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Earning a Quick Buck – Some Thoughts on MLM

on March 20, 2010

Earning a Quick Buck

Having recently become jobless, I was called up by a friend of mine, saying he wanted to introduce me to a company he was working at so that I could earn a little bit of extra cash. BIG BONANZA! You might say, but a combination of several things made me more than a little skeptical about this “job offer”.

Firstly, this friend of mine (whom I still count as a friend and so won’t be naming here) was very vague about what the job entailed (“You have to come down and see to understand, too complicated to explain in person”). Secondly and slightly more obvious, he was rather insistent that I drop by his workplace to ‘see what was going on’. If alarm bells rang for you too, give yourself a pat on the back.

Turns out, he was running a Multi-Level Marketing (MLM) scheme for a company peddling TCM, fuel additives, slimming pills and diamonds.

Now I know many of us students find ourselves constantly strapped for cash, and the chance to earn a quick buck is always a welcome prospect and engaging in MLM schemes may be a tantalizing opportunity, but before you launch headlong into one with the hope of striking it rich, I think some understanding of the way MLM works and the risks involved should be properly laid out.

So How Does MLM Work?

MLM comes in several guises. At different times, it has been called Network Marketing or Direct Selling, though they all mean the same thing (for the purposes of this post, I’ll be referring to this phenomenon as MLM).

MLM schemes work by charging promoters an upfront “membership fee” in exchange for the license to sell the company’s products, which will have to be purchased at additional cost. In turn, these promoters (also known as Associates, MLMers, Partners or Investors) are rewarded for recruiting more promoters to the company. These rewards range from commissions on sales made by recruited promoters to elevated status. Examples of these include being appointed as a Director or gaining access to executive facilities. These serve as incentives to encourage promoters to recruit more and more people into their marketing network. The end result is a multi-layered network of marketers in the shape of a pyramid, with many marketers at the bottom level, and few at the top.

For the more visually inclined, this is what an MLM scheme looks like:

Bear in mind, though, that while MLM is commonly associated with a similar marketing tactic called Pyramid Schemes, the two differ on one fundamental point. While MLM participants earn money through the product sales of both themselves and the people they recruit, pyramid schemes merely deal with the exchange of money for introducing more people into the scheme. As such, the likelihood of a pyramid scheme actually having a product or service to sell is highly unlikely and is thus an illegal practice in Singapore (and in many other countries). For a similar kind of scam, you might be interested in looking up Bernie Madoff and Ponzi Schemes.

But Isn’t MLM Illegal in Singapore?

No it isn’t. Although pyramid schemes (see above) are banned by the Ministry of Trade and Industry (MTI), MLM schemes are legally permissible in Singapore so long as they conform to certain rules and regulations. You can find the terms and conditions here on the MTI webpage.

So Is MLM Bad?

Although MLM schemes have generally garnered a bad reputation in Singapore (after a brief craze in the early 2000s during which many fingers got burned), it’s not really entirely possible to judge MLM schemes as either fundamentally ‘good’ or ‘bad’. To be fair, there are successful companies that run highly effective MLM campaigns such as Tupperware and Amway and if you’ve ever been to a ‘Tupperware Party’, that’s MLM at work right there. Instead, it would be more beneficial if we look at the weaknesses and strengths inherent MLM as a marketing strategy.

Ok, So What Are The Weaknesses Of MLM?

As mentioned earlier, MLM as a marketing practice is generally frowned upon in Singapore, and all for a good reason. Although MLM schemes have the incredible potential to produce remarkable results when applied creatively, Multi-level Marketing has a great many inherent weaknesses and limitations that make it incredibly risky, especially for the uninformed.

