Multi-level Marketing (“MLM”) has a bad name among large segments of the population. Some of it is for good reason. Some of it is flat out wrong. I’m sure you have heard positive and negative biases for many businesses, politicians, entertainers, etc. Let's put the topic of MLM on the table and address what is justified and what is not.
I have been the target of MANY pitches to join multi-level marketing and network marketing businesses because I have multiple independent small businesses that are profitable, legal and ethical. In fact, any business that does not meet ALL three criteria of profitable, legal and ethical, cannot be anything I would consider for even a moment.
When you have a proven track record of success in small business, every MLM participant wants you in their “downline.” I have been pitched MLM in the usual fields from health and nutritional supplements to less common MLM's such as selling satellite TV and even “investment grade insurance” for which I would have needed to get a license. Satellite TV was the first one for which I attended recruiting presentations in large meeting rooms in our local town of Mount Laurel, NJ in 1996.
Regardless of whether you call it Multi-Level Marketing, Network Marketing, Direct Selling or Relationship Marketing, when done legally, they all involve selling a product or service directly to customers and they all involve developing a sales force (“downline”) that also sells product or service directly to customers. As far as I can tell, the differences between MLM and the other creative terms are primarily semantic. I’m sure I’ll get E-mails that will attempt to explain the difference, mostly from people who call themselves network marketers because they fear the stigma of the term MLM. I’m sure I’ll also get Email from people who will say that all MLM’s are illegal. The 1st Amendment protects their right to say that and believe that. The 1st Amendment also protects my right to think and analyze as a rational human being, then communicate the basis for my thought process. That's what I'm doing in this article.
My Objections to MLM for 21 Years
Before I tell you why I finally did join a specific category of MLM business, I will tell you why I was so fiercely resistant to it for more than two decades. Following are my objections that had to ALL be overcome for me to join.
Need: I never want to sell something that people (or companies) don’t absolutely NEED.
Benefit: I never want to sell any product or service that has any question whatsoever about its benefit(s). Very preferably, the undeniable benefits of the product or service are so obvious that all you have to do is mention the name of the product or service and the end customer already knows its undeniable benefits without any sales pitch.
Value: I never want to sell anything unless the cost to achieve the undeniable benefit is well justified without any doubt.
Personal Credibility: I never want to trade my very high credibility, reputation or relationship to make a sale.
Sales Ethics: I never want to pressure anyone into buying anything, even if they absolutely need it. I certainly never want to sell anything people don’t know they want (let alone NEED) using hard sell techniques such as “there are two types of people in the world…there are people who have soft smooth skin who maintain their youth forever by using our product every single day decade after decade and then there are the people whose faces are wrinkling as we speak!” Shaming is revolting in society and it is revolting in sales.
Recruiting Ethics: I never want to recruit a downline associate (salesperson) into an MLM who is ever required to put at risk more than a few hundred dollars when joining the MLM or to maintain her/his status and that includes money to buy the MLM's product or service for resale. Note that recruiting private equity from accredited investors is a very different category of investment activity.
Source of Income: I never want to be in a business in which the personal purchases by the downline are a significant portion of the income of the upline. In other words, THE OVERWHELMING MAJORITY OF THE INCOME OF THE UPLINE MUST BE BASED ON PAYMENT FOR THE UNDENIABLE VALUE TO THE END CUSTOMERS WHO ARE NOT PART OF THE DONWLINE.
Getting Stuck: I never want to have to buy product that I must then resell with the potential of accumulating unsold product in my basement or garage.
I’m sure that most of you also will never ever want to do any of these things. But if you don’t agree and if you have half an hour to be entertained by John Oliver, you should invest some of your free time to watch this hard hitting investigative reporting comedy that rips MLM to shreds.
Before you watch the John Oliver video, remember that I am not only aware of all of what he says, I have my own ethics criteria on top of that and I still finally joined a certain MLM because it met all of my criteria.
My Criteria For Choosing a Specific MLM Business
Following are criteria I use to evaluate a specific MLM business according to my conservative approach. I’m not saying that these should be your criteria. These are just the ones I chose for me to be comfortable.
My direct upline and my direct downline must hold themselves to the highest ethical standards.
The primary product/service must be a basic need, not a luxury.
The product/service benefit(s) must be proven with no doubt AND universal to ALL end customers. No pseudo-science. No pseudo-authoritative special reports.
Maximum investment/risk by associates MUST be nominal. Corollary: The product/service does not need to be purchased by the associate for resale to end customers who are not associates.
Compensation of associates must be overwhelmingly driven by end-customer purchases (NOT by associate recruitment fees or associate purchases).
No one should EVER be pressured into becoming an associate or a customer.
There must be significant opportunity to enhance social justice or bridge the gap of income inequality for individuals in my downline.
