It’s a simple, proven program: You bring me five souls, and they each get five souls, and… pretty soon, you’ll have a halo, company wings, and a six-figure residual income for eternity.
 
 
Kelli B. Grant in Market Watch exposes Multi level marketing. These are the firms who want  you to sell products to everyone you know. This model consists of companies like Avon, Tupperware and Amway who hire people to peddle products through parties and demonstrations. Salespeople earn commissions on their own sales, as well as on those of new salespeople they recruit.
It’s a booming industry, according to the Direct Selling Association:
  • U.S. sales totaled nearly $30 billion in 2011, up 4.6% from 2010.

Even in a poor economy, people seeking extra income are lured by the promise of potential earnings. Avon advertises:

Choose to work as little as 20 hours a week — and you’ll probably earn more than from a ‘regular’ part-time job.
Sound too good to be true?  Kelli provides a long list of things that could go wrong. Here are the top problems

1. “You’d do better slinging french fries.” 

According to Prashant Malaviya, associate professor of marketing at Georgetown University’s McDonough School of Business, most salespeople earn very little. Robert FitzPatrick, president of consumer-watchdog Pyramid Scheme Alert says: More than half of the entire commission payout is transferred to the top 1%. That’s partly because, while 90% of salespeople work part-time, the top sellers who make direct-selling their full-time job clean up:
  • Nutritional supplement direct sales company Isagenix reports that its “associates” (sellers who have no recruits) earned an average income of $197 last year.

Professor Malaviya invites you to do some simple math. To get a rough estimate of what the average salesperson earns, divide a company’s annual revenue by its number of salespeople. Also factor in the facts that the company’s cut is often 50%, and salespeople incur other expenses. Using this math, Kelli B. Grant notes:

For the direct-sales industry as a whole, with its 15.6 million sellers, following that math results in estimated annual sales of $1,914 per seller. [DSA spokeswoman] Amy Robinson says that calculation fails to correct for the many salespeople who only “sell” to themselves. The median annual income for salespeople, she says, is $2,400. (FitzPatrick, in turn, says the DSA’s figure is inflated.)
You can make much more at McDonald’s or Walmart

2. “We might put you into debt.”

Even breaking even can be problematic due to expenses, such as product samples and membership fees. In 2010, FitzPatrick studied 12 multilevel marketing companies, and found:
The bottom 99% of salespeople did not earn a net profit at all.
Membership fees: At Shaklee home and nutrition products, for instance, a salesperson can join as a Gold Ambassador for $299, $599 or $750, depending on the initial inventory. 

Inventory costs: Tracy Coenen, a former Mary Kay rep and founder of PinkTruth.com, a site where ex-employees complain about the company, says that Mary Kay Cosmetics sellers have to order at least quarterly in order to get  wholesale prices, as well as regularly buy samples to keep up with new product launches and replace products handed out at parties and demonstrations.

Training expenses:  After the initial free mentoring, there are costly  training materials, seminars and conferences.

3. “Recruiting isn’t in your best interest.”

Direct-sales companies offer representatives bonuses and commissions on sales made by their recruits. as well as recruits’ recruits. Some bonuses extend to recruits further down the chain, so that high-level salespersons can earn bonuses worth up to 35% of their team’s sales.

But, as Susan Solovic, chief executive of SBTV.com and small business expert points out,
What happens when all your friends and family sign up beneath you, and now they’re your competitors?
For example, Premier Designs sellers keep 50% of their own revenue, so a recruit would need to sell $500 in product each month to get the same $50 in commission that you could get from $100 worth of sales.

Additionally, the local market may be saturated with other sellers from the same company who have already cornered the market on customers.  There are millions of sellers who are personal acquaintances, or use Facebook or Twitter as sales tools, creating massive pitch overload. Solovic of SBTV.com points out that sellers risk getting blocked or unfriended by their networks:

You have to be very cautious. You get your friends and followers because they trust you, but people find it awkward to be pitched, no matter how good the product is.

 

Proceed At Your Own Risk

In addition to the daunting odds against success, the product benefits are often exaggerated. The Food and Drug Administration has taken action against direct-sale companies for marketing issues, including faulting Avon’s claims about some of its anti-aging products, which may have veered into drug-marketing territory, violating the Federal Food, Drug and Cosmetic Act.

While other businesses receive similar regulatory scrutiny on quality and marketing, direct-sales companies face an added challenge in being responsible for claims made by their independent contractors, as well as by company materials. If a company is sanctioned, it could be difficult to recoup commissions owed or get refunds for unfilled orders.

 

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