One Reason to Hate MLM’s

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Imagine loving Starbucks coffee so much that, one day, the manager approaches you and proposes having a Starbucks installed into your living room. Instead of paying $5 per latte, you’ll only need to pay $0.50! Since you go there every work day, that would equate to a savings of $90 in the first month alone! The best part is that having the business set up in your living room will only cost you $75, which means you are in the black in the first 30 days. What? You don’t want a Starbucks in your living room? You don’t want to have to run a business? That’s OK! You don’t actually need to hire anyone, or promote your coffee shop at all. You don’t even need to tell anyone that you have it. If your friends come over though and see you drinking your Starbucks, they’re going to ask for some too, at which point you can still charge them $5 per latte…or better, invite them to have their own Starbucks!

Such would be an equivalent to any number of Multi-Level Marketing (MLM) companies out there, especially the newer ones.

In my experience, a fairly common trait of MLMs is a built-in disincentive to have customers vs. business partners. There’s one company I’m thinking of in particular that has “start-up” costs of $39 per year. The product retails for $160 each month. As a distributor, the same product can be had for $112 each month. This means that if someone gets a real benefit from the product and wants to use it every month, they recoup the $39 in the first month’s savings.

This practice comes with several implications. The first is that if the company is incenting you to sign people into your business–even if they’re acting as just a customer–isn’t the “distributor cost” really the going market price? That would mean that selling it at $160 for a month of product borders on unscrupulous behavior. Sure, it could be justified that there’s only a 28% profit margin, which isn’t outrageous, but that’s overlooking the fact that the company has set up the structure recognizing that no one would want to pay the extra $500+ over the course of a year. Second, is that if the company is incenting you to sign people into your business, it can be construed that you are being paid for recruiting, which is illegal. Such a company has a high likelihood of being shut down by regulators in short order.

I have not found this practice anywhere else in business, have you?

Granted, not all MLMs include this practice; however, enough of them exist and actually thrive despite such unethical pricing structures to leave a bad impression of the industry with the majority of people. Combine this stigma with the masses of distributors who are told by their “uplines” that everyone in the world is a prospect and it’s clear why people lose friends when they partner with the wrong company.

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