I will never respond to hype. Unfortunately, hype is present in MLM’s as it is in politics, real estate training, advertising, entertainment and other elements of society that we tolerate and are able to mostly ignore because most of those segments actually provide value to society.
The benefit to me must justify the effort and NEVER be at the expense of anyone, especially end customers.
Only after ALL of the first eight criteria are met will I allow myself to be open to the personal benefit in Criterion #9. Corollary: I will immediately lose all respect for anyone in the MLM business who puts himself/herself before the end customer who is not an associate. An example is people who say that it is acceptable to ask friends or family to buy the product/service to help the associate. Such statements are simply ethically unacceptable to me.
Let’s use utilities such as electricity and natural gas as an example. More specifically, the product/service being sold by MLM is the conversion of utility customers from buying from a utility monopoly to a service provider of their choice after energy deregulation in that state allows for competition.
Everyone who owns or rents a home or has a business NEEDS electricity. Electricity has not been an optional product in the Western world for nearly a century. Electricity is not a luxury. The same is true for gas in areas that rely on gas for heat. For simplicity, I will discuss only electricity.
There is no doubt that electricity has obvious undeniable benefits, so much so that we take for granted electricity for refrigeration of food, lighting, running our home computers, etc. Unlike vitamins or face cream or soup or workout DVD’s or scented candles or kitchen gadgets, all of which are sold by MLM in hundreds of millions of dollars each, there is nothing to demonstrate, convince or pressure customers into buying the product or service when the product is electricity.
As long as the end customer pays a lower price for electricity than from the “incumbent” (generator), the benefit is real and universal for all end customers.
If one is selling discounted electrical service through MLM, there is no need for the associate to buy electricity that they must turn around and resell to end customers. In fact, that sounds absurd. Unlike skin cream, not only am I not required to buy inventory, I can’t even store unused electricity for resale in my basement or garage!
When you interact with people in low income neighborhoods who are struggling to pay their electricity bills, not only do you feel good by saving them precious scarce money on basic essentials, you are also likely to find someone in those neighborhoods who has excellent social skills who could sell discounted electricity service to her/his neighbors and generate some extra income in the form of residual income, thereby becoming more independent. That is a partial personal solution to income inequality that requires no one in their sphere of influence to buy anything they are not already buying while saving money on a basic need.
I would never have to “force” anyone to buy electricity. I would never even ask anyone to switch electricity service providers unless they can save money and I can prove it by simply asking them to compare energy rates to those in their current bill. I would never ask someone else to sell electricity to anyone who cannot save money on electricity and be able to prove it. Saving money on electricity in the summer months (like now) is even more timely and I just locked in lower kWh rates for the next 6 months for my primary residence. The decision was a no-brainer for me and cost me nothing, so why would I withhold the savings on a truly basic need from people I know?
I feel comfortable selling electricity service provider conversion through MLM. I would not feel comfortable selling face cream through MLM. That’s just me. Others feel comfortable selling face cream through MLM and I’m sure that they have customers who enjoy the benefits of those products. I’m not saying that selling face cream is unethical. I’m just saying that there are characteristics of that particular MLM business with which I don’t feel comfortable. I didn’t feel comfortable with those characteristics decades BEFORE John Oliver’s piece. I am an independent thinker, not easily swayed by the media. Easily entertained? Yes. Easily swayed? No.
By the way, electricity and gas utility provider MLM’s popped up when utilities were deregulated to open up the utilities to competition that reduces price to the consumer. When MLM companies buy electricity or gas at wholesale prices and sell to end consumers, the economic difference is split between lower prices to consumers and the MLM companies who sell the electricity. Another way to look at this is that electricity consumers (almost everyone) are given the power to choose their electricity provider in much the same way they choose telephone carriers...in those states in which utilities have been deregulated.
Now go and watch the John Oliver video (again if necessary) and see if my criteria for joining an electricity MLM pass the smell test.
Now let’s talk about pyramids.
Pyramids
From Charles Ponzi in the 1920’s to Bernie Madoff in the 2000’s, the term “illegal pyramid scheme” associated the noble word “pyramid” (as in one of the greatest wonders of the world in Egypt) with the less than noble word “illegal.”
Most products and services that you buy are sold by a pyramid structure. To illustrate this, think of car manufacturing and sales for example. At the top of the pyramid are a few manufacturers or service providers. In the middle are distributors and/or stores and they outnumber the manufacturers by a couple of orders of magnitude. A bit lower in the pyramid are multiple sales managers at each distributor and/or store. Even lower in the pyramid is an army of many salespeople who work for these managers at the distributors or stores who distribute the products, all of which is produced by a limited number of manufacturers. The very wide base of the pyramid is a group of thousands, hundreds of thousands, millions or tens of millions of end user customers who buy the product/service and are NOT salespeople for the product or service.
