Economics of multi-level marketing

THE ECONOMICS OF MLM

The nature of network marketing capitalizes on economic fears and the insecurity of the human spirit. It leads distributors to believe that they can free themselves from the dangers of downsizing, debt, and global competition by using the newest compensation plan, lead generation processes, and a revolutionary product that is unmatched in the industry. world. We will examine the relationship between low-cost entrepreneurship and the economy. Including the red flags of MLM compensation plans, why they benefit the founders and not the frontline distributor, lastly, we will delve into the supply, demand and competition relationship of “proprietary products”.

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When the economy is strong, consumers become complacent and typically accumulate larger amounts of debt out of a secure sense of financial well-being.

History shows us that when economic recessions occur (historically approximately every 8 years and last on average 18-24 months). Those who are proactive seek alternative sources of income to cover the rising cost of debt, interest rates, and insecure job prospects. Baby boomers are also contributing to this trend by realizing that they have not financed their retirement with respect to the inflationary costs of daily living.

That said, it makes a compelling argument that consumers are looking for the best quality product at the best prices. Recessions have a profound effect on people. Feelings of scarcity or financial insecurity cause people to seek business opportunities and alternative sources of income. MLM companies work hard to convince the potential distributor that they can start a home-based business without spending large amounts of money. Is that an aspect that attracts new distributors? Other aspects are home-based businesses, tax breaks, being your own boss, not having a physical plant or retail storefronts, storage, employees, advertising, or other costs typically associated with running a business. Such an organization can be built from home without the expense and complications typically associated with other types of businesses. MLM offers distributors not only financial independence with minimal investment, but a level playing field that anyone can participate in, regardless of gender, age, education, or financial resources. Other advantages include social benefits and recognition. Suddenly, the new distributor finds himself surrounded by a personal support network—a veritable fraternity who cares about him and his success—to help him build his own business. The new distributor is also backed by a company touted as having a strong debt-free track record, years of double-digit growth, a research and development budget the size of Zimbabwe’s GDP. MLM sells the opportunity, peace of mind, and ease of success to trusted people. These private “debt free” companies will provide the products and infrastructure necessary for success. It seems that network marketing is the best “recession proof” answer to your financial life!

Unfortunately, the economics of network marketing is changing. The cost incurred to market and enroll a distributor is increasing at the same time that actual returns and lifetime value (LTV) returns are declining. Let’s break down the math. You enroll five investors and each investor fair he has to enroll five more each. This is what is called a 5×5 Matrix. This will equate to 3950 people in your “Organization”. Let’s assume a conservative return on investment of $1 from each distributor per month. Your winnings would be $3950, sounds easy. What you are not told is 1) that if you only go down 12 levels, you exceed the population of the earth, and 2) The industry records a 99% failure rate. Therefore, the real role of a distributor is, in essence, a recruiter. Recruitment networks are classified as Ponzi schemes and are illegal in the US.

In 1996 the industry had some 6.1 million distributors, a year later there were 6.5 million. A 6.6% increase in dealers sounds great. However, the number of companies went from 200 to 350 in 1997, a 75% increase in competition for distributors. The net result was an average downline decline of 39%. It gets worse. Industry consultants agree that the average number of investors/dealers needed to break even is 4,000. Factor in the 99% failure rate, and suddenly the average company needs 400,000 new distributors annually to maintain a constant breakeven. This is assuming that no new companies would enter the market. Between 1996 and 1997, the industry needed 1.6 million new investors/distributors to break even by maintaining the 4,000 member downline. This assumption is based on the number of companies holding constant at 1997 levels. However, there are now over 2,100 companies.

The Red Flags of Compensation Plans

The pyramid concept in MLM is seen in multiple layers of distributors, with lower level distributors bringing income to an “upline” that has little to do with a given sale. MLM companies also structure compensation plans to pay commissions 5-10 levels above the original sale. This is a very different structure from the typical retail scenario where a retailer can get two to three times the return per sale with perhaps only 1-2 tiers of commissions paid to manufacturer reps and managers. MLM and upline distributors can get as much or more in a return per sale (in commissions and bonuses) than the distributor who actually sold the product.

Because MLM compensation systems reward top-line distributors with only a small commission (usually less than 10%) on the sales of a product. Discounted prices on products to stay competitive in prospect industries simply cannot happen due to heavier compensation systems. The truth is that MLM companies to keep successful distributors happy constantly cannibalize their competitive advantage for the sake of higher bonuses and commissions to sell in the future. Recruiting for income from new downline distributors now becomes the vital activity to earn a meaningful living.