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STREET SMARTS

Multilevel Mischief

CEO Brodsky recounts the experiences of a friend who went to work for a multilevel marketing company. He explains why very few people get rich from MLM ventures.

Norm Brodsky is a veteran entrepreneur.

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Some people get rich through multilevel marketing, but the overwhelming majority fall by the wayside--and that's no accident. It's how the system works

My friend Eliot is a guy who's always out chasing the dream. He works in the back office of a major financial-services firm, making five times more than he could earn anywhere else, but he hates his job and wants to be in business for himself. A few years ago he bought some vending machines for disposable cameras and put them in zoos and airports. He lost his entire investment. Then he thought he'd open up a chain of gadget stores. It never got off the ground.

One day he came to see me, and I noticed he was looking better than usual. He'd taken off some weight. He was wearing nicer clothes. He had a new air of self-confidence. He said, "I've got another deal, a selling deal. I want to give you a presentation."

I said, "It's multilevel marketing, isn't it?"

"No, no, no," he said. "Just come over to my place. I'll show you."

He was insistent, and I was curious. So I showed up at the appointed time. Eliot went through his sales pitch, which was very good. You could tell it was canned, but he'd rehearsed it, and he did a good job. He laid out the whole plan.

It was multilevel marketing.

I generally try not to make value judgments about businesses, but I admit I have a real problem with multilevel marketing (MLM), or network marketing, as it's sometimes called. You know the concept. It's what made Amway a household name. For that matter, it was MLM that propelled both Herbalife International and, more recently, Equinox International to the top spot on the Inc. 500 list.

Whatever products they offer, MLM companies use essentially the same formula. They sign up sales representatives by offering them the opportunity to go into business for themselves with little or no start-up capital--and to make millions if they're successful. How? Mainly by recruiting other salespeople. Unlike most businesses, an MLM company pays you a commission not only on your sales but also on the sales of all the people you've brought into the network, either directly or indirectly. So if someone you recruit goes out and recruits a bunch of terrific salespeople--and they recruit more terrific salespeople--you stand to make a fortune. In fact, some people do.

The successful ones are the exceptions, however. The overwhelming majority of people who come into the network fall by the wayside. What's more, the company knows in advance that they're going to fail. It's a matter of statistics. It's part of the plan.

Why? Because when you strip away the hype, MLM is nothing more than a technique for finding good salespeople by promoting a fundamental falsehood, namely, the idea that anyone can be a good salesperson. All you need are the right tools.

That's not true, and the MLM companies know it's not true. Most people will never be good enough at selling to earn a living from it, let alone take home a six-figure income. To be a good salesperson, you need qualities you simply can't get from a motivational tape or a seminar--a knack for connecting with people, an ability to handle rejection. Above all, you have to enjoy selling. Most people don't.

On the other hand, just about everybody wants to be financially independent, and a well-designed MLM program looks and sounds like an easy, low-risk way to get there. Different companies use different approaches. Some programs require participants to buy a starter kit for, say, $100. In Eliot's case, there was no starter kit, but participants had to purchase at least $50 worth of products--mainly household goods like paper towels or lightbulbs--from the company catalog every month.

Whatever the terms of the deal, the emphasis is always on building the network--and on the stream of earnings that seems to come almost automatically as a result. If you don't have sales experience, no problem. The program usually includes a hefty dose of training in the form of motivational tapes, videos, and seminars, all of which can be purchased from the company. Those motivational items are the company's second product line--and a very high-margin one at that.

And a lot of people want to believe the sales pitch. They want to believe that, to get rich, all they need is training and determination. They want to believe that making money can be easy. That's an illusion, of course. Making money is very difficult. It takes blood, sweat, tears, and talent to succeed in any field, particularly sales, but many of us would prefer to believe otherwise, and the MLM companies make it easy to do so.

So people sign up, buy the tapes, attend the seminars, and go out to sell and recruit. Whom do they go to? Their friends and relatives, of course, some of whom join the network as well. Most of them don't last, either, but they buy tapes and attend seminars before they leave.

And a few people, a small but predictable percentage, actually turn out to be good salespeople. They wind up selling a significant amount of the company's first product line--vitamins, personal-care items, household goods, whatever. That's good for the company. It's also good for the successful salespeople, particularly those who got in early and stayed with the program.

But their success comes at the expense of the other people, the ones who waste their time and money pursuing a goal they can never reach.

And that's the trouble with multilevel marketing. You make money on your ability to use people. Once you sign on, you hardly have a choice. Not that you want anyone to fail, but you can't hit the jackpot unless you build the network, and that means signing up as many recruits as possible--most of whom have no chance of making the grade.

Listen. There are better ways to earn a living, especially if you have the ability to sell. Anyone who can make millions in MLM can do just as well in another type of business, one that doesn't require you to take advantage of other people. Selling is an honorable calling. Good salespeople provide a service to their customers. Good salespeople generate the revenues that pay other people's wages. Good salespeople are often the ones who start their own businesses. And good salespeople don't need multilevel marketing to get rich.

As for people like my friend Eliot, they're just MLM cannon fodder. I could see, however, that he was sold on the program.

When he finished his presentation, he asked me what I thought. I said, "Eliot, you aren't a salesman, and you're not going to be successful with this, but it seems to be doing good things for you. You're looking better. You're more self-confident. That's terrific. So maybe you want to keep doing the tapes and the seminars, but treat it as a second job. Don't quit your day job.

"And one more thing. Don't solicit your friends or relatives. When this is over, a lot of people are going to be angry at you. It's better if they aren't people you have to see all the time."

Eliot lasted about eight months. All told, he spent $5,000 or $6,000 in the program, mainly on motivational material, and traveled to pep rallies all over the country. When he saw he wasn't getting anywhere, he dropped out. He put the weight back on, started dressing the way he used to, and left six or eight people annoyed with him for not following through.

The company did all right. Between Eliot and his recruits, it probably sold $25,000 of its high-margin motivational material. And a couple of the people Eliot brought in wound up sticking with the program, which helped the guy who'd signed Eliot up.

Maybe when that guy becomes a millionaire, he'll send Eliot a bunch of roses.

Norm Brodsky is a veteran entrepreneur whose six businesses include a former Inc. 100 company and a three-time Inc. 500 company. This column was coauthored by Bo Burlingham.

Last updated: Jun 1, 1998

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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