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A young lady (“Laura”) approached my wife the other day at a cafe. My wife was eating a meal with our son, and Laura casually struck up a conversation with her. My wife shared a few things about her life and my son and that she was expecting. Laura shared a few details about herself as well. It was a very amiable conversation.
Before my wife left the restaurant, Laura asked my wife for her number so that they might be able to get together again since they really seemed to hit it off. Laura seemed nice and trustworthy. In fact, they had realized that they both attended the same church, so she gave Laura her number. A few hours later, my wife received a follow-up text. Laura expressed how she enjoyed their conversation. She also shared that she had an interesting and exciting opportunity to connect my wife with her “mentors”, who retired early before 30, to open some sort of lucrative small business.
My wife shared the text with me, and I immediately knew it was a multi-level marketing scheme. When my wife wrote back and said that she just wasn’t interested, Laura became more intense and tried to convince my wife to fold. My wife stood her ground. Laura ended by saying that her mentors were really busy anyways and are very selective with whom they take time to meet.
Feeling deceived and slightly used, my wife decided to end the conversation at that point. It really left a bad taste in her mouth. Obviously, Laura had one thing on her agenda.
Today, more than ever, we are inundated with the message that we need to have a side hustle in order to get ahead. It’s not enough to graduate from a good school and obtain a steady job. There is a pressure to use any free time to find a side hustle in order to bolster your income to reach your financial goals.
Over the past year, I have noticed my Facebook timeline become inundated with friends that are throwing house parties featuring DoTerra (essential oils), Rodan + Fields (skincare), and Plexus (nutrition and weight loss). My friends tell me that I desperately need their life-changing products.
I really wish Facebook allowed a mute button that would filter out certain words like Twitter does. Then, I wouldn’t have to mute so many friends who sell these types of items that I’m just not interested in.
More and more people are joining these companies. According to the Direct Selling Organization, 5.3 million Americans participated in these types of direct-sales companies in 2016.
Why are so many people participating? Well, It can be incredibly lucrative. In 2016, sales were $35.54 billion, which is an increase of 18% from 2011. It’s easy to see with figures like this why someone would want to jump in.
Most of the previously mentioned posts on my Facebook timeline were from my female friends. To me, it was just an ad that I had no interest in reading. It really started to bother me when my wife started getting invited to these parties and then felt pressure to buy items. I’m happy for my wife to go out and have fun with her friends. I’m also not against her spending money on items that she wants to buy. However, I don’t like the thought of her buying items that she doesn’t really want or need.
These companies market themselves as direct sales models to customers. Simply put, they are Multi-Level Marketing (MLM) businesses.
Multi-Level Marketing (MLM)
MLMs only sell through an “approved” network of consultants, which usually is not available for the public to buy through traditional retail channels.
In turn, there is an air of exclusivity that you can only buy certain products directly from these consultants. This means that these consultants must buy inventory from their parent company, like a franchise would. The consultants are able to keep the profits, less whatever they spend on the inventory.
This seems fairly straight forward, until you learn that the real money comes from generating a team of sellers. This means that you must recruit new consultants and motivate them to buy more inventory. When they reach sales targets, they earn bigger bonus checks. Once they do, you also receive a higher bonus check. The real money is making sure that you’re at the top of the recruiting ladder.
MLMs vs. Pyramid Scheme
The FTC defines a consultant as someone who makes money by selling a product without the requirement to recruit consultants.
“Not all multilevel marketing plans are legitimate,” the FTC states in its literature on MLMs. “If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
Famous People Involved with MLMs
Warren Buffett owns Pampered Chef. President Donald Trump used to have a MLM called the Trump Network. Finally, Secretary of Education Betsy DeVos is married to the son of the cofounder of Amway.
The barrier to entry of an MLM sounds appealing. Buy a little bit of inventory, and you make a profit during your free time. Who wouldn’t think that it’s a great way to earn some additional easy money?
Not As Lucrative As You May Think…
The only problem with this is according to a study done by the FTC, 99% of recruits who join a MLM end up losing money. In fact, “the vast majority of commissions paid by MLM companies go to a tiny percentage of TOPPs (top-of-the-pyramid promoters).”
The author of that study, Jon Taylor, goes on to say, “The claim by MLM promoters that many participants work for part-time or seasonal income is a bogus argument because without full-time and long-sustained effort, MLM participants cannot build and maintain a large enough downline to meet expenses, and therefore do not profit.”
While I am all for people earning a side hustle doing something that they love, be careful. If you sign up to become a consultant for an MLM, there is only a 1% chance that you will actually be successful.