Ask Stacy: Should I Try Multilevel Marketing?

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By Stacy Johnson

Ever consider trying to make some extra money -- or even a living -- working with Amway, Nu Skin, Herbalife or some other multilevel marketing company? If so, you're not alone. Here's this week's question:

"I've recently seen a renewal of direct selling -- specifically Amway and it's products. What intrigues me is that this isn't the same Amway that I was approached by about 20 years ago -- it's online shopping, shipping directly to the consumer. While the organization appears to function the same, I'm wondering if this new method of product delivery would lend to a more successful business?

"Can you recommend specific things that people should be looking for, or asking (and what answers denote good vs. bad opportunities) when considering joining something like this? Any other advice or reality checks that people should give thought to before jumping on the MLM, direct-sell or IBO (independent business owners) bandwagon?" – Jade

In multilevel marketing, Wikipedia says, "the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. Other terms for MLM include pyramid selling, network marketing and referral marketing."

The Benefits of the Pyramid

In short, the ultimate goal of network marketing isn't to sell products. It's to recruit enough people for your downline so you'll make a living from their efforts rather than your own.

I've been solicited for various multilevel marketing programs many times over the years. Most recently, an acquaintance tried to get me to attend a meeting for a network marketing company offering a cash-back shopping card. Because I could theoretically use TV and the Web to reach and recruit hundreds of thousands of people -- and he'd be making money from all of them -- I guess he figured I'd be the perfect person to have in his downline.

But I've never considered joining any network marketing company and never will. That doesn't mean you shouldn't; do whatever makes you happy. But tread cautiously, because there's a lot of hype and broken promises in these businesses. I'm not going to speak to Amway or any other specific company, but here are some things to consider:

Do You Love Sales?

Many people consider sales a sleazy way to make money. That's understandable, because there are a lot of sleazy salespeople who employ sleazy sales tactics to separate you from your money. As far as I'm concerned, however, sales is an honorable profession. I've been a salesman for more than 30 years: 10 as a stockbroker and 25 selling my news series to TV stations.

If you've never tried sales, let me assure you it's not easy. You have to reach people, then convince them they need what you're offering. You'll be regarded skeptically, because some on the receiving end of your pitch will think you're trying to enrich yourself at their expense.

So if you're going to sell something, make sure you can take rejection. But most important, make sure what you're selling really has value. Because unless you're a sociopath, you'll never be successful selling something that doesn't.

Are You Willing to Approach Your Friends?

While network marketing doesn't require you to sell to friends and acquaintances, it's often done that way. This is the chief reason I'll never do it. In my opinion, attempting to sell anything to your friends is sleazy, plain and simple.

Back in my stockbroker days, I became friends with one of my co-workers who wasn't a good enough salesman to make it. Months after he left the firm, he called and invited me to lunch. Looking forward to catching up, I agreed to meet him at a local Denny's. But as soon as pleasantries were exchanged and lunch ordered, he launched into a spiel for Amway. It continued uninterrupted until I slammed my car door. I never saw or spoke to him again.

If you're looking to reduce your list of friends, treat them like marks. Try to persuade them to become salesmen who work for you.

Are the Promises Realistic?

One reason that people hold salesmen in low regard is they tend to make self-serving statements and false promises.

I once attended a big multilevel marketing meeting at the behest of one of my stock brokerage clients. It was more like a tent revival than a business meeting, with person after person taking the stage to wild applause after waving around the giant checks they were receiving monthly, courtesy of their downline.

The next day, the visiting head of the organization called me at my office. The pitch: Because he had directly and indirectly enrolled so many people in his downline, he was now getting $100,000 monthly checks with no effort. Didn't I want to make that kind of money? I replied by asking him exactly how many people he needed in his downline to make that much. When he told me, I whipped out my calculator.

The details are sketchy -- it was a long time ago -- but as I recall, in order for all the people in this guy's downline to make the same money he was making, they would have had to enroll more people than there were in the state. And if those new recruits used the same $100,000 promise when they signed up their recruits, they'd be required to enroll more people than there were in the United States. And if the next layer down wanted to make $100,000 a month, they'd have to sign up more people than there were on the planet.

Network sales often involves those at the top of the pyramid convincing the newcomers at the bottom they can make the same money they do, something that's highly unlikely.

More Questions to Ask

The FTC has a page about multilevel marketing that has some additional questions you should ask:
  • How many people have you recruited?
  • How long have you been in the business?
  • How much time did you spend last year on the business?
  • How much money did you make last year -- that is, your income and bonuses, less your expenses?
  • What were your expenses last year, including money you spent on training and buying products?
  • What percentage of your sales were made to distributors?
  • How much product did you sell to distributors?
  • What are your annual sales of the product?
  • What percentage of the money you've made -- income and bonuses less your expenses -- came from recruiting other distributors and selling them inventory or other items to get started?
The Bottom Line

There are a lot of passionate believers in network marketing, and as a result I expect a lot of negative comments to this article. So let me reiterate: I'm just listing reasons I personally don't like this method of selling and suggesting you invest thought and research before you invest time and money. Recruiting meetings are pumped with emotion, and it's easy to get swept up. Use your head, not your heart.

At the end of the day, network marketing is just another way to distribute products and services. It's sales. There are tons of companies doing it, and there are no doubt tons of people who have had positive experiences with it. But because this road is littered with hype and broken promises, tread very carefully.

This column originally appeared on Money Talks News. Got a question you'd like answered? You can ask a question simply by hitting "reply" to our email newsletter. If you're not subscribed, fix that right now by clicking here. The questions I'm likeliest to answer are those that will interest other readers. In other words, don't ask for super-specific advice that applies only to you. And if I don't get to your question, promise not to hate me. I do my best, but I get way more questions than I have time to answer.

Stacy Johnson founded Money Talks News in 1991. He earned earned a CPA (currently inactive), and he has also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about him here.

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