Look at it another way. If every manufacturer had one salesperson in a linear structure (as opposed to a pyramid), the manufacturer could not be economically viable since customers are all over the geographical map, too much for one salesperson to cover. The pyramid structure is essential for most mass produced products and services. That’s just the way markets work. That just the way economics works. Money flows up the pyramid from the base, paying the middlepersons who transfer the money to the source of the product/service and valuable product/service flows to the customers from the top of the pyramid through the middlepersons.
That’s just the way markets work.
Are pyramids illegal? Are triangular sales structures illegal? Of course not. Pyramid sales structures are not only legal, they are essential for the distribution and sale of many of the common products we buy.
This is very different from illegal pyramid schemes.
Illegal pyramid schemes ARE illegal if money flows up the pyramid but valuable enough product or service does not flow proportionately back to the people shelling out the money. In contrast, if value and money are flowing freely and proportionately in opposite directions up and down the sales triangle structure with true non-coerced benefit to all, that is nothing less than the basis of a functional economy essential to a functional society.
One characteristic of a “good” and “permissible pyramid” is that it is possible for salespersons in lower positions of the pyramid to make more money than those in higher positions. More on that later.
Another point sometimes raised is that MLM companies rely on associates to sell product/services and don't advertise and that seems odd or even suspicious to some people. Those same people don't seem to have a problem with expensive 60 second advertisements on TV. MLM companies promote differently. As long as an MLM associate is selling product/service legally and ethically that meet end customer cost-benefit criteria, the choice between network marketing and advertising expense is a valid business choice.
The Ethics of Recommendation Selling
If you take this one step further, are you more inclined to buy a product or service because you watched a multi-million dollar Super Bowl ad or if someone you know well and trust told you they are personally using the product or service and citing the specific undeniable benefit? The latter is called “recommendation selling” and we do it all the time when we tell neighbors about a great restaurant or when we recommend a great heating/air conditioning contractor to fellow real estate investors on our REIA’s message board. For those of us with very high credibility based on track record, the validity of the recommendation is the same whether the recommender is getting paid a commission (like a real estate agent or insurance agent) or not (like a friend). If the credibility, judgment or track record of the person making the recommendation is low, the recommendation is worthless anyway.
Many of you know me personally and/or have heard my seemingly endless zero-hype lectures and you know that I am obsessively data-oriented. My lectures and articles are long because they are filled with highly detailed supporting evidence for whatever point I am making AND I address the objections to whatever point I am trying to make (I never avoid addressing the alternative point of view with verifiable data of logic). So, if I tell you that I signed up for paying less money per kilowatt-hour for the same exact electricity for which I have been paying year after year, generated by the same electricity generator and transmitted over the same power lines to my house, I am either lying or telling the truth. Not a lot of options in between the truth and non-truth in this case.
I did not convert my personal household electric bill to the new service provider until I had undeniable proof of savings in return for investing less than 5 minutes to sign up online. Do you think I would risk my credibility to tell you this if it was not true (and violate Item #4 of my list of objections)? If converting my electricity service provider was justified for me and I tell you how and why I did it and show you the numbers, then showed you that you could save on your electricity bill as well (the same one you have been paying for years!), would that affect your decision to consider doing the same? That is recommendation selling and there is nothing illegal about it and there is nothing unethical about it, as long it is true.
By the way, everything I wrote about electricity is true for gas service as well, except that in my location of my personal residence, the MLM company I chose doesn’t happen to offer gas service. It does offer gas service for nearly all the rest of the area that serves several million people.
Pay for Performance
I worked for five years as a chemist in a multibillion dollar traditionally structured company that manufactures and sells products. They hired salespeople who were given specific territories to sell specific product lines. Let’s say they hired five salespeople and required each one to sell $2M each of a certain product line to achieve the company goal of $10M for that product line. If one of the salespeople couldn’t do it, that salesperson would likely be fired and replaced until the company could find someone who can achieve the goal. That’s not the case with MLM. MLM is about A LOT OF SALESPEOPLE SELLING A LITTLE BIT EACH to achieve the company’s goal. There are no quotas or territories and no one gets fired if they don’t produce. They simply don’t get paid if they simply don’t produce. Produce è get paid. Don’t produce è don’t get paid.
What part of “produce è get paid” is illegal or unethical if I am providing a basic life need (such as electricity and gas) to an end customer at a lower cost than they are already paying? That is a VERY serious question.
In fact, in a legal and ethical MLM business, a newer associate can make more money or MUCH more money than a veteran associate. The large multibillion dollar traditionally run company liked to talk about “pay for performance” as a mantra, but that concept is much more valid in a legal and ethical MLM business. In illegal pyramid schemes, the veterans typically get paid more than newer associates by virtue of getting in earlier. That is one of the red flags when determining whether a pyramid structure is permissible or illegal.
