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MLM and network marketing - viable online businesses or scams?

Each day I go through my inbox, I get plenty of offers of online business opportunities that will make me rich. Many of these solicitations use terms like "downline" "upline" and "matrix" - a dead giveaway that they are based on an MLM model; Multi-Level Marketing (aka network marketing).

I also get a lot of email from excited people who are about to venture into online business and want some advice. In many of these instances, it turns out to be an MLM based business they have signed up to. I thought it time to write an article on the subject - Is MLM a viable means of online business or are they generally just a scam?

First, the basics..

What is MLM (Multi-Level Marketing)?

MLM, also known as Network Marketing, is by no means confined to the online world; in fact it has its roots long before the World Wide Web. Some very large and successful companies were built on, and continue to thrive, based on a network marketing model.

The way it basically works is this: a company sells products or services via a network of independent distributors who buy at wholesale prices from them, and then sell at retail prices.  The distributor usually pays some sort of joining fee or has to buy X products to gain distributorship status. It sounds very much like a normal business, but read on.

The company also urges distributors to bring in other people to act in the same capacity. The referring distributor then also earns commissions on the products that the referred distributor sells. If the distributor they referred also brings in other distributors, the original distributor also receives commissions on those sales - and so on. This is the "Multi Level" component. I've seen some matrixes go to 15 levels (or tiers) deep.

For most people wanting to get into these kinds of businesses, the attraction isn't so much in selling the companies products, it's getting the clients they accumulate to do the same and spurring *them* on to sell the products and convert buyers into distributors.

Most products and services sold via MLM or network marketing aren't available in bricks and mortar stores, the whole model is built around independent distributors working via their network of family, friends and acquaintances. A whole social and business culture is built around the program with conferences, conventions and training products available - at a price.

Learn more about dropshipping Learn more about drop shipping
Dropshipping - an effective & simpler way to make more from ecommerce!

MLM and affiliate programs - the same thing?

There is a distinct difference between MLM/Network marketing models and affiliate programs. In most affiliate programs, you do not need to purchase a product or pay a license fee in order to promote it. Commissions usually only run 1 tier deep (the purchase by the client), sometimes 2 tiers (where the client then also promotes the product), but rarely 3 or more. Affiliate programs usually don't charge for training materials either.

All MLM/network marketing models require distributors to buy in - either through the purchase of products or special licenses; and there's a strong focus on not just the selling of the product, but recruiting new distributors. There is also a big push by upline members (the distributor "above" you) to purchase training materials and attend conferences.

Is MLM/Network Marketing a pyramid scheme?

There are some similarities between network marketing/MLM and pyramid schemes, except that pyramid schemes are illegal and there's usually no tangible product or valid service involved. One important point - just because an MLM program does offer a product, it doesn't mean that it's *not* a pyramid scheme. To the best of my knowledge, USA law states that in order for a network marketing operation to be legal, at least 70% of the revenue must come from the sale of products to non-distributors.

So what's the problem with MLM?

Like any other online business, you should always view a network marketing opportunity with great caution. The more the person extols the virtues of it, the bigger the promises, the more likely it is that either the opportunity is a scam, or even if it is legitimate, you may be sorely disappointed.

I've had two brief brushes with network marketing and MLM in the last decade. The first one was just prior to starting my online business. The first company is very well known and successful. In fact, they are basically a household name. The products were of good quality and a diverse range was available.

A few things bothered me about it.

- The products, while of good quality could be obtained elsewhere under different brands at a substantially lower price.

- It turned out the market was saturated with distributors, so only those who got in early really stood to generate much in terms of revenue.

- My distributor sponsor was more interested in getting me to purchase "how to sell" tapes and attending expensive conferences than he was in the actual products.

- I never went to a conference, but those I spoke to who had returned from them very hyped up; it was almost a religious fervor. Even with that level of motivation, given the market saturation, they didn't generate much in sales or recruit many distributors under them.

