! Problem solved." ....Uhuh!
The Growth Plan
The plan was to get six leaders in my first line of people and then to get them to get six each and so on down the line. With my first line, including myself, I would have 7 people in my group. My 2nd line would have 36 people in it, making 43 all up, and my 3rd line would have 216 people, making 259 all up. With 259 leaders the plan just had to work. That's how a geometric progression works. (Read more about geometric progressions in MLM recruiting).
Growth Plan Problems
But by this time I had personally recruited more than 20 people. While several of these people were showing promise, (perhaps two or three), that meant for me to get six leaders I might well have to recruit between 40 and 50 people. How many people would need to be recruited for me to get 259 leaders in my downline matrix? At a rate of maybe one in every seven who might succeed, that worked out to some 1,800 people! Just so I could achieve my goal of a three level downline matrix of 259 people. Hmmm.
What if all these people entered the business as I did, with an outlay of about $7,000 for product and promotional tools? Hey! That's a total of over $12,600,000 people will have spent, just to give this opportunity a try! This business certainly wasn't impossible, but it was looking mighty grim for an awful lot of people who would have to sign up in my group for me to succeed. This was a very different picture to what I imagined before I started.
An advertising problem crops up
While I was working all of this out, I began to notice that the rate of replies to my advertising was dropping alarmingly. I doubled my expenditure, then tripled it. Not much improvement. My downline was complaining too. (This subject is explained more fully on The MLM Advertising Conundrum page).
The fact is, I now had some 40 or so people under me in my own group who were actively advertising in newspapers and on internet facilities that I had generally available to me. Hmmm!
It suddenly fell into place for me. I was really in the business of recruiting my very own competition! Of course, I had realised this earlier on, but I'd never thought in depth about its impact on myself and others in my group. (This subject is explained more fully on the MLM Market Saturation page).
As well as competing against all the other people in my upline's Australian marketing groups (which were growing fast, but facing similar problems), and all the other groups in my MLM here in Australia, here I was trying to put people in my own group out of business! (Duh!)
On the other hand, the better I trained them and the more they spent, the harder it was for me to keep my business on track!
Because I had wonderful results from using the products myself, I found it reasonably easy to randomly retail products as the opportunity to do so arose. It wasn't until I received a notice from the company about potential non-payment of my recruiting commissions because I hadn't submitted a form, that I came to understand just how important retailing should have been in my MLM's marketing plan.
From my very first attendances at regular training meetings, where I heard often enough in private conversation that "...very few people actually retailed much...", my understanding was that the "10 Customer Rule" was nothing more than "...a means for my MLM to keep a rough record of retail figures." Many, many times I was to hear on my international telephone training/messaging facility from my upline that retailing was a secondary pursuit and that the real money to be made from my MLM was contained in my recruiting efforts - 20% retail, 80% recruiting was pushed as a regular message. As I understood it, retailing was just something you did when you weren't recruiting.
The company's rules required distributors to sell at retail to 10 customers who were NOT distributors every month and report that fact on a form. If these retail sales were not reported, the distributor would not qualify in this regard for payment of commissions, royalties or bonuses for any recruiting efforts! A distributor also had to ensure that at least 70% of his purchases were sold to others every month.
So retailing was supposed to be very important! But I couldn't understand where the figure of 10 customers came from. Why 10? Why not 5 or 12 or 20 or 50? It made no sense to me that I could sell each of 10 customers $5.00 to $10.00 worth of products and with $50.00 to $100.00 worth of sales in one month I could qualify for recruiting payments, whereas if I sold $300.00 worth of goods to one customer, I wouldn't qualify. In other words, the dollar amount of my sales isn't as important to my MLM as the fact that I have a minimum of 10 customers!
Could the 10 Customer Rule be interpreted to mean that all a distributor had to do to operate his business legally was to arrange for 10 "friends" to buy a small item each month, on invoice, then pay for the items himself as a part of his overhead costs and get on with his recruiting? Hmmm. I started researching the web, looking for how others treated this situation.
I found that the 10 Customer Rule was used as part of Amway's marketing plan, as a means to help avoid being legally classified as a pyramid scheme by American authorities. Many other MLM's picked up on the logic and used it in their own marketing plans. The logic behind its use is that if an MLM's distributors retail valuable product, the MLM may be classified as a "product-driven MLM" and gain a legal standing not afforded to what would otherwise be regarded as a likely pyramid scheme. This though, does not mean that a product-driven MLM is immune from prosecution as a pyramid scheme, particularly if it does NOT cause these rules to be effectively enforced. Hmmm.
An excerpt from Grimes & Reese website - "The Law Library" makes this assertion to existing and intending direct marketing companies who face growing activity from class action law suits from disgruntled distributors:
"In summary, the emphasis of any multilevel program must be on product sales rather than the enrollment of new distributors. To exist in the 90s and beyond, companies and distributors must make a paradigm shift from business based primarily upon recruitment of downline distributors and internal consumption. Distributors should be taught that their primary function is to gather customers. Their second priority is to build a downline and to teach it about the first priority."
