The Likelihood of MLM Success

Success Rates and Tips for MLM Businesses

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You'd have to be living under a rock to never run into someone involved in multi-level marketing (MLM) (sometimes referred to as direct sales or network marketing). Maybe you've been to a party where a host does a presentation about makeup, cookware, or jewelry. Perhaps on old acquaintance has shown you a plan on how you can leverage your time and money

If you're like many, you may be skeptical of MLM businesses.

Some of the leeriness is based on myths and misconceptions about network marketing and fears of scams. And yet, according to the Direct Selling Association, over 18 million Americans are involved in direct sales, adding $34 million to the economy in 2014. Those aren't small numbers.

So what's the truth about MLM? Can you actually make money doing it? How much time and money is involved? What is the actual likelihood of MLM success? 

Jon M. Taylor, PhD (PDF) conducted comprehensive research and analysis of the compensation plans of over 400 various MLM companies and presented his findings in his e-book, “The Case (For And) Against Multi-Level Marketing”. His findings, which are posted on the FTC website, are pretty sobering:

What Are MLM Success and Drop Out Rates?

According to Taylor's research:

  • In the first year of operation, a minimum of 50% of representatives drop-out.
  • After five years of operation, a minimum of 90% of representatives have left the company.
  • By year 10, only those at or near the top have not dropped out – making it safe to say at least 95% of representatives have dropped out.

He contrasts these statistics with the failure rates for traditional small businesses, using the Small Business Administration’s statistics for 2008 that found that 44% of small businesses survive at least four years and 31% at least seven years, and 39% of businesses are profitable over the life of the small business.

Only 64% of small businesses fail in 10 years.

Because of the dismal MLM failure rates and other criteria, it is interesting to note that MLM businesses don’t even qualify for SBA loans or other small business funding and assistance programs.

How Much Time and Money is Involved in MLM?

Taylor researched the investment required to launch an effective business-building campaign for a recruitment-focused MLM (a company that places compensation and incentives on recruiting a "down-line" as well as selling a product). He estimates a minimum of $25,000 in total expenses that include incentives, products, phone, internet, giveaways, computer supplies, advertising, and travel etc. To come up with this figure, he joined a recruitment-focused company and worked full-time with the business for a year. Obviously, this figure will differ based off a number of factors including personal commitment and the company's requirements.

For a product-centered direct sales company, where the product is the focus for compensation and bonuses, expenses include the cost of a starter kit, marketing expenses, party-hosting expenses, Internet, phone, office supplies, ​and travel expenses, etc. For a properly launched campaign, this could run anywhere from $1,000 per year on up.

The chances of being able to start a successful MLM business with little or no upfront income is slim to none.

Of course, what you might actually spend could be more or less. Since the time of this report, many business-related expenses, such as those found online (websites, social media, etc) or phone costs (now we have unlimited long distance services), have decreased in price. 

Are MLM Businesses Doomed to Failure?

The above information might be scaring you away from a direct sales business; however, there's more to the story than Taylor provides in his report. The data isn't encouraging and it appears to put all the blame on MLM as a business model.

However, there are few things to consider:

1) While Taylor indicates large sums of money are required for MLM, compared to many other businesses, the investment is small. Franchises and business opportunities run in the thousands just for the start-up. 

2) Because the start-up investment in MLM is much smaller than in traditional small business, it's also easier to quit. It's easier to walk away from a $100 than $5,000 or $25,000. 

3) People make many mistakes when starting in MLM. Some don't research the company or product. Others don't read the contract they sign. Many newbies rely on the information provided by their sponsor. This is a problem because even the best sponsor won't be able to cover every little detail, and of course, some sponsors fail to disclose everything (in which case, you don't want that sponsor). Problems people experience in MLM due to failure to research or study the contract is their fault, not MLM.

4) Many reps struggle because they don't treat their MLM like the business it is. For some reason, many MLM businesses are viewed and treated differently than a traditional business, which is a problem. It doesn't matter what business you start, if you don't market, sell, and do the activities that make money on a consistent basis, your business will fail. 

5) Like most things in life, success or failure mostly relies on the individual. Certainly, the MLM industry has a vast sea of reps who don't make much money or who quit, but there are reps who are meeting their income goals and some (a small few) are rich.

Can I Be Successful Building and MLM Business Part-Time?

There are many factors that go into MLM success, including:

1) Your goals. If your goal is to be filthy rich, it's a possibility in MLM, but maybe not your best bet depending on the type of business owner you are. If your goal is to make enough to help you pay down debt or make a little extra, a part-time direct sales business can be a good resource.

2) The company. What does it sell and can you get excited about it? What are the compensation plan, marketing system, and policies, and can you work with it? Is it a member of the DSA, and through your research, been found to be a legitimate company?

3) Your work ethic. Every goal requires action. MLM is no different. Success comes from doing the work that needs to be done. 

Can You Really Make Money?

Can you really make the big money? The short answer is yes. However, most people don't. According to an Inc.com article on direct sales, the median income for an MLM rep is about $2,400 per year. That same article profiles a mom who makes $300,000 per year. Taylor researched Nu Skin and cited a 2008 case study which showed the number of people achieving Blue Diamond status (the highest level of earnings) was 0.14% - not even a half of a percentage point.

The reality is, only a tiny percentage of representatives actually realize the high earnings advertised in MLM promotional materials and at meetings. Some say the big earners got in early and are positioned at the top; however, like other MLM data, this is misleading. First, it suggests that getting in early is all you need to do to be successful, which of course is false. Success comes from work. Second, many companies have been around for over 30 years, and some of their top selling reps joined last year or five years ago. In essence, their top earners aren't only the ones that joined 30 years ago. Finally, yes, of course, the people positioned on top make the most, but that's not because they came in early. It's because they built a business that put them on top. 

So is it possible to make any money doing an MLM? After finishing all of his analysis and research on various MLM data, Jon Taylor concluded, “In every case, using the analytical framework described, the loss rate for all these MLMs ranged from 99.05% to 99.99%, with an average of 99.71% of participants losing money in an MLM. On average, one in 545 is likely to have profited after subtracting expenses and 997 out of 1,000 individuals involved with an MLM lose money (not including time invested)."

That sounds dismal unless you're the 1 in 545 or the top 1 percent working your business. 

Conclusion

To be clear, MLM is a viable home-based business opportunity. Anyone interested in selling a product to generate income has the ability to achieve success. With that said, it is crucial to research and investigate the company and products thoroughly to make sure that it's not a scam, and also, that it's a product and system you feel you can promote. There are many single-level marketing (selling products without a recruiting component) companies where the likelihood for generating income is much higher than typical MLM statistics. This is because compensation comes solely through selling products (no downlines, minimums or recruitment tactics). Additionally, some MLM companies are product-centric and have compensation plans designed around richly rewarding product sales.