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Multilevel Marketing Might Offer Some Lessons in Entrepreneurship — but There Are Better Ways to Learn

Back Commentary Aug 26, 2019 By Kelly Azevedo

I consider myself a typical entrepreneur. Authentically growing an audience for my business consultancy — which develops custom business systems solutions — and pivoting when something doesn’t work out and serving clients day-to-day isn’t always easy, but it is rewarding. 

Over the years I’ve met thousands of business owners. I have also met many of a particular breed who call themselves entrepreneurs despite functioning more like employees of multinational, billion-dollar enterprises. I bet you’ve met some of them, too. 

We all have a Facebook friend, distant relative or acquaintance who has offered to help us get fit for the beach, unlock the power of essential oils or sport the perfect pair of leggings. This is the world of multilevel marketing (MLM), also called direct sales. To the aspiring or struggling entrepreneur it is undoubtedly enticing: Make your own hours selling a product you love alongside your friends and with a vast network of freedom-seeking successful “entrepreneurs” like you.

The Federal Trade Commission is responsible for regulating businesses, including how they can market products and services. In 1979 the FTC lost a case against Amway, ushering in new guidelines that allowed MLMs to shed the “pyramid scheme” label. Tupperware, one of the oldest and most widely respected of MLMs, is also one of the few to publicly share stats on its direct sellers. The average Tupperware consultant earns $710 annually. Research shows that 99 percent of direct sales recruits never make a profit, according to the Federal Trade Commission. When you consider 18 million Americans participate in network marketing, according to research by AARP, that’s a lot of dashed hopes. 

So, why do so many people join? I spoke to a number of people within my personal and professional networks who had been affiliated with MLMs at some point, who prove this sales strategy doesn’t always pan out. What became evident to me is that these arrangements actually prevent direct sellers from learning some of the most fundamental lessons of entrepreneurship. Most wished to speak with relative anonymity, so I’m using their first names to share their personal experiences.

Living the Dream?

I managed to connect with a few individuals who claimed to have experienced success with MLMs. In the end, Danielle was the only one willing to be interviewed. In 2011, she needed some additional income to supplement hits to her family’s construction business after the economic crash. Danielle says she spent 48 months in direct sales, earning $493,000 in the process. Danielle declines to disclose how many hours she worked, the name of the company she worked for and how much of a financial investment she made.  

After two years, Danielle says she left due to disagreements with the management team, though she declines to elaborate on those, too. Ultimately, she says she considers it a positive experience and that those earnings saved her home and helped pay down debt, crediting her success to “working harder than almost everyone at the company.”

The MLM recruitment process focuses heavily on how much sellers make, usually overlooking how much they will need to spend. Jackie, who signed up with Jamberry nails because she used the product, found a slew of hidden costs adding up to hundreds of dollars, a number she can’t name accurately because she didn’t keep detailed records. 

“You have to buy everything from them, right down to the business cards,” Jackie says. “You cannot use their logo unless you buy their specific materials, which of course are at an inflated price. If you want to sell online, there’s a fee to have the website. If you need brochures, you pay for them. Jamberry makes money off of the consultants at every turn.”

In attempting to verify Jamberry’s policies for consultants like Jackie, I learned the company went into foreclosure and was bought out by another MLM company in January 2018. 

Every independent contractor can expect to have expenses, which may be used as a tax write-off, but few are prescribed in the same manner as MLM companies. I remember the agonizing months of decision-making over my own website’s design; the costs varied from cheap do-it-yourself options to over $10,000. Each step of the way I had to weigh what I wanted with the best long-term benefit to my business. While I can’t fault anyone for trading their control for support, I do see an uncalculated cost to the entrepreneur who hasn’t had to work through those business decisions and, unlike a MLM participant, at least I get to keep the profits! 

The Cost of Running a Business

A few years ago, I found myself alongside my mother, a former Mary Kay representative, decluttering pink face masks, lipsticks and other cosmetics. There’s a reason my mother ended up with more eyeshadow palettes from the 1990s than any sane person would want.  

In order to meet quotas for themselves and their downline (when you recruit friends to sell and take a percentage of their sales as well), many MLM reps often end up purchasing their own product — even when it doesn’t sell. 

“Every entrepreneur goes through periods of selling something that no one wants. When the market responds with rejection, you pivot and find a new offer, different pricing model, update the marketing message — options which are limited when working with an MLM.”

Every business owner will tell you that there are ebbs and flows in business and when sales are down it’s prudent to reduce unnecessary expenses and focus on sales. But rising through the ranks of an MLM means there’s more to lose if you don’t make your sales goals. While most participants envision a lavish life of travel and freedom they might end up with inventory taking over the house and the alienation of friends in the process. 

While MLM companies may release their company sales data, they don’t break down how much is purchased direct versus inventory and rarely disclose the income made by recruits. Amway reported sales of $8.8 billion in 2019, but that’s not necessarily reflected in the income of the sales team.

While I’ve never met the owner of a retail store that would react to slow sales with more inventory, the real problem of an MLM is that the company dictates what’s expected to their supposedly independent and freedom-loving recruits. 

