In 2017, approximately 18.6 million people were involved in multi-level marketing programs (MLM) in the US. Around $34.9 billion in retails sales took place across the country, showing just how much money circulates through these businesses.
While the numbers seem positive, and many MLM sales representatives swear that success is possible, MLMs come with their fair share of risks. However, there are benefits to these arrangements, as long as you play it smart.
What is Multi-Level Marketing?
MLM, also referred to as “direct selling” and “network marketing,” can represent a number of program structures. The most common business model involves companies that distribute products to distributors, the sales representatives, and those individuals make the retail sales.
The multi-level part of the structure refers to the hierarchy used by the company. Representatives can recruit new sellers to work under them, gaining access to a portion of that person’s profits. The more recruits you have, the more money you can make. And, as your recruits recruit and make sales, you get a piece of those profits too.
One of the biggest benefits touted by MLM companies is the ability to set your own schedule. This makes it seem like working MLM selling into your life will be easy, and it certainly can be.
Many people are lured into becoming sales representatives based on the idea of working part-time. There are no set hours for these positions, so they can adapt to nearly any schedule.
However, if you want to make a profit, working part-time might not be enough. Unless you have a large group of potential customers right from the beginning, it will take time and effort to build your clientele. Often, new sellers underestimate the amount of work involved when it comes to getting everything off the ground, so it’s important to be realistic about the potential of these arrangements.
Initial Startup Costs
When considering the pros and cons of MLM programs, the startup costs are a factor. Typically, each new representative has to purchase a base level of inventory, usually in the form of a starter kit.
The costs of starter kits vary. Some are less than $100 while others may cost $5,000 or more. This is money you have to spend up front, and you only get it back if you sell.
For instance, a LuLaRoe starter kit is about $5,500. If you want to get started with Beachbody, a mostly digital business, you’ll need to pay $39.95 to start as a coach along with a monthly fee of $15.95.
Since the starter kits vary in cost so dramatically, it’s important to research any company you are considering before you make a move.
The startup costs only reflect part of your expenses. You’ll also need to replace sold inventory, store the items until they sell, and transport them to parties. Plus, it doesn’t account for the time you’ll spend attempting to sell the products, including maintaining websites, social media profiles, and other forms of advertising you may choose to try.
In some cases, the companies send new inventory automatically. This means you’ll have a recurring charge (usually a credit card number is necessary at sign up to support these expenses) every month no matter how much you sell or don’t sell. Often, MLM companies report your inventory purchases as sales for the company. This can falsely inflate sales numbers by making your purchases appear as though retail customers are buying.
Some MLM companies have additional ongoing costs on top of inventory-related expenses. You may have to pay extra to maintain your company-hosted website, for example. If you sell your items at parties, a common approach for many sellers, you may have to provide the host with free products or a discount on purchases.
Recruiting other sellers is practically a requirement if you want to make a profit, and it isn’t always easy. It takes a substantial amount of time to convince others to work under you, so keep that in mind as well.
What are the Loss Rates?
One of the caveats of MLM programs is the need to purchase products up front. In most cases, sales representatives have to maintain their own inventory. This means they have to buy some of the products before they can make any sales.
Plus, maintaining your inventory is also an essential part of the program. When you sell items, you usually have to replace them quickly, cutting into your profits.
If you aren’t able to sell your inventory, or at least enough to offset new inventory purchases, you are operating at a loss.
Many MLM companies provide misleading data regarding their success and loss rates. However, a report by Jon M. Taylor of the Federal Trade Commission, states that the loss rate is 99 percent. That means only one in every 100 sales representatives make a profit. Everyone else doesn’t.
If you extrapolate that information to apply to the 18.6 million people working in the industry, that means 18.4 million are operating at a loss. Only 186,000 representatives are making a profit.
What are the Pros and Cons of MLM Programs?
It is important to note that you can make a profit as an MLM sales representative. However, the vast majority of people don’t. In fact, some sellers have even called certain MLM companies scams. LuLaRoe is being sued by multiple former representatives who assert that the company is actually a pyramid scheme.
When reviewing the pros and cons of MLM, most would say that the rewards don’t outweigh the risks, especially if you look at the numbers. Much of making profits involves recruiting other sellers, allowing you to access a piece of their earnings. But, if you target friends and family, you could over saturate your town with representatives, which will impact each rep’s sales.
Since internet sales are often an option, you may be able to expand your reach. However, there are a lot of representatives operating online, so competition can be fierce.
Before you commit any money, take a hard look at the company. Seek out news and reports from reputable organizations, such as government agencies, to see if what the company claims is true, and don’t get pulled in by sales representative reviews that may only be platforms for them to recruit.
Even if everything looks good, it’s important to realize that your business can still fail. If you are comfortable with that, then proceed with caution, and make sure you read the fine print to see how hard it is to get out if you decide it is no longer right for you.
Have you ever been an MLM seller? If so, what were some MLM Pros and Cons you experienced? Tell us about it in the comments below.
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