Do I hear the first Multi Level Marketing Pitch of the New Recession?

It's like the first cuckoo of Spring.  When we have an economic downturn then the sharks start to circle.  And they pick off the weak, the desperate and the struggling.  These sharks provide hope - the hope of an income that does not have to be worked for.  They liken it to royalty income.

Yes, we're talking about Multi Level Marketing, Network Marketing, the sales channel that has taken great pains to distance itself from Pyramid Selling.

Now I do know the difference.  Just to prove it:

A pyramid scheme:

This takes tatty crappy goods and sells them in bulk to the first person for (say) 10 pence per item.  They buy a garage full because they see a genuine bargain.  After all, this stuff retails for £1.50 per item in the shops.

Person 1 buys and takes delivery of the goods.  And sells them all to person 2 at 20 pence per item.   Person 2 is happy, and sells them all to person 3 at 40 pence per item, who sells them to person 4 at 80 pence per item.  We're still ok with the bargain, and person 4 manages to offload them to person 5 at £1.40 per item.  Still a bargain, but now near regular retail price.

Person 5 is kind of stuck.  He has a garage full of crap at pretty much the retail price.  he does his best and manages to con half a dozen folk into parting with £1.60 per item, thinks himself lucky he has come out just about ok, and licks his wounds.  

Everyone at level 6 loses money.

A pyramid scheme is unfair, and unlawful.  The price soon escalates to the point where people can't sell the rubbish and make even their money back, let alone a profit.  And, as usual, the early scammers make the money and the latecomers lose out

This is not the same as Multi Level Marketing:

In an MLM scheme there are safeguards.  Everyone buys from the corporation, not from the person before them.  Everyone buys at the same wholesale price, though trading discounts can and do apply as one attains corporation administered goals.  The retail price is regulated insofar as one is lawfully allowed to regulate a retail price, and is known.  A legitimate trading profit may be made by any individual able to sell the products.

MLM sounds good and ethical.  And it can be.  But it is also a hugely hard area to make a profit in, let alone a living.

The broad idea is that you must know a few people just like you who want to make a bit of money and have a bit of spare time.  Of course you do.  So let's assume you show your exciting new product to 30 or so and five decide to buy it and five more decide to join up and do just what you do.  You have five trading profits, and five recruits.  This is, of course, a good thing.

You are ethical and want your friends to be successful.  So you help each of those five to show the products to 30 or so, and five of each of their friends decide to buy (so they each have five trading profits), and they each have five recruits.

You get a sales commission, quite reasonable to repay your hard work, on the five lots of five trading profits.

This feels great, especially when the company sends you a cheque in the mail and you see the fruits of your labours.

Lets be simplistic.  Let's say that each person recruits five friends and sells five other items.  Let's say that there is 25%  wholesale/retail split, and that the commission paid on your recruits' (we'll call them"downline") sales.  And let's say that each quantity of product sold has a retail value of £100.

That first level of recruits, plus your own sales, earns you 25% of five lots of £100 (your own sales), That's £125, not bad for a part time occupation, and then 5% of each of five lots of five sales.  That's £5 per retail sale that your first level of downline makes.  They made 25 sales of £100.  That's 25 lots of £5, or another £125 to you.

You are not rich yet, but you can see how you could be.  So you work with your downline and their downline, recruit level 3.  Level 3 is 125 people.  And you will make 5% of 125 sales of 5 lots of £100.

Hmm, that's 5% of £6250.  We're starting to make money here and we haven't really been working that hard.  Or so the Business Opportunity Meetings you go to say.  So th eordinary folk like you who stand up and give testimonials say.

Now look, I am not selling this stuff, so you can do the maths.  Assume 5% commission on 5 levels beneath you after which there is no deeper level of commission.  That's 5% of one heck of a lot of people.  Look:

1 - You

5 - Level 1

25 - Level 2

125 - Level 3

625 - Level 4

3125 - Level 5

Care to add that lot up?  Excluding you it is 3095 people.  5% of 3095 lots of a £100 sale is a sneeze under £20,000, and that is in a month!

The sales pitch will tell you that people are making this amount of money!  Then it will say "but let's be reasonable.  Even if you only make a quarter of this, that's just under £5,000 per month."

And you are in.  Hooked.  Because you just lost your job, and you respect Fred, who came and pitched this crap to you because Fred is a success in life.  And, secretly, you think that you are brighter than Fred and can do better than Fred anyway.  And, heck, this is a recession, and if you can earn £5k a month in a recession without doing much work yourself then where's the catch?

Of course your rational mind extrapolates the pyramid:

1 

5 

25 

125 

625 

3,125 

15,625 

78,125 

390,625 

1,953,125 

9,765,625 

48,828,125 

244,140,625 

1,220,703,125 

6,103,515,625 

30,517,578,125 

152,587,890,625 

762,939,453,125

3,814,697,265,625 

And it says "You have to be joking.  There aren't enough people in the world to buy, let alone join!"

Then you see huge cheques and folk driving Ferraris and they tell you that they earnt these rewards in the scheme.  I was told of one person who regularly wrote a huge cheque to the corporation each month and they wrote him a slioghtly larger one back that he showed anyone who asked him to prove his earnings.  His "loan"  plus his commission.  Don't be fooled.

And some do make big money.

Those who get in early do.

Those who are first into a new country do.

Those who sell weekly and monthly training meetings and training materials do.

Not you.  If you didn't think of the scheme then you are cannon fodder.  You will crash and burn, and so will the friends you introduce unless oyu and they are incredibly lucky.  And your friends will run away from you as hard as they possibly can.

That's what happened in the last recession.

It doesn't make good bedtime reading, does it?

How do I know all this?

Oh that's so easy.  In 1992 I was made redundant from a great job with a once great corporation, Wang Laboratories.  An ex colleague whom I respected greatly pitched this to me.  I worked very hard indeed at it for two years and managed to build up a network of about 300 people.  I'm ethical, diligent, hard working and single minded.  We worked hard, the several I recruited as my front line downline.

But the thing is, the retail price was inflated to make the corporation a profit as well as reserve 50% for commissions and wholesale/retail split.  And most people weren't out of work and desperate to feed a family, so didn't find badgering their friends and colleagues to be an attractive proposition.

The best way to make a small fortune in Multi Level Marketing is to start with a large one, work for a couple of years and watch it shrink.

MLM is lawful.  But is it wise?  Only you can judge.  Just judge wisely.  Do your own maths.  Heck, mine may be wrong!  If you go and do it, do it with your eyes wide open.  And do not get taken in by the stuff in the "MLM is Easy" adverts that are bound to surround this blog item.

Me?  I thought I had.  I was wrong, and it almost wrecked my marriage.