Yesterday was a bittersweet day. I quit my network marketing business. I was very profitable, and in fact, it was the second most profitable business I was running. The reason why I quit was not because of money, but instead because of the principle behind and economics of network marketing/MLM in general. Here’s where the industry is going and how all internet marketers can take advantage of it.
For those who don’t know, network marketing is the business model in which independent representatives (sometimes called distributors) are the primary method for a company to market products. Think of Pampered Chef, Amway, Avon, Discovery Toys, etc. How did you hear about those products? Probably not from a Super Bowl commercial, but instead from a friend or family who is trying to sell them.
The Business Model
The business model runs off the extremely successful theory that the best type of marketing is word of mouth, or endorsement marketing. It has been around for decades and will be around for a long time to come. The commission structure is different for every company, but usually it is a multi-tiered commission structure.
For example, if I sign up under my sponsor, Person A, for every sale I make, not only do I get paid, but my sponsor (Person A) gets paid a small portion as well. If I sign up you, my reader (Person B), every sale you make will pay me a commission, and for some companies will also pay my sponsor, Person A, a commission as well. Terms such as upline, downline, "team", roll-up, one-up, two-up, residuals, and many more are used to describe the payment structure.
Network Marketing vs. MLM
Multi-level Marketing, or MLM, is a type of company that has multiple levels of commissions. Like the example above, if you, Person B, makes a sale, I get a commission, my sponsor (Person A) gets a commission, his sponsor gets a commission, and so on. For your first sale, everyone gets a commission except, well, you, the person who made a sale. Some companies (called 2-ups) even have the policy that you won’t get paid until after your first TWO sales.
MLM has had a very checkered past and does not enjoy the best of reputations. They have been hit pretty hard by the FTC and rightfully so. It is illegal (in the US) to require someone to join a program in order to sell it. For instance, it is illegal for the a company like the Global Resorts Network (GRN) to make you buy one of their vacation packages before you can sell it. This law came about when people were joining Amway, buying thousands of dollars of stuff in order to be able to sell it, and would go bankrupt because they couldn’t sell it.
The way current MLM companies get away with this type of practice is requiring what they call "qualifying sales". If you do not buy the product or service, the MLM company segregates you from the rest of the distributors who did, and requires you to make even more sales before you start receiving your commissions. It is not uncommon to have to make 5, 6, or even 10 sales before you get paid for your first sale. Even worse, all the people who sign up as distributors will be signed up under your sponsor instead of you, potentially costing you thousands of dollars.
As you can see, this is shady at best. Because of these practices, the MLM industry has gotten a bad name. It is so bad, in fact, that my best advertising ads included the phrase "NOT MLM!"
So the term "Network marketing" was born. Sometimes it is synonomous with MLM, sometimes it means something completely different, but the concept is the same. The MLM business model is slowly dying away but is being replaced with the direct sales model, in which you get paid, from day 1, for every sale you make. In addition, your sponsor will get paid, and that’s it.
The Stigma and How They Get You to Join
Quickly (maybe it’s obvious), I found out that the best people to join your "team" are those who want to start a business and market the product themselves, not someone who wants to buy the product just for the product. This way, you can take advantage of the residual income they make for you by selling the product (no advertising cost for me). I’m sure you’ve heard the pitch: what if, you were to get 5 people to join, and they got 5 people, and they got 5 people. It’d be easy to make millions! (in truth, you may get 5 people to join, but any one of those 5 people may get a total of 3 people, only 1 of which will actually make commissions for you, and it goes on from there)
So for you relatively advanced marketers, it should be obvious that the ideal persona for these companies is a business opportunity seeker with enough cash to spend a significant amount of money on advertising. In fact, the best chance to get someone in your downline is by recruiting them from another company. MLM is extremely incestuous, with the top earners usually coming off a bad experience with another company.
Herein lies the first fundamental problem of running a network marketing/MLM business online. I’ll discuss that in a second, but first I want to get into the basics of who profits from MLM companies.
Who Profits, and How Many Fail?
It should be obvious that the people who profit the most in an MLM company are those who are at the top. Who is higher than the original founders of the company? There are a few sporadic cases of extreme success sprinkled throughout the organization, but by and far the most successful people are the ones who "got in at the ground floor".
The reason behind this is one that not many people see right-off-the-bat. I’ll put it in another light.
What if I, right here and now, revealed that I was making about $100,000 a month in the croquet niche? Then I went on to say that the way I made this money was by selling croquet balls, and I told you who my manufacturer was, what my keywords were in Adwords that I was advertising on, where I placed my banner ads, etc. all for the low price of $39.99. Then I went on to say that you, too can get into the croquet niche, sell the same balls, and make the same amount of money? What would you do? Would you go out and start your own croquet site using all my information? Maybe some of you wouldn’t, but most of you would.
