Multi-level marketing plans systematically flawed

I've been studying multi-level marketing for several years, and Robert FitzPatrick has been studying the industry even longer. He's been qualified as an expert witness in MLMs and knows a whole lot about the industry. He recently released a report on 11 large MLMs which demonstrates that a full 99% of participants lose money.

I've believed for a long time that any business venture which boasts 99% failure rate is one to avoid. Quite predictably, the supporters of multi-level marketing plans exclaim that those who don't succeed (i.e. turn a profit) have not worked hard enough or have not done the right things. Really? Could it really be that all 99% of the participants in MLMs are lazy losers who don't try hard enough? I seriously doubt it.

Sure, any business venture carries risk along with it. But FitzPatrick wrote recently on his blog that multi-level marketing is systematically flawed, and I agree with him. There's no such thing as a "good" MLM. People will suggest you "just haven't found the right one." Yeah. Ask the people who are on their eighth or ninth MLM and still haven't made any money.

The sad truth is that multi-level marketing companies are designed for consumers to lose money. The owners of the companies get rich, and a very small handful of people are able to profit handsomely at the expense of the 99%+ below them in the recruiting chain.

Failure is all but guaranteed in MLMs because they are based upon an endless chain of recruitment. The money is not generated by a robust business of selling products and services to legitimate retail customers. It's generated by recruiting new people into the scheme, who pay fees to sign up and also purchase expensive inventory and supplies. These members make ongoing purchases (even though they're usually not selling much to customers) in order to stay "qualified" to receive commissions from their downline.

Robert FitzPatrick has this right: The 99% loss rate in multi-level marketing companies is built into the plan, and the owners of these companies are well aware of it from the start. 99% of members will never be able to recruit enough new people into the plan to recover the money they've "invested" in fees and minimum purchases. That, my friends, is a flaw in the design which will never be overcome by most.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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