The second brush with MLM in an online environment was a new company. Again, the product was good - but the company director was, and this is in the kindest possible terms, a thief. He still owes us a substantial amount of money which I know we'll never see.

These two experiences are by no means isolated. For every person you come across who has generated big incomes through network marketing, there are many thousands more who haven't. These big players will tell you that it's down to dedication. Nothing could be further from the truth - once a market is saturated, it's saturated - no amount of effort will generate healthy revenue. 

MLM / Network Marketing warning signs

I am not stating by any means that nobody makes money from Network Marketing models or that all MLM programs are scams, but if you are tempted to get involved, there's a number of things you should watch for.

Promises of renumeration. 

The old saying of "if it seems to good to be true, then it probably is" definitely applies. Don't be fooled by graphs and projection charts - they are just numbers based on an idyllic market.

Market penetration. 

If the company has been around for quite a while, then the chances are that the market is saturated with distributors. Bear in mind that usually only the early birds get the worm.

Overpriced products. 

Regardless of the quality of the products offered, compare prices with similar products. Nobody wants to pay 30% more than what they should - it will greatly decrease your potential market.

Get rich products.

If the product is a "how to get rich" magazine or business "kit", stay well away as this is more akin to a pyramid scheme - most of the purchasers will also be distributors.

Start up fees. 

Remember that this is not a fast food franchise - it is a high risk venture. If you can't afford to lose the money or the time you'll need to invest to get it up and running, look elsewhere.

Hype

The testimonials you'll probably read may well be true, but they are most likely to be from distributors that joined early.

"Companion" training products. 

If there's a focus from the company on selling you products to help you succeed in their business; run like hell. Many network marketing companies generate huge amount of revenue from selling these products to distributors whom they know will never recoup the money. Success in business is not just a skill, it's an instinct - something that cannot be taught to some people.

Limited distributorships

Many scam companies are aware of the bad rap that MLM and network marketing has, so as part of the sales spiel, they'll tell you that there will only be limited distributorships available. 

Even if this is true, then what real incentive is there for the "final" distributors to join? Will you be one of the "final" distributors - if so, you'll suddenly find that your dreams of building a passive income via the hordes of distributors you may have recruited will be gone; and the only way you can generate money is via 1st level sales commissions.

"Part time" business

One of the greatest myths about online business is that you can get rich part time while working in your underwear. The second part is true, but underwear may be all you can afford if you only apply yourself part time to a *legitimate* business.

People who successfully run their businesses part time are usually those who threw themselves into their business for the first few years; often at a great cost to themselves and their families. People who are successful in part time online businesses usually also had a full time job to start off with to finance it. Running your own *successful* business is hard work, that's something you can be sure of. Most new small businesses will fail within the first couple of years. Do not be fooled into thinking that financial success will be easy.

Learn more about dropshipping Learn more about drop shipping
Dropshipping - an effective & simpler way to make more from ecommerce!

General personal/business ethics

Let's say that you find a really good MLM/Network Marketing opportunity and you're one of the early distributors. Here's something to think on. If the company is that good, at some stage the market will be saturated. For those people who are brought in as distributors at a later date, you will probably be giving them the same spiel that enticed you in the first place. You'll be doing this knowing that each new level brought into the matrix will have less of a chance of making the same amount of money as the level above it. Will you be telling these people that?

MLM/Network Marketing is a nice concept, but ultimately there has to be losers; and I'm not referring to the unmotivated distributors. At some stage in the matrix, even the motivated people will not receive anywhere near a similar return on the same level of effort that you put into build your distributorship. You need to ask yourself if that's something that you are comfortable with.

Related learning resources

Successful affiliate marketing
Affiliate Marketing Survival Strategies
 
Affiliate Programs - working with merchants

Beginners' guide to drop shipping

Michael Bloch
Taming the Beast
http://www.tamingthebeast.net 
Tutorials, web content, tools and software.
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