Multilevel Marketing May Not Be a Path to Riches

It's easy to see why someone would be drawn in by a multilevel marketing (MLM) company. These brands show potential salespeople how much money they could make without telling them that the vast majority of their commissioned sales force make nothing or even spend more than they earn. In many cases, these MLM companies show best-case scenarios and don't disclose what most people actually make.

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This video was recorded on May 14, 2019.

Dylan Lewis: We're not just picking on some publicly traded companies, Rodan + Fields, the skincare company, had over 400,000 enrolled consultants in 2018. Over 200,000 of them received payment, about 54%, in at least one month for sales that occurred during 2018. Of the people that did receive income from Rodan + Fields, half earned less than $600. Again, those numbers that we threw out there, broad strokes, they seem to jive more or less with what we're seeing from these companies specifically, Dan.

Dan Kline: Yeah. And we're seeing the same thing over and over. Part of your research was looking at Berkshire Hathaway, Warren Buffett's Pampered Chef company, a company using this model, and how they present the business to the public. There's no one more reputable than Warren Buffett. But, Pampered Chef is using marketing materials like, "See what you can earn! Your earning potential is endless!" And they show charts and graphics about how you could make all sorts of money. The reality is -- and we keep saying this -- you could make all sorts of money; technically, that ability is part of the program. But the reality, and we see it company after company, public or private, is that you're not going to make that kind of money. And if you're happy just making a little bit and bringing some of these products -- because you really love Pampered Chef and you want your friends and family to have it or use it yourself -- you really have to think about what you're getting out of it and what the company's getting out of it.

Lewis: Yeah. Just to put some numbers to what you're talking about with Pampered Chef, they estimate that at three to six hours per week, you could be pulling in an average monthly income of between $611; for eight to 15 hours per week, you'd be pulling in $1,400 to $18,000 in average monthly income, [laughs] a far cry from what we're seeing from some other vendors. When we talk Pampered Chef, it's impossible for us to look at those numbers and then look at the actuals, because in doing research for this show, I couldn't find a disclosure of income summary for the Pampered Chef sellers. My hunch, though, is that it's pretty in line with what we've seen with these other folks.

Kline: I think that's a red flag. If you've decided, "Hey, I'm great at sales! I want to be in this type of business," I think you want to look for companies that disclose numbers. The reality is, the vast majority of them don't. They're more than willing to show you best-case scenario, but they're not willing to say, "Over 90% of people don't make meaningful money," or in some cases, "99% of people don't make meaningful money." Really ask those questions. If you're being recruited by a company to do this, or you're in discussions on it, push back and say, "Hey, beyond these three people who've done really well, what does the average person make in their first year?" Not their first month, which is going to be easy, but the first year, where it's going to start to get hard.

Lewis: Yeah. And I don't disagree with you, Dan. I think that there definitely are people in the MLM industry that make a considerable amount of money. You think about the structure and how you are receiving commissions on the people below you who are placing orders, ultimately, to sell stuff. Yeah, if you get enough people in your downline, it totally makes sense that you're pulling in some serious money. I think, though, that MLMs tend to be very top-heavy in their compensation, and a lot of the wealth that's being generated for those folks comes from people that are being pitched the idea that, "You can start your own business, and it doesn't cost all that much!" I have a problem with that, as an investor.

Kline: Yeah. I think it's fair to say they're only showing you the rosy side of it. And that's true of anything. If you're looking at a franchise, if you're going to open a convenience store, they're not going to show you the three people that failed, where it didn't work out well. They're going to present, "The average person makes this, here's what their investment pays off." In this case, I think it's hard to ignore that chances are, you will be paying them money and not getting anything in return. Again, that's fabulous if all you want is a discount and to play around with doing a little sales. But before you think this is a way to make a living, realize that this is a very difficult side hustle. This is not, "I drive someone from here to there and get $X." This is, you only get paid if you sell; and in many cases, you have upfront costs that are somewhat significant.

Lewis: Yeah. It's a lot to work through. Listeners, if you're interested in more on the MLM space, John Oliver has done a remarkable 30-minute breakdown of MLMs and the industry. I would also highly recommend you check out the podcast The Dream. It covers the history of the industry, gives a look at the culture and how it impacts a lot of the people that do become distributors. If you want more on this discussion, those folks have done an incredible job of painting a picture of what the industry looks like.

Dan, anything else before I let you go today?

Kline: Well, Dylan, now is when I tell you I'm leaving in order to start -- no, just kidding. [laughs] Yeah, all I want to tell people here is, don't get sucked into the dream. If you want to build a business, do your homework. Talk to other people who do this. Find something that isn't just what the company is feeding you. If you do all that homework, and talk to lots of people in lots of different areas, and believe you can make money selling Tupperware or knives or whatever it happens to be, then go for it, give it a shot. But be very skeptical. Don't just pay your money on the idea that you'll have financial independence.

Lewis: Yeah. I'd say, hunt for the numbers, and know yourself. If you're someone who is not a natural salesperson, perhaps you're not going to become one overnight just because you have this inventory on hand to sell. You have to know what your strengths are and play to them.

Kline: Yeah, and you have to think about your comfort level talking to strangers. I mean, asking for a sale is hard to do for a trained salesman. If your training comes from watching some videos online or reading some training materials, you have to think twice before getting into this type of business.