Network Marketing
Why It Sucks & How to Make Money
Network Marketing (MLM) is a $36 billion dollar U.S. industry, but can You Make Money? Sure. Will you? No. Not unless you're a self-starter who can sell ice to Eskimos, or you learn how to actually run a business.
The cold hard facts are these: An AARP Foundation's study found that 44% of MLM participants drop out after less than one year. Another study done by Jon M. Taylor, Ph.D., founder of the Consumer Awareness Institute, shows similar numbers and goes into a little more depth on dropout rates:
A minimum of 50% of MLM representatives drop out in the first year.
A minimum of 90% of representatives leave within five years.
By year 10, only those at or near the top have not dropped out—which means at least 95% of representatives have dropped out.
Compare that to the average failure rates of small businesses. According to the U.S. Small Business Administration, 20% fail in their first year, 30% in their second year, and 50% of small businesses fail after five years in business. Finally, 70% of small business owners fail in their 10th year in business.
Analyzing Network Marketing Opportunities
I've been analyzing Network Marketing opportunities for over 40 years. Friends bring them to me to evaluate because they know it's what I do for a living. As an Investment Banker I have almost 50 years of performing due diligence on investments and companies and have specialized in working out troubled or under-performing businesses.
So, what is my "expert" opinion about MLM: First I want to say that I have not analyzed every MLM company or product. But what I have found is that most MLM companies sell either inferior products at an inflated price, or comparable products readily available in the market place, but with no cost savings. Very very few sell superior products at a fair price and to my knowledge there is only one that sells a unique breakthrough product at any price.
Making Money in Network Marketing
Among the more than 20 million Americans who participate or have participated in network marketing organizations, 90 percent say they got involved to make money. The AARP Foundation also found that only about 25% of those it surveyed made a profit with MLM, 27% broke even, and about half of them lost money. Of the quarter that made a profit:
14% made less than $5,000
6% made between $5,000 and $9,999
3% made between $10,000 and $24,999
3% made $25,000 or more
.05% made $100,000 or more
Taylor's research came up this bleak conclusion: "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)."
Another disturbing statistic is: 47% of the participants in the AARP Foundation's study said they did not receive a copy of the company's compensation plan before joining. Almost all received no formal training. It seems that most new recruits rely solely on information, training and advice provided by their sponsor.
About two-thirds of the participants in The AARP Foundation's MLM study said that they would not join the same MLM company after knowing what they know now.
Whose Fault Is It That Most People Fail
So who is to blame? Is it the MLM business model, the Recruiter or the Network Marketing Company?
MLM is just a business model, the same as retail is a business model, wholesale, direct-to-consumer and business-to-business. All business models have their strengths and weaknesses, all are dependent on managements ability to create, execute and monitor a plan. There are things wrong with the MLM model, but it is not why people fail.
The Recruiter, the person who sold you on the idea, are they responsible? To generalize they come in two flavors, first the person who believes you can make money while doing good and second the person who sells you the lifestyles of the rich and famous. The Network Marketing company is hoping that this person is good at recruiting, training and monitoring. The odds that this person has the time or skill set to help the new recruit is slim to none.
The Network Marketing Company is the #1 reason people fail. Before I explain how they setup people for failure and how to fix the problem, I want to explain a little known fact. Businesses fail because they don't understand the business of business. They understand their product or service, but that doesn't translate into maximizing the businesses full potential. Many of the Network Marketing companies I've analyzed understand the business of Network Marketing, but not what it takes to help the greatest number of recruits succeed.
How to Fix the Failure Rate
It's called training. Equipping people for success. Building a turnkey operation that plans and documents the work so people can work the plan. Network Marketing companies don't just throw people into the deep end of the pool and say, "learn to swim," they take them 20 miles offshore, throw them over board and say, "we hope you make it." The failure rate proves this.
In the late 1970's I was charged with two tasks by my firm, bring the brokerage firm offices that were subpar performers up to profitability and second create a firm wide financial planning department. I saw the potential of the planning department could help my problem with the under-achievers. At the time, if a broker wasn't producing $200,000 in gross revenue after 3 years he was considered a failure and we needed his desk.
At the time I had just concluded a long workout for MacDonalds and a few ex-franchisees. I learned first hand how the the MacDonald brothers had built this wonderful business that Ray Kroc would buy out. Their "speedy service system" allowed minimum wage employees to turn out a perfect predictable experience every customer every time. I also knew the business with the best training and trainers was the top life insurance companies.
Network Marketing companies could and should do the same thing. Sure they produce videos and brochures, but they do not have a systematic approach to helping people succeed. So recruits tread water as long as they can, and then they drown.
Not All MLMs Are the Same and Yet They Are
If you're still thinking of joining Network Marketing, then it's crucial that you research and investigate the company and products thoroughly to make sure it's a product and system you feel you can promote.
Thanks for reading,
Rick Fox
