In case you weren't aware, multi-level marketing (MLM) doesn't have the greatest of reputations.   People refer to one of the biggest, Amway, as ScamWay.  I've often heard MLM compared to a giant Ponzi scheme. 

To set the matter straight, MLM is not a Ponzi scheme.  Well, not exactly.  A Ponzi scheme involves earlier investors earning "returns" generated by capital brought in by newer investors.   Bernard Madoff was running a Ponzi scheme in which many well known brokerages and celebrities were duped.  The capital in a Ponzi scheme is never invested in a real wealth creation project that can increase the size of the pie for all the investors.  The capital is just shifted from one investor to another to create the fiction that the Ponzi fund is performing spectacularly, which then brings in fresh investments to keep the scheme going. 

MLMs work by members paying a fee, usually an annual one, to join up. Membership entitles a person to buy the company's products at a discount.  The idea is that you get other people who are interested in the products to join up as well, with you as their sponsor.  You then get a cut off every product they ever by.  You also encourage them to get their own buddies to join the MLM and purchase products for themselves.  You'll score a cut, albeit a smaller one, off those people, too.  All the people whom you continue to make money off of are called your downline.  All the people who continue to make money off of you are your upline.

Where MLM's border on a Ponzi s, at some point, no new people will enroll.  Companies can't grow forever.   The earlier momentum slows down.   At some stage, everyone who wants to become a member already is.  If you're sitting twenty levels up from the last guy who joined, you're already golden.  It's the guy sitting on the bottom rung who's screwed.   He'll never be able to setup a downline in order to earn commissions.

In another respect , MLM's aren't Ponzi schemes at all.  In theory, anyone joining an MLM has the same opportunity as anyone else in the organization.  I say "in theory" because in actuality, when you join an MLM has a lot to do with whether you'll make money at it.   The market can quickly become saturated, both with distributors in the MLM company you joined as well as with competing MLM companies selling similar products.  Too often you'll be told by your upline that there's plenty of opportunity left.  That's a good indicator that the ship has already sailed and you'll be left in the port.  But if we stick to the theoretical workings of an MLM, the structure really is more equitably based than any traditional corporation.  According to this CNN Money article, CEO's in 2005 made more than 260 times their average worker's salary.  In other words, CEO pay for a single day topped their average worker's wages over the whole year.  That's certainly more of a pyramid scheme than any MLM, particularly when you consider that distributors for MLMs are paid according to performance whereas top management compensation at traditional corporations seems to go up even as share value and profits for those corporations erode.

MLMs can be looked at in two ways.   The first way, beaten to death by the management of most MLMs, is as an income opportunity, as a way to work for yourself and escape the 9-to-5 corporate grind.   The recruitment videos will show a succession of successful members in front of their million-dollar mansions.  "It's not too late to get on board.  You can be part of the crew, too!" they chirp, with their fingers crossed behind their back.  The second way is to see yourself as joining a club which allows you to purchase products not available anywhere else.  I've joined a number of MLMs for this reason.  The MLM companies offered a special or better quality product I could not easily find at a local store.  My annual membership dues allowed me to get a discount off the retail price.  I never had any intention of selling their MLM business "opportunity" to others. 

I've only joined two MLM's in my life to promote the "opportunity" part.  The first one was a terrible company.  I only joined because I'd just moved out to California and wanted to set up an income source fast.  I was naive about MLM at the time.  I finally did manage to recoup my initial investment, but only just.   The second MLM was a much bigger and better company, but they didn't do diddly squat in terms of support.   My experience with the first was so negative that I probably wouldn't have considered joining the second had I not just read a book which reported that billionaire Donald Trump endorsed network marketing as a low-cost way to wealth creation.    Doing my own due diligence later, I could find no evidence to substantiate that Trump ever said this.  It seems to be another urban legend floating about the Net to perpetuate the soundness of joining an MLM, especially in today's economic climate. 