Whoa!! What then was my own legal obligation to the people under me in my current situation? Was it possible that anyone I recruited might well be able to sue ME if they didn't clearly understand these rather complex obligations and lost their investment as a result? Even if I passed my (generically acceptable, but legally incorrect), learning on in good faith? Would I be liable under the law? When I found a class action MLM court case and, eventually, its outcome against distributors and management of the Herbalife company that seemed in part to reflect this very situation, I felt I was on very shaky ground. With further research I found more court cases for many similar MLM's to my own over many years.
The obvious answer to the problem seemed to be that everyone should retail to at least ten customers every month to make the situation tenable. (Duh!) But I was well aware that retailing could not possibly earn me a reasonable income without extraordinary effort. There was just too much competition from people in my own MLM, from dozens of other MLM's and from the "traditional" suppliers of health and nutrition products, all of whom made the standard claims as to their products being uniquely suited to consumers needs. Market saturation (in many regards), seemed to be a problem. With my lifetime in selling, I might be able to retail successfully on-going, but could I expect the same from my average downline members when there are thousands of distributors in my MLM competing in the same marketplace? Not likely.
An odd recruiting occurrence
In November 2001 I signed up as a distributor a young fellow who was full of beans. He had no money, and he was keen to make some. By January of 2002, he had lined up a group of people to come in as business builders. It was looking good for him to make the 2nd and 3rd corporate levels in one hit!. His people entered the business and more were in the pipeline. The excitement level was high.
Then it was discovered that this young fellow had made a terrible error of judgment. 12 months before he signed with me and joined my group, he had been at a party. Friends of his had convinced him to join a Work at Home opportunity. Drunk, he had signed and then promptly forgotten about the whole thing.
Of course, he was already a member of my MLM when he joined my group. The fact that he had no real knowledge of this was immaterial. An investigation into his standing was commenced, with promises of an early decision (a month or two), as to which signature on which bit of paper was going to hold sway. Was he going to belong to my group, or someone else's group?
10 months later, there is still no decision from my MLM. No word at all. The decision would have impacted on both the young fellow and his recruits. If the decision went against the young fellow's wishes and he had to revert to membership of the original group he unknowingly signed up with, then all his downline members would have to go with him. They all wanted to remain in my group and retain the use of the advanced internet marketing tools they had access to. All of these people are currently "inactive".
Interestingly, none of these people have yet refunded their initial product orders. They can't go forward without a decision, so they are just sitting waiting - none of them with a good opinion of my MLM or their upline (including me!). I can't blame them.
(At 31/1/03) A decision was finally brought down in this matter and advice given to all concerned - today - just on 12 months after the initial problem arose! The decision was in favour of the original distributor, as expected. End result? Each distributor involved has indicated they will resign and refund what product they have on hand. Consideration is being given to a class action lawsuit. Some were considering suing ME for having helped to get them into the situation.
(At 31/3/05) All the festering ill-feeling has come to nothing at this point. None of the people concerned have the money or the will to take the company to court over this situation.
What was really happening here?
I agonised over the delay in getting a decision from my MLM in this matter.
Perhaps the submissions made by the people concerned, including myself, were a little uncompromising for their taste. The threat was made by everyone concerned, quite seriously, that if they were not allowed to remain in their current group, which had advanced marketing tools and other advantages, then wholesale refunds and resignations would take place and law suits would also quite possibly take place.
Knowing my MLM's psychological approach to refund policy now, I have no doubt that a conscious decision was made to sit on the matter until it went away of its own accord. And that is exactly what has happened. I repeat: no-one concerned has yet refunded their business builder product order. It'll probably all just fade away, and my MLM will have achieved their end of retaining the value of the sale without addressing the thorny problem they were presented with. It's called "churning" in the trade. Distributors are a dime a dozen but business builder sales dollars are to be retained if at all possible. It's a very clever ploy, and it works very well.
What self-imposed conditions have I applied to myself for me to remain as a distributor?
Provided only that this website with my opinions and gathering of facts are not found to be an appropriate reason for my MLM to terminate my distributorship, I will continue my distributorship and retail products as the opportunity arises.
I make no secret of the fact that I LOVE my MLM's products. I believe they have done wonders for my health. I will continue to use them for as long as I can source them for myself.
I also make no secret of the fact that I believe the company is guilty of a great many sins of omission in the data, or lack of it, that they present to incoming distributors. No new distributor can possibly make an adequately informed decision about starting a business with my MLM without having any idea of product market penetration or of the number of distributors who are actively working a given geographical area at a given moment in time.
