Why Most Network Marketing (MLM) Companies Fail? Top 7 Basic MLM Problems
Published on: 03-August-2012
AVON, Herbalife, Natura, TupperWare, Forever Living, Nu Skin etc. You’ve heard these companies, right?. What do they have in common?
They all utilize a marketing strategy called Multi-level Marketing (MLM) in which members or distributors are compensated not only from their product sales but also from the sales of the people they recruited (downlines).
These companies are also proven successful. They endure for many years.
Do these companies succeed because of their MLM strategy? If MLM is proven to be a successful marketing strategy, why do most network marketing (MLM) companies fail?
Let me help you analyze seven (7) basic problems associated in MLM:
- Ease of Entry
- Unexpected Explosive Growth
- Resisting Attacks by Government Authorities
- Market Saturation
- Pyramid Structure
- Morality and Ethics
- Relationship Issues
1. Ease of Entry
MLM lawyer D. Jack Smith believed,
“…that one of the greatest attractions and greatest strengths of the MLM industry is also one of its greatest weaknesses. I am referring to what is also known as “ease of entry”. (http://mlm-law.com)
It’s very easy to establish an MLM company because it only requires low capital and minimum amount of business experience.
And also, capital for memberships is so low compared to opening a franchising business.
How much would it cost to purchase a McDonald franchise? The cost would range from 1 to 5 million dollars.
How about buying a Jollibee franchise? It would cost from 15 to 30 million pesos (or US$266,445.00 to US$532,890.00).
But if you want to become a member of an MLM company, how much could you pay as a start-up capital? You could pay for as low as PhP500 to PhP10,000 ($11.62 to $232.56).
That’s how easy to it is to enter in an MLM business – “ease of entry”.
But, but, but, MLM lawyer D. Jack Smith emphasized that “If I had to pick a primary reason for MLM company failure it would indirectly be attributed to this “ease of entry””.
Because it was Smith’s experience as an MLM lawyer that “an MLM company having small amount of capital, much ambition but with little management background, education, training, skill and experience, sooner or later these weaknesses will take their toll and the company may very well fail solely because of them”.
2. Unexpected Explosive Growth
You may notice some MLM companies experience unexpected explosive growth. Just after a few months of operation, a huge number of distributors is coming in.
What will be the consequences then?
Smith said “unexpected explosive growth can place demands on management and its available cash flow and production facilities causing delays in product delivery and commission check mailings.”
What would its effect to the distributors/members?
They will be disappointed and become frustrated to the delay and chaos in the office of the MLM company.
What will happen then?
Due to the dissatisfaction, some members will file formal or informal complaints to the government authorities. As what you can read and hear in the news, most MLM companies are reported of not paying their investors or members due to overpayout.
3. Resisting Attacks by Government Authorities
Due to the complaints filed by some members, the management of the MLM company will be spending money to defend the accusation. Sometimes this can be costly especially if the MLM company has little resources or little financial back-up.
The management’s energy and time will be also drained in defending their case.
If the MLM company is proven guilty of the accusations, then this would lead to the premature death (failure) of the company.
4. Market Saturation
What is market saturation? According to businessdictionary.com, it is the…
“Point at which a market is no longer generating new demand for a firm’s products, due to competition, decreased need, obsolescence, or some other factor.”
Is the market saturated for MLM? Yes.
Dean Van Druff, the first one who critic MLM since 1990, said,
“MLM can no longer claim to be new and, thus, exempt from the normal rules of the market and the way goods and services are sold.” (http://www.vandruff.com/mlm.html)
It’s no surprising that many MLM companies which sells beverage, health or wellness products were doomed to fail. Why?
Because they are selling products that are already in the market. The market is already saturated with those kind of products except if the product is unique and better than other MLM products.
5. Pyramid Structure
MML companies work by geometric expansion. Nowadays, usually you get two to sponsor two to sponsor two and so on.
If you illustrate the expanding matrix, what would it look like? Yes. It’s a pyramid structure.
There’s no big deal or problem with the pyramid structure. What’s the real problem that lies behind the structure?
If the MLM member earn an income primarily from inviting people to join the MLM and not from product sales, this is called pyramiding or Ponzi scheme. This scheme is illegal in many countries:
- United States
- United Kingdom
- New Zealand
How do members of pyramiding MLM company protect themselves to an attack against their pyramiding scheme?
They will probably say, “We have products. We are not just earning from recruiting but also from product sales”.
What was Dean Van Druff’s answer to this kind of reasoning?
“The product is not the incentive to join an MLM. Otherwise people might have shown an interest in selling this particular product or service before in the real world. The product is the excuse to attempt to legitimate the real money-making engine. It’s “the cover.””
What’s the main consequence to the MLM company using pyramiding scheme?
Since it’s not sustainable, it will fail. The bottom downlines of the pyramiding MLM will end up wasting their time, money and effort.
Uplines are in deep trouble building their reputation and respect.
6. Morality and Ethics
Many members of new MLM companies are desperate of searching for invites. Some are even using great LIES just to attract their invites and earn money from referrals and commissions.
At this point lies GREED and ENVY, the GREED and ENVY to earn huge money in MLM. Even if many members know that their MLM company is using pyramiding scheme, they just continue to market and recruit.
Some even SCAM other people just for profit.
How do some MLM members react when someone discovered their SCAMMING technique and PYRAMIDING scheme?
Those members aggressively and unprofessionally defending their case. They will rudely attack that someone whom they think steals their dreams.
You can check your ethical behavior by answering these questions:
Do I want to sell products that are illegal or banned by Government authorities?
Do I want to become famous for scam/pyramiding MLM rumor?
Do I want to recruit my friends or family in a known pyramiding MLM?
Do I want to lie with my friends in order to get their sweet “yes” answers.
Do I want to keep the bad news behind what’s really going on with my MLM company?
7. Relationship Issues
It’s a fact that MLM grows by exploiting relationship. In the home, work, school or even in the church, you make ways to invite people related to you.
Then, many of your friends, relatives or family joined in your MLM company because they trusted you. They become your downlines.
Later, the government authorities discovered and filed criminal charges against your pyramiding MLM company.
BAD NEWS broke out. Your downlines heard this.
What would be your downlines reaction to you?
Some would probably say to you, “You’re lying. I thought I can trust you. You are a BIG SCAMMER! My money is wasted!”.
In this case, your relationship with your friends, family, officemates or churchmates might be destroyed just because of a pyramiding/scam MLM company you’ve joined.
If these problems persist in your MLM company, you can predict or anticipate that your MLM company will fail.
“An MLM that fails is like a pyramid that collapses”