mistakes business owners make

Multilevel marketing companies, or MLMs, are a well-known business model in the United States. Leaders at these companies tout big benefits like high incomes, part-time hours, and overall life improvement from participating in their direct sales downlines. There’s a reason these companies are looked at with skepticism, however. Many people known MLM companies by different names. One of those is pyramid marketing, which conjures images of pyramid schemes. When you look at the hard numbers, you’ll know if you should say yes or run for the hills when your old high school acquaintance asks you to join their “business” on Facebook.

99% of MLM participants lose money

According to research at the FTC, a whopping 99% of recruited sellers lose money in an MLM venture. That means just 1% actually turn a profit. That is generally just those at the very top of a recruitment structure. Because recruiters earn from their own sales and the sales of everyone they recruit, and their recruits, and so one, those at the top can earn a profit. But with 99% of people losing money, it’s hard to see why anyone would join this type of company.

It’s hard to succeed in any business, but the success rate is well over the 1% you see in MLMs. The same FTC report explains that 39% of legitimate small businesses ultimately earn a profit over time. That’s still less than a 50/50 success rate, but about 39x better than an MLM.

Before starting in any business, regardless of the product or service, do your research and find hard numbers on your odds for success. There is risk in starting any business venture. As long as you understand and can afford those risks, that’s okay. However, you should never start a business where the odds of success are better at a Vegas slot machine.

95% quit within ten years

What happens in a business model where everyone loses money? Everyone quits. Well, not quite everyone. But close to it. The same FTC report from Jon Taylor explains that 95% of MLM participants quit within ten years. Around 30% of all small businesses survive at least ten years, according to Bureau of Labor Statistics data. That means the typical small business has 6x the longevity, when measured by who’s around after 10 years, of MLMs.

While it makes sense that people would get want to move on from some businesses after a period of time, the rate at which people flee MLMs are a testament to the 1% profitability rate above. According to another study, at least half of participants quit within one year.

All businesses take a lot of work and there is no quick and easy path to success. If there were, everyone would be doing it!

The top 1% at Amway lose nearly $1,000 per year

While this study is a bit dated, the result is shocking. In 1980, the top 1% of distributors in Amway in Wisconsin brought in a gross profit of $12,500. However, after taking out operating expenses these 200 distributors lost an average of $900 per year.

In the United States, the top 1% earn $718,766 per year. You’ll need to near $118,400 per year to reach the top 10%. The top 1% in Wisconsin MLMs would be in poverty.

Be careful when starting any new venture

MLMs are a tempting model because the startup cost is so low compared to many legitimate businesses. However, when you consider that 99% lose money, they are not actually making an investment in a business. They are simply becoming new customers.

Now that you know the truth out MLM models, you know to say NO when someone pitches you. There are many great models that are not predatory if you want to join onto an existing business. Affiliate sales and franchising, for example, are models that allow you to build a business with more realistic opportunities for success.

But don’t drink the Kool-Aid. When 99% fail, there’s no reason to waste your time or money on MLMs.

Eric Rosenberg

Eric Rosenberg is a finance, travel, and technology writer originally from Denver, Colorado living in Ventura, California. When away from the keyboard, Eric he enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and baby girl. You can connect with him at his own finance blog Personal Profitability.

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