MLM: Valid Business or Scam in Disguise
Multi-Level Marketing (MLM) businesses are often associated with hyped-up promises, recruitment drives and sometimes, with pyramid schemes. Supporters on the other hand say that MLMs offer financial, professional and personal development. Career Central takes a closer look at the many layers.
By JOSHUA RAYAN
Mention Multi-Level Marketing (MLMs) and most people will probably imagine slick-talking salesmen (and women) or cult-like crusaders who want to convert you to their cause and entomb you in their pyramid, surrounded by bottles of miracle health items or shady but expensive products.
On the other hand, MLM champions claim that it can be a lucrative source of income if you are persistent, organised and enjoy helping others, but it’s important to have realistic expectations of what you need to put in, and what you’ll get (and when).
So are MLMs a valid business that can lead to better lifestyles and financial freedom, or new versions of the old pyramid scams?
HOW MLM’S WORK
The Government does recognise a difference between MLMs and pyramid schemes, which are outlawed. Under MLMs, distributors join a legitimate network marketing company and work hard to learn about the products and business.
MLMs sell products by using independent distributors and allowing these distributors to build and manage their own sales force by recruiting, motivating, supplying, and training others to sell products.
Abd Muluk Abd Manan, 39, a veteran MLM entrepreneur, has been with his current company, his third, for about a year. This international nutrition/beauty company had a joining fee of less than $100, but this was waived as he chose to commit to a year’s worth of nutritional supplies, amounting to about $1,000. Due to his efforts and his team’s venture into a new overseas market, he received cheques in his first month and hit his first major milestone of promotion to the next level within four to five months.
Ben Loh, 24, has been a business owner with a major international MLM company for four years. He paid about $80 to sign up and recouped that quickly, but in terms of a traditional “break-even” point, started seeing profits in a year.
WHERE’S THE MONEY COMING FROM?
Generally, MLM business owners earn their money in two ways – retail profits from their own sales of the products, and commission on the sales volume generated by their group. According to Muluk, it’s a misperception that MLM distributors get a commission from recruiting new distributors. The registration fee goes to the parent company, not the upline, and offsets the sales kit and administrative costs.
“You don’t get a commission just for recruiting new people,” he says emphatically. “Otherwise people might just concentrate on recruiting others and you could end up with a group of 100 or 1,000 members, but no sales. Then it’s a pyramid scheme,” he says, adding that none of the MLMs that he participated in has paid commissions purely for recruitment.
Sharifah Raudhah Syed Ismail, a distributor with a different MLM, agrees. “We’re not in the business of selling sales kits, i.e. recruiting for the sake of numbers. The product must move, so we must have high-quality products. We share with people our fantastic products and opportunity, then it’s up to them if they want to sign up or not,” says Sharifah, 39, who gave up a lucrative real-estate career to enter the MLM business full-time, “for a lifetime”.
So do distributors make money more from personal sales, or from their downlines? According to Muluk, it depends on how long you’ve been in the business. In your first month, you probably haven’t built up a big group and are likely to earn more from personal sales. However, if you’ve been at it for a year, you’ve probably built up a sizeable group with significant sales volume – while your personal sales wouldn’t have grown all that much.
“Retail profit is about 20% to 40%, whereas in my experience commission from the group grows with the amount of volume generated, starting at about 3%,” says Muluk.
“In my first month I sold $250 worth of products to five people and earned $60 retail profit. I only signed up two people who bought $100 worth of products each, so I only made a total of 3% or $6 commission,” he says. “Now I have a group of 30-40 people locally and internationally, generating about US$1,000 per month. My commission is now 6% or US$60 – but my personal sales haven’t really grown beyond $60.
”This “compounding factor” where the commission percentage increases with the group volume also gives an incentive to help and support your downlines to build their businesses, he says.
MLM SCHEMES VS. PYRAMID SCAMS – HOW TO TELL
According to the Ministry of Trade and Industry, illegitimate MLMs usually share certain characteristics. You often find the promoters hyping about quick and easy money. The whole point is to recruit others, who must then invest money as a joining fee, or to buy products that you wouldn’t normally buy at that price.
However, there are other distinguishing features, says Muluk. “There is a cut-off point to how far you can earn from your group. You don’t earn from each succeeding level of downlines to infinity, but only to a certain level. Pyramid schemes are a game of who joins first. In the MLM business, it’s a game of who works harder. It doesn’t matter how far down the line you are.
”Legitimate MLMs also tie your income to the structure of the business so that you have to develop several “legs” to see results, says Ben, adding, “You may have a dynamo downline, but you won’t benefit much from just one leg.
You have to build a strong foundation of several legs.”Finally, some MLMs stipulate minimum sale (sometimes called a maintenance purchase) on your part before you can earn a commission from your group. Therefore, the image of “earning your money from the sweat of others” doesn’t hold true.
PROS OF MLM’S
When you join an MLM, you are basically starting a franchise business. Ideally, you’ve got a great product, polished marketing tools and great support from mentors and the parent company. As Ben puts it, “You’re in business for yourself, but not by yourself.
”All three find that the benefits of MLMs go beyond system support and financial promise, and extend to personal and professional development.
“You undergo training and reinforcement to think and behave confidently and positively,” says Muluk. “You’re also surrounded by colleagues who are positive and uplifting, and share your passion for life.
”MLMs also tend to attract people with drive. “My upline, for example, has a Master in Business Administration (MBA),” Muluk says, adding, “If you don’t want anything extra in life, you won’t see the point in building your business.
”Finally, it is true what they say – MLM is an extremely flexible business that can be done at your own time. This makes it ideal for many people who have something they want to devote their time to – kids, a passion like music or art – or who just don’t like having to follow another boss’s schedule.
THE CONS ABOUT MLM’S
Many people don’t succeed because they go into MLMs with unrealistic expectations of unbelievable profits, early retirement and “earning money while you sleep”. However, nice as it is to dream about easy money, those who succeed in MLMs have usually worked long and hard for their big bucks.
Says Sharifah with a smile, “Many people are surprised that they have to work at it. Well, MLMs offer freedom to make choices about your own schedule and priorities, but not freedom from work.
”It’s also true that you need thick skin, discipline and persistence to handle MLMs. If you can’t handle rejection, can’t keep to your own schedule and/or need immediate results to stay motivated and committed, then MLMs are not for you.
It’s important to do some homework before signing up, says Ben, adding, “Choose a good company. Check out their marketing plan.
”Other moves include asking on forums, or contacting CASE to see if they have information on the company, good or bad.
“Also check out the people or community you are going to build the business with. This is a people’s business, so make sure you have good chemistry with your uplines,” says Ben.
Ultimately, it’s important to be realistic. Dollar bills don’t fly in through the window and float onto your lap. With good planning, hard work and persistence, though, you may just find MLMs helping you earn money in your sleep – not just in your dreams.