When selling electricity and gas utility services (and other essential services such as mobile phone services and a few other services sold by the MLM company I chose), if you make the effort, you will perform. If you don’t make the effort, you won’t perform. This concept not only makes sense, it’s easy to understand. This is not a job. This is a part-time business. What you put into it will determine what you get out of it. There will be individuals in my downline who put in more effort than I, will produce more than I and will make more money than I. I am happy for them as I support them.
Pressure or Hype
In the end, I am not trying to convince you to join an MLM. No one should join any endeavor with which they do not feel totally comfortable, for rational reasons or even just for gut feel reasons. All I am doing here is sharing with you my thought processes and criteria for why I joined a specific category of MLM after being fiercely resistant for more than two decades. It took me that long to find an MLM that met my standards.
I do not expect to get rich off this MLM business and I do not suggest to anyone that they will get rich off this or any other MLM business. In my personal situation, I do not need to pay off some massive debt and I do not seek to drive a luxury car. Some people are looking for those things and that’s OK. But I personally am under no pressure to join an MLM business or to solve some overbearing personal problem. All I am looking for is yet another source of income to supplement my multiple independent streams of income, all of which meet my ethical standards so I can sleep well at night and afford the highly fulfilling non-conspicuous consumption lifestyle I have been enjoying for years and intend to enjoy for years.
I cannot predict how much you can make in MLM since it can be anywhere from zero per month to more than $10,000 per month. What I can do is compare it to rental real estate since the residual income from MLM has some similarities to the semi-passive income from rental real estate.
Thoughts for Real Estate Investors, Especially Part-Time Real Estate Investors Like Me
Let’s say that you have a rental real estate business with a portfolio of single family homes (like I do). Let’s also say that your average positive cash flow per single family home rental is in the range of $200 per month per unit to $600 per month per unit (my average positive cash flow for financed rentals is at the higher end of that range as I explain in great detail my lectures). If all you do is achieve a residual income from a supplemental part-time MLM business that is similar to your average positive cash from a single rental, that means you can achieve the same pre-tax income level with one less rental unit with one less set of tenants to manage.
If you make enough effective effort to generate enough residual semi-passive income from MLM to replace the positive cash flow from several rentals, you can significantly reduce the number of tenants you manage. This may be an important driving force to seriously consider MLM depending on how you view tenant management at your stage of financial development in terms of cash flow, net worth and time you wish to allocate to various lifestyle activities.
If you are a part-time real estate investor with rentals, like me, you have already learned the benefits of semi-passive income and it may be easier for you to evaluate the pros and cons of a properly executed MLM business, like I have done. Again, I am a big believer in multiple INDEPENDENT streams of both passive and active income, even in semi-retirement which is my intended status until roughly my mid-80’s.
For example, I intend to keep my rental real estate for semi-passive income. I intend to continue to provide chemical process consulting for active income performed mostly in my La Z Boy. I intend to continue to sell my zero-hype lectures about part-time investing for passive income. And yes, I intend to continue to generate semi-passive residual income from energy MLM. These are just four of my multiple truly independent streams of income that in total serve me well as I continue to “work” 10-30 hours per week in my various profitable, legal and ethical business activities that frankly are interesting. If one or two of these businesses go south for a while, I can always ramp up the others since they are independent.
If you really do want to get rich, you can turbo-charge your efforts in any of a number of businesses and a legal MLM business, that meet your ethics criteria, can be one of them. If you want to get rich and you are flexible on your ethics, there are plenty of MLM and non-MLM businesses in which you can engage. I will not write about those businesses. I write about businesses that make sense to me with the intent to simulate thought by sharing my underlying thought processes that you can challenge or ignore as you choose.
If you have been resistant to joining MLM as I have been for 21 years, I hope this article gave you something to think about, especially in terms of criteria for choosing an MLM that is profitable, legal and ethical. Every individual makes choices in life that affect their performance in life. I just shared with you one of my choices and why. You can do or not do whatever you want and that’s OK.
Biography: Marc Halpern is a successful part-time investor who has achieved financial freedom in terms of passive income and net worth mostly through rentals and flips using “regular” money and self-directed 401(k) funds. Marc supplements his income through a variety of small independent part-time businesses including one small part-time MLM business. https://parttimeinvestors.mystream.com/ Marc’s primary occupation is in the field of phase-transfer catalysis. http://phasetransfercatalysis.com/
E-mail Marc Halpern directly if you want to learn more about part-time investing or improve your profits through coaching by a local expert in South Jersey/Philadelphia with track record.
Do not take any action or make any decisions based in whole or in part on the content of this article. ALWAYS consult with licensed professionals in YOUR state before making any investment.
