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Don't Get Taken By MLM

Small-business columnist Rhonda Abrams advises entrepreneurs to avoid MLM programs.
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Finally, I'm going to speak my mind. It's not easy, because I'm going to be deluged with angry e-mails, disparaging phone calls, perhaps even threats. But I'm going to do it anyway.

Okay, here goes. Never, and I mean never, sign up for a multi-level marketing (MLM) program.

Wait, before you send me an e-mail telling me how you made thousands of dollars or how some miracle MLM product changed your life, let me explain why I'm such an ardent opponent of MLM.

A bit of background first: there are MLM programs for just about every kind of product or service, including nutritional supplements, household products, cosmetics, diets, telecom services, and on and on. You've certainly received dozens of offers to join.

MLM programs work by having participants recruit other participants. In a "single-level" situation, I make money off my sales. In a multi-level situation, I make money off my sales and also the sales of those I bring in to the organization.

Theoretically, this should bring you greater income. For instance, in a single-level situation, if Chris sells $1000 worth of products and gets a 25% commission, Chris makes $250. In an MLM scheme, however, let's say Chris also recruited Pat to become a salesperson. If Pat makes $1000 worth of sales, Pat would make $250, and Chris would get a small commission of Pat's sales too, perhaps 5% or $50. Sounds good.

One of the other attractive aspects is that MLM programs usually have low up-front costs -- typically $199. That makes it easy to "start your own business."

From the above description, you can see why multi-level marketing sounds attractive: it costs very little, and you can make money on other people's work.

It's not what it seems, however.

For instance, many states have laws regulating any "business opportunities" requiring more than $200-$500 initial investment. To avoid government scrutiny, most MLM programs keep under that threshold.

All MLM programs share the same fundamental flaws, including:

  • Recruiting your competitors: If I'm in sales, the last thing I want is more salespeople competing with me. But in MLM, your goal is to get lots and lots of competitors. Why would I want to do that?
  • You pay to be a customer: Overwhelmingly, buyers of MLM products are MLM salespeople. A legal counselor to MLM programs advises that a mere 20% of sales to outside consumers is high enough to avoid legal scrutiny. Can you imagine any other business where 80% of sales are made to employees?
  • You'll pay far more: Expect to be required -- or pressured -- to buy samples, marketing materials, training courses and tapes, seminars, etc. You're very likely to spend far more than you'll ever bring in from sales.
  • Your products are priced too high: No matter how good the quality of your products, consumers are likely to be able to find better deals elsewhere. Just think about it - all those middle layers of salespeople and commissions means higher prices to the consumer.
  • You turn your friends and family into "prospects:" MLM programs typically suggest you sell to - and recruit - people you know well. Do you really want to be constantly beseeching those closest to you?
  • You face group pressure: One of the positive sides of MLM groups is the support given to those who spend a lot of money or who try hard to succeed. The flipside is that those who don't spend as much or believe as strongly in the program are likely to face strong negative judgments from the group.

Be careful! As with any business opportunity, before investing your time and money in a multi-level marketing program, really do your homework. Ask to speak to participants who do not recruit others, sell only to non-program customers, or spend little or no money on training programs. Can they really make money?

Get on the Internet and look at sites set up by people who've left your particular MLM program. You might also check out www.pyramidschemealert.org.

Personally, I recommend you NEVER sign up for any MLM program. I believe most of them are unethical, many illegal, and all of them a waste of money. So, go ahead, send me your e-mails. I know they're coming.

Copyright, Rhonda Abrams, 2002


Rhonda Abrams writes the nation's most widely read small business column. She is the author of The Successful Business Organizer, Wear Clean Underwear, and The Successful Business Plan: Secrets and Strategies. Register to receive Rhonda's free business tips newsletter at www.RhondaOnline.com.

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Last updated: Nov 10, 2002




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