  1. Supply without the demand – The main problem of MLM is that it messes around with the rules of Supply and Demand. While I may not be an economics student, it is quite plain to see that MLM creates a system which ignores consumer demand in favour of a situation where supply remains well in excess of any kind of projected demand. By requiring individual promoters to buy stock directly from the company and having these promoters recruit more and more promoters, the number of promoters and by extension the supply of products will increase exponentially. What you will eventually find is a market entirely saturated with that particular product since it is not consumers that shape the demand, but rather the number of promoters at any one time. In a situation where a product is fairly unique and popular, this might not pose so much of a problem because natural demand is already very high (as is with Tupperware). However, if the company’s product fails to draw a sustained amount of interest to drive a continuously high level of demand, then sales per promoter will eventually plunge as the numbers of promoters grow. Although promoters do have the option of selling stock back to the company for a refund, bear in mind that by the time promoters realise that the product isn’t selling; the market has probably already reached its saturation point. At that point, the product would be worth less than it originally did and the promoter would end up selling the product back to the company at a loss, and the company earning just enough to cover overheads with minimal risk.
  2. Potential impact on personal relationships – Although many consider this to be a trivial issue, the reality is that being part of an MLM scheme can deeply affect your personal relationships with others and has a high likelihood of causing strained relationships with both family and friends. While much of the problem stems from the already tarnished name that MLM has among Singaporeans, part of it is also due to the nature of MLM and its target audience. By selling through referrals and networking, MLMs rely on an individual’s ability to use his or her own circle of family and friends to not only advertise but also recruit new promoters. All this, with the sole aim of generating revenue through direct sales and downstream commissions. The reason why this is ripe opportunity for friction to develop is because MLM breaches the boundary between work and friendship, thus exploiting personal relationships for the sake of profit. It creates a situation the breaking point will come when either the promoter runs out of friends or when his/her friends run out of patience, and neither of these are desirable consequences.
  3. What’s my motivation? – The third problem with MLM lies not so much with the system, but the kind of people the system attracts. For what reason will someone join an MLM scheme? Although companies involved in MLM are prohibited by law from advertising MLM as a get-rich-quick scheme, it is implicit in many MLM pitches that MLM offers an easy way to earn a quick buck, and many (if not most) MLMers sign up simply because of the money. At its very core, MLM schemes hinge on tapping an individual’s desire to earn more money, also known as Greed. It’s a moral question, without doubt, and one that you will have to ask yourself before taking part in any MLM scheme; do I care about what I’m selling? Or is it just about earning as much money in as little time as possible? Add the fact that family and friends are usually the ones on the receiving end of MLM, and you have a situation where MLM promoters are essentially earning money at the expense of the very people they care for. Be mindful though, that while this issue is one of grave importance, it is a generalisation and is by no means true for every single MLMer. There are those who genuinely believe in the product they are selling and are incredibly passionate about what they do, though they are more often than not viewed as exceptions to the norm.

The points mentioned above are but a fraction of the inherent weaknesses of MLM as a marketing strategy, and from the ones raised it is quite clear that there are some serious deficiencies associated with the practice of MLM. While this doesn’t mean MLM is evil or bad (value judgements we should seek to avoid), it means that anyone who wishes to be part of an MLM scheme must be aware of the potential problems that MLM can cause in order to take steps to prevent unwanted consequences.

So What Are MLM’s Strengths?

Although I’ve just painted a rather grim picture, MLM is not without its redeeming features. Flawed though it may be, MLM does have several properties that make it an excellent learning opportunity for young people and could possibly, under the right circumstances, make for a rewarding and meaningful job experience.

  1. An excellent opportunity to gain sales experience – An important transferable skill, knowing how to market a product is something that is highly likely to come in useful later in life and MLM offers a good opportunity for people to pick up such skills. In selling a particular product or service for a company, you will learn how to craft a proper pitch and deal with the inevitable cases of rejection. But more than that, since MLM usually entails selling the product/service to family and friends, it will also be possible to get constructive feedback from these people on how best to refine your sales techniques, something that would not be so readily available were you to be selling to complete strangers.
  2. Plenty of opportunity for self-enrichment – Another reason why MLM can prove to be incredibly useful is because many of them offer training courses and seminars for MLM participants. While these courses are unlikely to be professionally accredited by external bodies, they present a valuable opportunity to learn something new or at least engage in some form of self-enrichment. Although these course are more geared toward improving sales and recruitment numbers, do approach them with an open mind and who knows, maybe you might acquire a new skill, learn something about yourself and come out of it a better person.
  3. Autonomy over how you work – For those who prize job flexibility as a very important point, MLM can also be attractive because it allows participants to work in any way they want. In an MLM scheme, you set your own working style and you work whenever you want. Obviously the harder you work, the more rewards you are likely to reap but if you already have academic commitments and still want to earn some money on the side, MLM does offer a potential way of earning some much-needed cash. However, whether or not that cash is earned through morally justified means or whether the amount earned is significant enough to matter is up to you to decide.