I will cease my recruiting activities for my MLM business immediately. As to retailing, only time will tell whether it will return sufficient income for my efforts.
Update April 2003: Allowed my distributorship to lapse - I will no longer
continue to support the existence of this extraordinarily unfair sales structure.
My Final Word
No more lies for me!
Once I worked out that I would not ever be able to tell an incoming distributor whether or not the marketplace he was buying into was saturated, either temporarily or permanently, whether for recruiting or for retail sales, then I knew that if I wasn't telling lies to people I recruited before, then I would be now if I continued.
Unfortunately, all people in MLM have to tell lies to grow their businesses - lies of omission at the very least. With very, VERY few exceptions, ALL new distributors are totally unaware of market saturation or are deliberately persuaded that market saturation is "demonstrably impossible" for ANY MLM to achieve.
ANY SUCCESSFUL DISTRIBUTOR MUST CONSCIOUSLY CHOOSE TO IGNORE MARKET SATURATION IN ORDER TO GAIN PROFIT AT THE EXPENSE OF NEW DISTRIBUTORS.
IT IS A FACT THAT A MAJOR PART OF THE INCOME GAINED BY ALL SUCCESSFUL MLM COMPANIES AND DISTRIBUTORS COMES FROM THE MONEY RISKED BY NEW DISTRIBUTORS WHO FAIL IN THE BUSINESS.
Market saturation is the greatest cause of new distributor failure.
Successful distributors are aware of this state of affairs.
Successful distributors deliberately promote this state of affairs by artful persuasion.
Successful distributors value money, not honesty.
I have not met one financially successful distributor who does not use carefully constructed "truths" in order to persuade others to become distributors. Sophist rationalisation enables the presentation of unpalatable facts as seeming positives. Lies, misrepresentation and deception drive all MLM's. To be fair, in a small percentage of cases simple ignorance also plays its part.
Greed is the driving force
When I worked out for myself what the "systems" (the integration of the Marketing Plan with distributor devised lead generation, recruiting and training facilities), used by individual marketing groups actually achieved for their creators and in turn, what they really achieved for the hapless individuals in their downlines, I knew that I could only succeed in the business by omitting this information during the recruitment process. New recruits are financial cannon fodder until they emerge from the coal-face as "leaders".
My MLM's much-vaunted Marketing Plan unfortunately lends itself to abuse, and, for reasons explained in these pages and through the links provided, in my opinion my MLM may well still only exist today BECAUSE of this abuse, with money as the motivating factor all the way along. I have every reason to suspect that all MLM schemes are built on this same scenario.
This is not to say that people in my MLM are generally dishonest, or that my MLM is operating illegally per se. Only lawsuits will determine these things. I am quite sure that the people I personally dealt with in my time are worthy people. I'm not so sure though, that they were as well schooled in certain aspects of the law as they might have been. I certainly wasn't and I have to give the benefit of the doubt unreservedly to those above me. However, ignorance for me is no longer an excuse.
Recruiting is morally indefensible
Many court cases have occurred in the past, with many MLM's falling on their own swords as a result. The outcome of many current court cases are yet to be determined, but for myself, I am quite satisfied that recruiting for any MLM business as such is morally indefensible, and if it's not illegal yet, in my opinion it should be.
There will be people who will think that I am suffering from a case of "sour grapes". That's definitely not the case. I went into my MLM with my eyes open, but unfortunately, my brain empty of appropriate knowledge. Any job and any business will have negative aspects to it that only come to light with experience. I have learned and I have paid for my lesson with MLM. I write this to give others the insights I have gained from my experience. I do not consider myself to be an MLM expert - just someone who says it as he sees it. Check out my "How to Succeed in MLM" guide!
I have come to understand that there are only three categories of people in the ranks of MLM distributors: Those who are deprived of relevant information, those who are intellectually challenged by the MLM concept and those who are dishonest. For a long time I was guilty of being ignorant and dumb. If I have any guilt at all regarding my time in MLM, it's to do with the fact that I did not apply myself to understanding the concept as early as I perhaps could have done. I'm disappointed in myself for that.
To those in my downline group, I apologise for my tardiness in making my discoveries. I wish there was some way I could go back in time and choose a different path, so that we may have perhaps met socially instead of through MLM.
Some of my resources
It wasn't until I made my own discoveries and began to suspect that I didn't know all that I needed to know, that I started looking for further information to prove or disprove my theories. Once I found Dean Vandruff's MLM critique and digested it, I knew I was on the right track. This is the most lucid and comprehensive dissection of MLM available on the net.
Another helpful article, The 10 Big Lies of Multilevel Marketing, by Robert L Fitzpatrick, an expert witness who has been called by prosecutors to testify in a number of cases of larger MLM fraud in America, gave me further confidence and understanding of my position.
I hope that these pages and links will help others to be more fully informed before they choose any MLM as a vehicle to "Work From Home"