Last year, I met a lovely woman in her 20s who was dealing with “boxes and boxes of Lularoe leggings” and a credit card balance that was still unpaid months after sales slowed down. As we talked, this woman disclosed that if she could sell everything she’d regain the space in her small apartment and make $10,000 in the process.

I was too embarrassed to ask her how much she’d spent on the leggings. Sharing your home with the remnants of such hope and disappointment is tough enough without disclosing the financial cost. 

Know Your Customer

A successful business hinges on a deep understanding of your client. Generating leads, customer acquisition and repeat business are all skills that one has to learn. 

When working with an MLM, making a percentage of your sales is a small part of the compensation. Most of the income is made through your downline.

CeCe was part of a company that sold beauty products, skin care and health supplements. “I asked a friend to go to lunch with me and I full-on pitched her the whole time. She messaged me after and said ‘Sorry, I didn’t realize lunch meant a sales pitch…’ I think what really got me is the friends who were brutally honest about what I was doing.” CeCe says that prompted her to do some number crunching and to reckon with the amount of money she was spending on recruitment and the friendships she was losing in the process. 

When your success depends on convincing others to join the company there’s very little incentive to be honest about the costs to your wallet or relationships. But failure is a natural part of the learning process and perhaps the worst thing you can do is hide your failures behind additional mistakes.

CeCe was told at the beginning that every consultant was part of a support system or upline. “This is true, but it was less of a support system and more of a pushy group of people who messaged you every day to ask how many sales you’d made or how you were pushing product.”

It feels great when a friend buys from your business, but depending on the deep pockets and kindness of friends isn’t a solid business strategy. Every entrepreneur goes through periods of selling something that no one wants. When the market responds with rejection, you pivot and find a new offer, different pricing model, update the marketing message — options which are limited when working with an MLM.

Learning the Ropes

In those early years of my business, there were many late nights when I wished for a mentor, proven processes and confidence that the hours I put into my business would ultimately pay off. Having a group of colleagues who are in the same business and support your growth is amazing, but unlike a startup incubator guided by business experts and advisers, your mileage in an MLM may vary. 

Andrey Mikhailitchenko is an associate professor of marketing at Sacramento State and has encountered a lot of business men and women through the Center for Small Business in the last 10 years. 

“There is no theoretical opportunity to make good profits on MLMs just selling the product, it’s impossible,” he says. “From a financial point of view, if there is a multi-level pyramid you cannot give commission to each level of the pyramid in a way that everyone and the company is profitable. Those on the bottom of the pyramid never make money.”

In order to determine if an MLM is worthwhile, Mikhailitchenko considers other benefits. He views MLMs as a great place to establish networking relationships and build social capital. Recruits “are also developing the skills in advertising and promotion which are important for successful entrepreneurs” especially if the product doesn’t yet have an established need in the marketplace. Learning how to establish need for a product, brand awareness and purchasing intention are all entrepreneurial skills.

“Entrepreneurship shouldn’t be lonely because all your friends are tired of you selling them protein shakes and posting about your new leggings five times a day.” 

If someone is committed to a product or opportunity with an MLM, Mikhailitchenko recommends going in with intention. “Make a list of benefits such as development of personal entrepreneurial skills, marketing knowledge, strategic view, financial accounting skills, communication skills,” he says. “If the company provides educational opportunities then take it, even if you’re not rewarded financially. These are priceless skills that can be used in another business.”

The Lonely Road

The idea that in direct sales you can walk away from the 9-to-5 life forever is certainly alluring. There’s the thrill of making your own choices, hours and office space that feels incredible after years of conforming to the corporate world. 

When I made the leap to start my own business, everything was a new challenge. Discovering my brand, developing a voice, becoming known in the market, creating products and services, even figuring out how to accept payments kept me learning and engaged, despite the long hours. Exploring what’s possible, trying new things and figuring out how to salvage it when it goes wrong is part of the game. 

Entrepreneurship shouldn’t be lonely because all your friends are tired of you selling them protein shakes and posting about your new leggings five times a day. 

The promise of an encouraging network of successful coaches is particularly compelling to the new recruit who wants to learn the ropes. But cultivating your own support network is possible and it often begins with meeting new people without an agenda. When I started out, the business owners I met were not potential sales targets, they were the encouragement, emotional support and advisers I needed when things were rough.

I tried to explain this to one local consultant who offered me the “unique opportunity” of joining her downline after a 10-minute conversation at the nail salon. When I declined and mentioned the business model wasn’t advantageous, the accusation was swift: “Oh, you’re not interested in supporting women in business?”

Such language is powerful and studying MLM marketing tactics can be illuminating. You can be a successful entrepreneur, spend time with your kids, earn a great income and create freedom in your life without these companies. It’s not always going to be easy, but neither will life as a commission-based direct sales rep.

Correction: An earlier version of this story incorrectly identified the company that sold leggings as part of a multi-level marketing operation. The company is Lularoe, not Lululemon. We regret the error.

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