So as you can see, MLM isn’t all bad. In fact, when approached with the right attitude and a proper understanding of the risks involved, MLM can potentially be a very rewarding learning experience and you might even earn some money through it.

If you’ve done some background reading, however, you will notice that I’ve left out many of the traditional plus points commonly cited in MLM’s favour. Very often you will hear these points being raised when a company representative is trying to convince you to join an MLM scheme, a ritual which I call ‘The Pitch’, and more often than not, these points are half-truths, fabrications or outright lies. As such, I’ll be going through some of the most popular points cited by MLM companies to convince people to join their little scheme.

The Top 10 MLM Misrepresentations

When you sit in for an MLM Pitch, you’ll usually be facing a very proficient smooth-talker, someone who can go on and on for 2 hours without losing your attention. During his/her speech, he/she’ll try to convince you why you should join their MLM scheme, and much of these will be fallacious or quite simply untrue. In this section, I’ll briefly run through some of the common misrepresentations bandied about by MLMers to convince people to sign up and why they might not be entirely true.

  1. MLM offers a cheap way of running your own business –Many MLMers will tell you that joining an MLM scheme is a cheap and easy way of running your own business; you don’t have to pay taxes or settle bills or handle any of the administrative matters, just sit back and let the money roll in. While running an MLM operation does emulate a business-like setting in many ways, all that the MLM company has essentially done is to outsource the sales and HR aspect of the company to you, along with all the risk of running a company. You will be responsible for making your own sales, recruiting your own people, and when you fail it will all be your own fault and not because the product is unpopular – the company doesn’t lose anything at all except for a rubbish salesperson. You’re not running your own business; you’re just purchasing all the risk of running one.
  2. Having a pyramid-structure doesn’t make MLM bad, all corporations are pyramid-shaped too – When the company rep said this to me with a straight face, I couldn’t believe my ears. He cited the example of a school having only one principal, many teachers and even more students, and this is a typical example of a false analogy. The only parallel between a school and an MLM scheme is the shape of the structure. Teachers do not have to recruit students, and neither do they have to pay a portion of their salary to the principal for recruiting more students. Just because other things are pyramid-shaped doesn’t make the structure of an MLM right or wrong, good or bad. Likewise for corporations, each employee works for the company and as such each company has a vested interest in the welfare of the employee (the employee is paid directly by the company too). In an MLM scheme, the flow is inverted. Instead, it is the employee that invests in the company and the company is not obliged to care about the employee or his/her productivity. Because of this there is no basis on which to say that an MLM’s pyramid structure can in any way be compared with that of other “conventional” companies.
  3. Our product is very respectable and reliable because celebrities endorse it – This is a good example of another common fallacy, the appeal to authority. Companies that resort to celebrity endorsements (regardless of whether or not they are MLM companies) rely on the supposed authority and influence that celebrities command in order to sell their product, and not on the salient qualities of the product itself. Whether or not a celebrity endorses a product rarely has anything to do with the effectiveness of the product or even whether the celebrity actually uses the product. Their only incentive is getting paid a buttload of money in return for plastering their pretty little faces all over the company’s advertisements. In some cases, even if the celebrity does use the product being advertised, he or she might not be aware of the effectiveness or potential side effects of the products. Probably the best known local example (for our Singaporean readers) would be the infamous Slim 10 saga, where Andrea de Cruz fell violently ill after taking the slimming pills, resulting in her husband having to donate part of his liver to rescue her failing one. Never assume that celebrities know better; after all, they’re human too.
  4. By selling this health product you’re helping your customers too – You will often hear this during pitches, especially if the company in question markets some form of health, slimming or ‘wellness’ product. The logic behind this is that, assuming the product works as advertised, not only will you be earning money from your friends and family, you can do it without guilt because hey, you’re making their lives better. However, with health being the sensitive topic that it is, it is always important to verify that the product you are selling has been adequately and rigorously tested in compliance with America’s Food and Drug Authority (FDA) standards. Very often if you ask to see some form of clinical documentation, you’ll be shown some vague lab reports, often from individual success cases and not as a result of comprehensive and methodical tests of the drug with adequate controls. Just because a treatment works for one person doesn’t mean it works for everyone else. And even if the treatment does work, are you confident enough or qualified enough to be prescribing any form of therapeutic treatments? And what if there are unknown or long term side effects? I hardly think it is necessary for me to point back to the Slim 10 case to illustrate this point.
