Multilevel marketing (MLM) accounted for $35 billion in sales in 2017. It's easy to see why these companies appeal to people who are looking for a side hustle or a way to reenter the workforce. They offer the prospect of owning your own business and promise earnings that are hard for many people to achieve. The problem is that once you exhaust your immediate contacts, it becomes much harder to make any sales.
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This video was recorded on May 14, 2019.
Dylan Lewis: That's the telltale sign that you might want to give it a harder look. I think this is something that people are increasingly encountering, because a lot of these MLMs are telling people, "Post on social media, get it out there and tell your friends and family about it, and become an evangelist for this brand." Not only are people seeing it on social media, it's showing up more and more because it's a pretty big chunk of economic activity. Looking at some data from the Direct Selling Association, in 2017, direct selling made up just about $35 billion in retail sales. There were 18.6 million Americans involved in direct selling activity in one way or another. Both those numbers, slightly down from 2016, but still pretty big, Dan.
Dan Kline: It's really obvious why this has an appeal. Pretend you're a stay-at-home parent. You used to work, you're used to making money. This is something you could in theory do very part-time. You might spend an hour a day organizing an event, hold the event one or two nights a month. In theory, the money comes in. The problem is, the reality for most people is that, A, they're bugging their friends by inviting them to a party to come over and buy stuff that they may not want; and, when they exhaust their immediate contacts, all of the reasons you're not at work in the first place come into play. If you're a stay-at-home parent looking for a side hustle, are you really meeting a lot of new people so you can continue to grow your business? That's a real big challenge. Are you the type of person who walks up to a stranger and says, "Hey, would you like to set up a party so I could sell meal plans or nutritional supplements or Tupperware or whatever it is to your friends"? That's not an easy thing to do. But, wow, owning a business and making your own money, I can see why people go for that.
Lewis: Yeah. And early on with a lot of these organizations, there is quite a bit of fertile ground. If there are not a lot of people out selling a specific kind of product, and you enter the market as a salesperson, it's going to be a lot easier for you to sell that product. If you're instead the tenth person in a relatively small town, or smaller area that is trying to sell something, well, that market's going to be saturated already.
Kline: Yeah. You also have to believe in what you're selling. I had a friend who sold children's books through a multi-level marketing company. They were good books. She liked the books. She actually did a really good job selling them. She'd been a teacher, so she had a very broad network. And for a number of years, she made a nice side income. The problem is, at some point, her kids aged out, and then it became harder to meet people and continue to grow that business. You really have to think about what your addressable audience is, and how you're going to deal with the fact that your next-door neighbor could become a distributor too, and all of a sudden, you're competing for the same people.
Lewis: Right. And a lot of people are incentivized to bring more people into the fold.
Kline: Which actually creates more competition. If I'm selling something, and I recruit you to it -- obviously, we know lots of different people, but we also know a lot of the same people. We'd both be approaching people and saying, "Hey, want to come to a party to buy whatever it is?" And at some point, the audience has either bought everything they want, they've sat through all the courtesy parties they want to, and there does become consumer fatigue. And then there's fights over the reorders -- it's a very competitive thing where you're also building your own competition as you grow your network.
Lewis: Yeah. As these get larger and larger, it gets harder and harder. For these more established ones, it's very difficult for new salespeople to make meaningful amounts of money. John M. Taylor, a researcher over at the Consumer Awareness Institute, spent years studying MLMs. He has a report, The Case [for and] against Multi-level Marketing available on the Federal Trade Commission's website. From it, of the 350 MLMs I've analyzed for which a complete compensation plan was available, 100% of them are recruitment-driven and top-weighted. In other words, the vast majority of commissions paid by MLM companies go to a tiny percentage of TOPPS, top of the pyramid promoters, at the expense of a revolving door of recruits, 99% of whom lose money. That losing money comes when you factor in all the expenses that go into running a business like this. Not only do you have product, but you have whatever you're going to be putting out for these parties, whether it's food, alcohol, flyers, you're going to be creating a website, all this kind of stuff. When all of that starts to add up, at slim margins on some of these products, it becomes very hard to make a meaningful amount of money.
Kline: What this shows is that it is possible for the top 1% to make money. Generally, that involves recruiting a lot of people under you. But sometimes it is just being a really good salesperson. It's not impossible. But it's improbable. If you find yourself needing a side hustle, and you're a salesman in your day-to-day job or have a history of being able to do cold calling and sales, well, this might be better than other side hustles for you. But if you've never sold before -- and trust me, I have sold, it is a difficult, difficult thing to do -- think about how willing you are to ask your friends and family, and then strangers, to spend money. It's easier to do that if you believe in the product. It's also hard to do that when you know that someone is maybe spending money they can't afford, or maybe the product isn't quite a perfect fit for them. You really have to think about your willingness to be competitive and be a salesperson. That's not for everyone.
Daniel B. Kline has no position in any of the stocks mentioned. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.