One of the hallmarks of a product-based pyramid scheme is the absence of sales to retail customers. Examine a multi-level marketing company like Usana or Mary Kay, and you will see that for the most part, their distributors do not have any substantial retail customer base.
How do I know this to be the case? Simple math. Mary Kay Cosmetics makes it easy for us.
Mary Kay has five divisions for distributors. The “emerald” division had about 600 consultants and sales directors who made the “Court of Sales” for fiscal 2007. Let’s round up to 1,000, just for kicks and just in case I missed some. Multiply 1,000 by the five divisions, and you have 5,000 distributors in the United States who made Court of Sales in the recently ended fiscal year.
What is Court of Sales? It’s really based upon orders, not upon any retail sales to anyone. But let’s err in favor of the company and assume that all the products ordered were actually sold to retail customers. In order to be part of the Court of Sales, a distributor must order $36,000 retail value of products.
Does $36,000 sound like a lot? It’s not. If all of those products were sold at the full “suggested retail value,” the distributor would net (at most) about $14,400 for the year. Not exactly a thriving retail business that one can make a living from.
Mary Kay has approximately 750,000 distributors in the United States. 5,000 of them, or less than 1%, ordered at least $36,000 retail from the company.
And that “less than 1%” figure is even worse when you consider that the company has 750,000 distributors at any given point throughout the year, but Mary Kay churns through 40,000 consultants per month. So throughout the year there are 480,000 distributors who leave the business in addition to that 750,000 headcount at year end.
And Mary Kay is not unusual. In fact, many in and out of multi-level marketing hold up Mary Kay as one of the best in the industry. If their retail sales are so poor, what does that say for other companies?
Tracey,
Congratulations on your recent reference in the WSJ article. I chose to include the article, A Fascinating look into the mind of a white collar criminal, in my best of series on a carnival of business and entrepreneurs.
You can see it at http://careerstrategist.com
Also congrats on the book. I’m headed out to the Maui Writers Retreat to work with Ron Powers on my book, “Bought Out, Booted Out and Blackballed!”
I’ll be the first to admit that there are many downright fraudulent network marketing companies out there. There are also totally legitimate ones that deliver excellent products of real value to the consumer.
What most network marketing critics fail to account for though — as is the case in the analysis above — is that a very large percentage of “distributors” sign up as such solely to take advantage of the reduced prices (and if they happen to make a few dollars here and there to offset their own purchases, that’s just a bonus).
I know that of which I speak because I’m one of them! I’m a “distributor” for two MLMs because I get value from the product and would prefer to buy them for 20-30% less than retail. And from time to time, I make some sales which offsets my personal use products. Occasionally, I’ve even made a tidy profit with cheques as high as $200-400 some months (with my best cheques being over $700 and even $1400).
So tell me, what’s wrong with that?
I get unique, quality products unavailable anywhere else. I get them at less than retail. My health benefits. And I even make some money to pay for my own consumption. There’s absolutely NOTHING morally or ethically wrong with that.
And if there ARE any bad apples in the bunch (which are very few and far between in my company of choice), big deal! That’s THEIR problem and they alone should be held accountable for their actions, not the whole company. If one sales guy at IBM lies in order to make a sale to a customer, does that mean that all of IBM is corrupt, their products are no good, and it’s business model should be abolished? Of course not. That’s ridiculous. Yet it’s what most critics of network marketing do.
Don’t paint all network marketing companies, products, and distributors with the same brush.
Robert – MLM is a product based pyramid scheme. You got checks because others gave the company money for products they’ll never sell. That is not an honorable business. And in fact, it’s not a business at all.