Last week the Salt Lake Tribune published a fantastic article about the reality in multi-level marketing, entitled Utah Juice Companies Offer Few Prospects. MLMs like Mary Kay, Amway, MonaVie, and Herbalife have been claiming that the great recession has increased the number of distributors because people are looking for ways to make money during this time of high unemployment. The problem with this claim is that while more people are signing up for these bogus business opportunities, almost no one is actually profiting from their activities.

Multilevel marketing companies like to refer to themselves as “direct sales” companies. They want to keep the focus off recruiting and onto selling of the products directly to customers. The problem is that little actual retail sales occur for a number of reasons:

• the products are not that good or unique
• the products are overpriced (even at wholesale pricing!)
• potential customers have too many other options for getting products they want (think Walmart, Target, Amazon.com, and other traditional and online outlets)
• people don’t want the recruiting hassle that goes along with their purchases (distributors are taught to hound buyers of products to host “parties” and sign up as representatives)

Why do people get involved (and stay involved) in these MLMs? The article in the Salt Lake Tribune describes the sales force as a cult-like following, and they’ve got it right.

Author Tom Harvey looked at the numbers for MonaVie, and found:

An analysis of the average earnings data provided by MonaVie in 2009, when it last supplied distributors with comprehensive numbers, reveals that 98.5 percent of distributors who earned commissions averaged just $129 a month despite the pitches to the contrary.

That $129 a month isn’t enough to cover business expenses, so the business of MLM is unprofitable for almost everyone. This example in the article is typical:

In her accounting of 11 months of her MonaVie distributorship, she earned an average of $209 a month in commissions, putting her somewhere among those in the lowest categories, where 98 percent of all commission earners reside. But her expenses averaged $520 a month, an average loss of nearly $311 a month.

For the 11 months she accounted for in a filing in bankruptcy court in California, June 2009 to April 2010, she lost $3,418, with deficits every month.

And then there are those who get no commissions because they didn’t “qualify” or don’t have any/enough recruits, which number upwards of 90% of all distributors.

There is also a ridiculously high turnover rate in MLMs:

The other factor that argues against making a success as a distributor is the turnover rate. MonaVie and other MLMs in Utah do not disclose such rates, but the Direct Selling Association estimates the average annual rate of people leaving MLMs is 56 percent. That means statistically a company loses all of its distributors in a little less than two years. Because their revenue comes from sales to distributors, the companies must constantly recruit new sources of sales.

Every time you turn around, an MLM distributor or former distributor is there. Of course, there is a constant debate about whether the high turnover rate is by choice (people choose not to work the “business” or do not do it the right way) or by design (distributors are doomed to fail in the model, and when they inevitably fail, they end up quitting).

Buyer beware.