Multi-level marketing is a popular way to make money from a home business, as demonstrated by the Herbalife MLM empire. But is MLM a smart play for you?
There has been a lot written about Herbalife recently. The multi-level marketing giant has come under fire from a hedge fund manager, asserting that Herbalife is one big scam — even if the company is listed on the NYSE.
Herbalife isn't the only direct sales MLM company out there. There are tons of home business “opportunities” in the form of multi-level marketing. In fact, I get a front row seat to many of them. To me, Utah seems to be the MLM capital of the world, with stay at home moms hawking products from Scentsy to Lia Sophia to Pampered Chef to Usborne. When I say that I have a home business, the immediate assumption here in Utah is often that I'm involved in MLM direct sales: “Really? What do you sell? My wife does ________.”
While it can be tempting to make money from home with the help of a home business system, it's important to be careful. Any home business takes a lot of time and effort, and these MLM direct sales programs can end up being more of a money pit.
Why are You Selling these Products?
Before you sign up for a multi-leveling marketing program, you need to figure out why you plan to sell the items. For many of the people I know, the real reason they are distributors is because they want discounted products. My mom never made much money as the neighborhood Avon lady, but she did enjoy getting her cosmetics on discount.
Most of those involved in MLM selling in my area get their products at a discount, and if they make $50 or $100 extra bucks each month on the side, they are happy. There are product parties (that I never attend), but there aren't a lot of recruiting efforts by these ladies to find “team members” to boost their earnings down the line.
It's when you start thinking that you want to use MLM as a business model that things can start to get a little sketchy. Actually making money in direct sales is difficult and time-consuming. And you might have to buy a great deal of product in order to move forward. In the end, as Pound Foolish author Helaine Olen pointed out in a Forbes article about Mary Kay, many of those who “invest” in MLM home business “opportunities” just end up with a bunch of product and high credit card bills.
There are success stories. There's a lady driving a pink Cadillac around town. However, her husband had the resources to support her vast purchases of Mary Kay inventory; no debilitating credit card debt for her. Unfortunately, with systems like the Herbalife MLM model, distributors are often pressured into using debt to buy a great deal of inventory up front. And many of those who do so are desperate, looking to earn extra income for their families.
MLM: Too Good To Be True?
While MLM companies are usually legit in a legal sense, it's important to understand that many of them make promises that are too good to be true. You are told that it's easy to make a lot of money in direct sales, and that all you have to do is hold a party, or “invest” in a system. You are told that you can reach “management” level by purchasing large amounts of inventory.
And then you are set to work recruiting others to be distributors. Some MLM companies are more into recruitment than others. Personally, I think it's best to be wary of any company that puts a great deal of emphasis on recruiting “team members.” Any MLM company that focuses on encouraging you to recruit rather than teaching you how to better sell the?product should be approached carefully.
Yes, there are ways to make money with MLM programs. However, it's not as easy as plunking down $5,000 for a large inventory and trying to get a few friends to do the same. To really make money in direct sales, you need to have a business plan, and you need to work hard at selling the product and turning a profit. You can't buy into the positive-thinking messages and hype that many MLM companies use to get you fired up. Any home business requires hard work and dedication to make it work.
What do you think of MLM companies? Legit? Or scams?
20 thoughts on “Herbalife, MLM, and Scams: Is MLM Right for Your Home Business?”
I don’t have a problem with MLM companies and have seen some people make a ton of money sellling good products. BUT (and with everything, there’s a but, right?) realize that if you’re going to get into MLM that it’s a LOW BARRIER business. Whenever everyone can do something, you’re going to have a ton of competition and are going to have to work really, really hard to make any money. Expect a ton of rejection and disappointment.
Good point! And one of the sad realities of MLM is that you are recruiting your own competition. The more people you recruit, the more you have to keep recruiting, because all those people will be selling to your potential customers. It can turn into a vicious cycle.