It's hard to come by reliable stats for MLM distributor earnings.  Pyramid Scheme Alert (PSA) maintains that 99% of distributors in ten major MLM firms averaged commissions of less than $10/week.   How they got those figures they don't say, but I could believe it.  It's probably true to say that retail door-to-door sales of MLM products are almost nonexistent and that most of the revenues come from constantly getting new people to join up vs current members generating revenue from repeat buys.  The churn rate just appears to be too high in the MLM world for established members to be generating the bulk of the revenue. 

MLM Watch offers a Skeptics Guide to MLM, worth a read by anyone who considers joining any MLM for the "opportunity."   It's still entirely possible to make a great living with the right MLM.  I know people who are doing it.  To achieve that kind of result, you need to recruit a strong organization of people who constantly buy the company product for themselves.    That's why I wouldn't join a company like Amway. It's too easy for me and everyone else in my downline to purchase products of similar quality at the local shopping mall for much lower prices.   Price remains a huge problem with the MLMs.  More than half the purchase price of the product can go to pay all the commissions everyone in the upline collects.    The MLMs argue that these commissions which inflate product pricing should be considered marketing expenses in the same vein as traditional companies passing on their marketing costs to you in the purchase price of their products.  But there are big differences.   First off, for most traditional corporation products, the marketing expenses aren't on par (or exceed) the actual product price.   And second, it's you who spends all the time and money marketing the MLM products, yet it's your upline who recoups these "marketing costs." 

And the biggest problem, as I see it, has yet to be mentioned.  MLM's may make a big claim that you own your business and call your own shots, but the more accurate picture is that you lease your own business. 

To illustrate, let's pretend that I decide to setup my own vitamin supplements company and sell the vitamins in the traditional way.  A year later, after building up a considerable customer base, I decide to add essential oils to the product line, figuring that the same customers who buy my supplements would likely be interested in the oils.  I send out an e-mail or a flier to all my existent customers to inform them about the new product addition.  End of story.

Now, instead of forming my own company, let's say I join an MLM vitamin company and build up a sizeable downline with them.  A year later I come across another MLM company selling essential oils and hatch a plan to bring my entire vitamin supplement downline into their fold to sell the oil products, too.  Why not do it?  Even if the second MLM company is a completely unrelated business concern to the first,  it's a sensible play.   I'm increasing economic activity in my downline and diversifying my sources of income.

Except I probably couldn't get away with it.  If the first MLM company discovered I was using ‘their' downline – the one I actually established through all of my own efforts and time -- to sell products from another, possibly competing operation, they would terminate me.  With one swipe of their wand, my MLM vitamin business would disappear, and the commissions my downline continues to generate would be absorbed by my upline without any of it passing to me.    The MLM vitamin company would be no worse for wear.  The only money they'd lose out on would be what they profited on from the products I was purchasing as a member. 

When you own your own business, your own real business, you have control over the products you introduce and the customers who generate your profits.   When you're part of an MLM, you're just working under the illusion that you control the products and have the customers.  The customers are not your customers.  They're customers of the MLM company, and you're just paid commissions on their purchases.  What you are is a salesman and when your "employ" with the company ends, for whatever reason, the company keeps whatever contracts you secured.

Nearly all people fail at MLM, myself included, because it's both very difficult to continue purchasing massive amounts of product each month as well as convince a huge downline of people to do the same.   Even if you manage to momentarily convince dozens of people to join up and spend, for you to keep earning, they have to keep spending; if they're not earning, they'll stop spending.  Wal Mart claims it costs them $2,500 per worker just to interview, train, and hire someone.  What's the real cost to interview, train, and ‘hire' someone to work under you when you consider that less than 1% of your hires are likely to perform?  Add onto the fact that most of the products these MLMs are hawking aren't that innovate or unique, and it's a recipe for failure waiting to happen.

Mind you, this is all just a theory.   I have crafted a very simple and inexpensive experiment, called Experiment M, to test my theories, to gauge if most MLMers fail because of everything I've been discussing or because they're just plain lazy.  Please don't prove me right!   I am hoping to prove it's the MLM models and products that bring about hardworking peoples' failures.  The results will be posted on Doug's Republic here as they come in.