  5. Our product can’t possibly fail because of its mass market appeal – If you look at MLM companies very closely, you’ll realise that most, if not all of their products are targeted at mass market consumption. Slimming pills; “Wellness” treatments; Traditional Chinese Medicine, these aren’t niche market goods, these are aimed at appealing to a very large and very broad customer base. However, if you’ve read the bit earlier about MLM and market saturation, you’ll realise that no matter how massive your market may be, MLM is designed to ensure that the market is so flooded that it eventually kills itself. This statement is only true from the viewpoint of the company. While a goodly amount of product will end up getting sold, the chances of you being a significant contributor to overall sales is low.
  6. Look at our top earner; he’s driving a Mercedes Benz! – I think it goes without saying that this argument very simply appeals to what has been discussed before, the greed impulse. You’re supposed to go “Hrmm, if he can earn enough to get a Mercedes Benz, I can too!” and this is clearly not going to be the case. Why? It’s simple. When you sign up for an MLM scheme, you are led to believe that you’ll end up like this:Whereas in reality, this is more likely to be the case:What MLM companies try to mislead people into thinking is that there is an equal chance of success. However, following from the market saturation argument, the further away you are from the top (i.e. the later you join), the less chance you have of even running a substantial network of salespeople and subsequently, the lower your chances of even coming close to even considering buying a Nissan Sunny.
  7. Many people from your school participate in MLM too – Another popular technique often employed by advertisers is very much evident here as well: the Bandwagon. Other people are doing it, and so should you. No you don’t. Other people in your school are failing their promos and getting retained. Should you follow suit? I’ll leave that decision entirely up to you.
  8. You can make money with minimal effort just by having a wide customer base! – The main problem with this argument is that it assumes your customer base/sales force is either growing or unchanging. However, remember that people come and go, and not everyone will find your product interesting over the long term or wish to continue with MLM and as numbers fluctuate, your revenue will also fluctuate. I’m not being cynical here, just realistic.
  9. Friends and family are easier to sell to than complete strangers –Just because people know you doesn’t mean they’re them more gullible or susceptible to your charms or wiles. Your family and friends are (hopefully) thinking people too and if the product you are selling one of questionable quality or relevance, then no amount of personal relationship or cajoling will convince anyone to buy your product, family member or not.
  10. Look at all these newspaper articles showing how effective MLM is – When the MLM rep starts pulling out all these newspaper articles, very rarely will you have the time to read the article in full. In fact, they’ll helpfully highlight a sentence or two to draw your attention to a line saying that MLM is good. If you actually take the time to read them in detail (and take note of the publication date), you’ll realise that many of these articles are quoted out of context or are completely outdated. Don’t be fooled by a misleading headline or a misquoted sentence.

So Should I Or Should I Not Participate In An MLM Scheme?

That, unfortunately, is a decision only you can make. While I personally disapprove of MLM and discourage most students from taking part, I can only go so far as to tell you what the weaknesses and strengths of MLM  are and ultimately, whether or not you actually join an MLM depends on a combination of factors unique to you. Do take your time to evaluate the pros and cons and if you feel MLM is a viable option, then be sure to take the necessary precautions to avoid getting cheated and go in with the right learning attitude.

If you wish to learn more about MLMs, here is a list of sources that I’ve consulted in the process of writing this much extended article. While everything you see here is (to my knowledge) written in my own voice, do let me know if I have inadvertently lifted or plagiarised any particular author’s work in any way. Also, if you should have any comments you would like to make or any inconsistencies with my arguments that you would like to point out, I strongly encourage you to post them here.

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One response to “Earning a Quick Buck – Some Thoughts on MLM

  1. […] g33k5p34k in Uncategorized. Leave a Comment As a short (and completely unoriginal) follow-up to my previous post on MLM some time back, here’s the Order of the Stick’s take on MLM with a parody of Avon, […]

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