From the few MLM encounters I’ve seen, the emphasis is usually on recruiting new suckers – I mean members. If your business model relies heavily of convincing others to convince others to convince others to join, it is a scam. It’s not about moving product and servicing customers; it’s about passing the buck and hoping other people’s foolishness will make you rich.
I think that’s a good smell test. Is the focus on selling a product? Or is it on recruiting people who are supposed to make you rich later?
Robert Kiyosaki believes in MLM. I think some MLM are not scams, there are many success stories we heard. Some people also build their wealth through this business set up.
No one is disputing that some people can earn a living using MLM. However, it’s not easy as many representatives make it sound, and it’s important to be aware of the realities involved before you get started.
Some people make money in Pyramid and Ponzi schemes. I don’t see anyone in MLM earning a living from selling product as you describe. It is always from their spot in the pyramid/team/recruitment hierarchy.
Robert Kiyosaki also was made popular because Amway (and MLM) pushed his book Rich Dad, Poor Dad. It is worth noting that Kiyosaki himself is a failed Amway distributor.
There’s a difference between selling pick axes to those digging for gold and their actually being gold available. He’s happy to sell books, but notice that he’s not interested in being in MLM.
Read more here: http://www.lazymanandmoney.com/robert-kiyosaki-and-multi-level-marketing-exposed/
The problem with MLM that focus on recruiting is that you have untrained people training untrained people. They have no experience and then the give advice based on their non-experience (kind of like the advice you give at the end). This is where the wild claims of money for nothing come in, “I got in yesterday and you can make a million dollars a year just sitting at home, mailbox money!” If you are going to take advice in any area of life, take advice from people who have succeeded. Find a mentor with success and follow them.
Most people who get into MLM are looking to make a lot of money and do no work. Sometimes they’ll buy a lot of products with the expectation of doing something, but end up sitting at home watching American Idle. MLM takes a lot of persistent work to have success and most people aren’t willing to put in the work.
There are some MLM companies that, no matter how hard you work, will have a hard time finding success. I’d say about 90% of the MLMs out there are a waste of time unless you are willing to dedicate everything to it.
Miranda, I’m sorry, but unless you have “really made money” in direct sales, I find no reason to follow your advice: “To really make money in direct sales …” You may have valid advice, or you may not, we don’t know because you do not have the fruit on the tree.
Actually the problem is that compensations are set up so that 99% are required to fail. It’s built in. Think of an island of 500 people and it is easy to see that the vast majority (over 90%) will be at the bottom with no one to recruit or sell to.
The part about poor training may be true, but it is insignificant. It is like blaming a golfer’s lack of commitment or training as a reason for why he can’t hit 10 hole-in-ones in a row. It’s not the golfer, it’s the circumstances.
And if you’ve “really made money” in MLM, you are obviously financially biased and probably at the top… which is someone you shouldn’t take advice from. Instead it is better to realize that external perspective is better than life experience in some cases.
I agree with Miranda that if the MLM company focuses too much on recruiting members you should avoid it. The people who I know that succeeded in MLM are hard workers and persistent in selling products. With the ability and skill to sell products or services you can achieve your income goals. Yes, join the company with good and interesting products that will teach you how to sell them, and you will get better with time.
I wrote a comment below on how it is almost impossible to sell products.
The products are often overpriced, discounted on Ebay, and available at discount if someone signs up to be a distributor (which carries either zero or insignificant fees in most cases).
I’ve never seen any of the top earners make money selling products. It’s always because they were at (or near) the top of the recruiting hierarchy and had numerous volume points under them. If you look at most MLM plans, they reward these people with bonuses based on the pyramid, not on sales to people outside the company.
One of the best pieces of advice I heard about network marketing is “if you treat it like a business, it will pay you like a business.” Sadly, that industry has often attracted people looking for a quick buck and willing to sell out anyone within 3 feet to get the job done.
I am a huge fan of the industry, but I am also an advocate for seeing the business done with integrity, which would mean getting rid of a lot of the people and practices I see.