What just happened? I became rich selling croquet balls. Then, I got rich again, selling information on how to sell croquet balls. What else did I just do? I made it a million times harder to sell those croquet balls because my competition just went from 0 or very low to extremely high. The same thing happens over the lifetime of a MLM or network marketing company. As the number of distributors increase, so does competition.
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The people who did not "get in on the ground floor" have to try to break into a market where they |
Besides, what USP are they going to have? They haven’t been successful yet, so they can’t talk about that. If you couple this with the fact that most people who start a network marketing business do not have much experience in marketing and have very little time and money to devote to success, you get a failure rate of 98%.
Seriously, a failure rate of 98%
What I personally started to see is that as soon as the company started getting very popular, the top distributors in the company started accepting the fact that they would break even, or even lose money their first sale.
In my company, this was a $2,000 product that we were breaking even on!!
How can you possibly expect a new distributor to get started if they 1) have to pay for a $2,000 product, 2) don’t make money on any of their follow-on sales and instead make money from their residual check.
If you’re a numbers person, here are the graphs from the Direct Sales Association, the guys who want to legalize pyramid schemes:
Keep in mind, these are THEIR number, and they are estimates. (they’re still not good)…
US Sales (Worldwide is worse):
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US Sales FORCE…
From this data, this is what I have determined. Amount of sales, per person, per year (in dollars):
Now here’s the sick part. Amount of yearly sales, per person, after adjusted for inflation:
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WOW! Not a very good trend, huh? Would you invest in a company with trends like this? Not only that, but the average person only sells about $2117 a year in the US and $1866 a year worldwide! That’s about $176 a month. And here’s the kicker: commission is usually around 10-20%, so that’s what, $17 a month? What kind of business is that? Do you think that offsets the fact that they had to buy hundreds of dollars of equipment to get started? Absolutely not. The numbers do not lie, folks.
They’re all Liars
So what drives so many people to network marketing? The money. There seriously is a lot of money to be made if you are successful, and the people who make the millions shine very brightly and attract a lot of distributors.
How do the new distributors attract other distributors when they don’t have a great success story? When a prospect calls and says "how much money have you made so far", how do they say, "Well, actually, I haven’t made any money, but I’m sure I will soon."
It’s simple… they lie.
I did it. Everyone under me did it. Everyone above me did it. I didn’t tell them over the phone that I was successful, but I did on my landing page. I joined a marketing company called Carbon Copy Pro. The landing page says "A Realistic $250k First Year Income". It tells the story of Jay Kubassek and how successful he was with this exact same marketing system.
I bet 80-90% of the people who opted into my system thought I was Jay Kubassek. They had no idea who I was until they bought from Jay me.
The Present and Future State of Network Marketing, Particularly Online
Network Marketing and MLM are here to stay. If you don’t think so, just google the term "business opportunity" and see what ads pop up. Advertising, however, is to the point where it is too expensive to compete unless you can make a significant amount of money on each sale. The companies where you make $5 or $12 a sale will not be able to advertise on any sort of bid-based medium (which most ad platforms are now)
The success rate will stay the same - around 2% - because most who join do not have the deep pockets or heavy time commitment required to participate in Web 2.0, pay-per-click, or banner advertising. That’s the statistics I saw in my business and that’s what I believe it will be.
Even though there are successes in this industry, I DO NOT recommend getting started in it. If its purely for the money, there are plenty of other ways to make just as much money online with a much higher success rate and in a much more honorable way.
I personally am quitting the company I’m in because I cannot market something that claims to be able to transform anyone into millionaires overnight and doesn’t deliver. After 9 months, I felt sleezier than ever before when I started to find out that the honeymoon may be over for my company. I would much rather focus on my guilt-free businesses.
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Wednesday, 18 Jun 2008 Filed under: Adwords/PPC, Leadership, Marketing, Mindset, Small Business, Starting Up by Bryan
Hi,
Cool post, for any business we need the network and those network need to energized for good implementation as shown as above.
Ultra Online Marketings last blog post..Article Marketing: New Rules for Massive Traffic
Very well written & insightful! Thanks for sharing your experience with Carbon Copy PRO & all of the rest of the definitions, history, etc.
Regards,
B. Rene
B. Rene Williamss last blog post..Jun 26, Get Your Blog Noticed at the Search Engines!
I am involved in tow companies, one is with purchasing silver bullion eagle coins and the other a health product I buy monthly. The reason I joine dwas because I LIKE the products so the making money side is a bonus for me. This way when I recommend them I don’t ever hype it up. I tell them how it is for passive and non passive persons, then it is up to them to jojn. I always say you HAVE to really like the product or don’t bother. Nice blog by the way.
yanjiarens last blog post..Traffic has increased exponentially to this site.
I’m glad someone is writing honest articles about all these money-making opportunities online.
Hi,
i admire your courage to make such a confession to the blogosphere.
Great post …*-)
It reminds me of the book “The 7 Great Lies Of Network Marketing” by Ann Sieg.
If you haven’t read it yet, you should go for it …
Regards,
Michael