My philosophy is that if you use a product or service that you are so passionate about, that you would tell anyone and everyone about it without being paid, then you probably have a good shot at being successful if you are intentional about making it a business endeavor. It’s hard to fake passion, which is why so many people fail at MLM. I recall being at an “opportunity meeting” a few decades ago where there was a guy in a business suit raving about how great his laundry smelled. It did not come across as genuine at all. My thought was “is this guy for real? who gets that jazzed about smelling their laundry?” The answer to the latter question is “the guy who wants you to go out and sell it.” Not my cup of tea. I’d feel pretty silly standing up in front of my professional peers telling them how excited I was that “my clothes never smelled so good.”
Another area that really annoys me is when people try to pitch network marketing as a job and target those out of work. It’s not a job; it’s a business. And for a business to be successful, it requires both money and time. It’s a disservice to anyone unemployed to try and sell them on a business opportunity when they really need a paycheck. A better strategy is to help them get a job, then help them start a business so that if they are ever unemployed down the road, they have less worry because they have some residual income.
I’ve been involved in network marketing for years, but most people wouldn’t know it. I represent a product that I use and am very passionate about (Legal Shield – formerly Pre Paid Legal) and when I hear of someone who may benefit, I share it with them. If they become a customer, I simply ask them for a few referrals to people who may want to have the protection they now have. When those folks are ready to come aboard, I ask the referrer if they want a referral fee, and if they do, I show them how they can become a rep. It’s a low key, but high conversion process and it’s rooted in a passion and belief for a product combined with a sincere desire to help others. In the end, I get paid for that, so how could that not be a win-win-win.
Actually that’s lousy advice about MLM. It’s what gets people to spend tens of thousands of dollars thinking that they are investing in a business. Unfortunately, you need to recruit a ton of people to make that investment back (it is almost impossible to sell enough widgets to make the money back). There’s a phrase for this recruiting to get your investment back and it is “pyramid scheme”.
The problem with actually selling product is that you can’t really make a business of it.
First, every product I’ve seen is ridiculously expensive… usually overpriced by around 5x-10x. They can get away with this, because they are really selling product to distributors. Distributors think they are saving 20%, but they are really overpaying by 300% or 400% in an effort to sell it at 500%.
This was quite obvious when MonaVie sold $45 bottles of juice. They were only 25 ounces. Even PomWonderful’s juice isn’t close to that price.
The next issue is that you can usually find the product for the discount price on Ebay. Why would anyone pay the suggested retail price, when you can get it cheaper very easily? You simply can’t make a living selling a month of protein shakes at $120 when anyone can buy them at $100.
Finally, if people really like the product, they may become a distributor themselves to buy the product at the distributor rate instead of the retail price. It’s usually very easy to become a distributor (a one-time $25 fee, sometimes even free), so almost anyone interested would join to get the discounts.
In this last scenario, you are back to recruiting instead of selling product, which according to the FTC’s guidelines makes it an illegal pyramid scheme.
I like to say that MLM has a selling component and a pyramid scheme component. You can’t know how much is which without full transparency into the MLM. I believe that a responsible company would stick to a simple affiliate sale model rather than risk running a pyramid scheme. It accomplishes the same thing of letting people promote product sales. When a company sticks with a pyramid scheme model, it tells me it shouldn’t be considered reputable.
Pretty simple really.
Lazy Man, you sound pretty jaded, so I won’t try to convince you otherwise. I will point out however that some of your information is incorrect.
1. You said “you need to recruit a lot of people to get your investment back.” That’s not true if the company has a low cost of investment and it’s a product that you love and sell it to people naturally. I have done it and my wife has done it as well with a different company.
2. You also said “every product you have seen is ridiculously expensive.” What I like about Legal Shield is that for $17 per month, my family is protected and my Will gets updated every year. If you have ever called a lawyer, you will know that is a steal. Legal service plans are great and there are a few companies who sell them, but Legal Shield is clearly not ridiculously expensive.
3. You also said “I like to say that MLM has a selling component and a pyramid scheme component. The fact that you like to say it doesn’t make it a good thing to say. A pyramid scheme is illegal; hands down. A trusted MLM should have no “component” of anything illegal.
Don’t let the bad apples spoil the bunch. I know too many good hard working people who make a good living with legitimate direct sales businesses and I fully endorse the industry (not all of the clowns in it, though). Yes, they do attract some clowns… you and I can probably agree on that.
Just to clarify:
1) You said that you get your money if you treat it like a business. When people say that, they usually mean spending about a thousand dollars on start-up kit, plus thousands on marketing materials, training conferences, lead generation tools, etc. Here’s a great example of that in Herbalife.
When you are in for a few thousand dollars, you aren’t going to be able to make back your money selling it naturally… for the reasons I stated above about it hard to actually sell product.
If you are going to keep your expenses to the low-cost (under $200 range), I would agree that you can maybe make money. However, I would call that treating it like a hobby, not treating like a business.
2) I may have to look into Legal Shield. I haven’t yet. There is some cheap will software out there from Intuit that is high quality. I hope that isn’t just a throw-in for the $200+ a year.
3) By definition, every MLM has a component of an illegal pyramid scheme. If it doesn’t then it isn’t “multi-level.” If you take the multi-level/recruiting/pyramid scheme out, you are left with just a simple affiliate/commission sales business that I have no problems with.
The bad apples (those recruiting, not selling, hit the FTC’d guidelines for running a pyramid scheme) are the ones that are celebrated with the highest ranks and rewarded with the most money and extra bonuses. The bad apples are the ones in the upline doing the training.
So you are right that MLMs attract clowns, but that’s because it is fundamentally designed to reward the bad behavior of the clowns.
We often make judgments based on our filters and that’s what you are doing.
When I said “treat it like a business” I did not at all mean “spend thousands”. I meant, focus on it, learn it, and be intentional. Most people are not focused, educated, and intentional; the ones who are make money.
The Will is created by the law firm… and specially by an attorney. (Again, don’t be so quick to judge what you don’t understand or have knowledge of.)
I am not going to argue, but this is WRONG. That’s like saying everyone who conducts business has an element of fraud because people do fraudulent transactions with money. It is poor logic and 100% wrong. And the FTC regulates MLM’s very heavily, so if it has hints of being illegal, they are quick to jump in.
The phrase “treat it like a business” is often used by people in MLM to explain away the >99% failure rate and also to get them dig a deeper hole financially, which often benefits the upline. Sorry that you meant it in a different way that it is typically used in the industry.
If you had really meant “focus on it, learn it, and be intentional” as you stated, no one would be in MLM in the first place. To be educated in MLM is like being educated in smoking, you know the best move is quit or not get started in the first place.
As for the Will, I only mentioned a competing product that does the job well. Take your own advice, and don’t be so quick to assume that I passed any judgment on Legal Shield.
The third part is completely, logically correct. You can see it from the FTC guidelines that say that making money from a downline (those recruited) is a pyramid scheme. I’m paraphrasing because of limited space here.
The FTC does not heavily regulate the MLM space. That’s the problem. They don’t have the money to do it. It’s why Herbalife is being mentioned in this article. The FTC and everyone else has been asleep at the wheel on Herbalife for 30 years now.
The NY Times has more information about the FTC and pyramid scheme here: http://www.nytimes.com/2015/01/10/opinion/joe-nocera-riddle-of-the-pyramids.html?_r=0
It also took the FTC a decade to stop another MLM, Fortune Hi-Tech Marketing: http://blogs.wsj.com/corporate-intelligence/2013/01/28/a-rigged-game-the-ftc-calls-fortune-high-tech-a-pyramid-scheme/.
Don’t be so quick to judge what you don’t know :-).
It filtered out the content in the brackets, but they correspond with your points 2 & 3.