Ep. 2 - Reality Check: Is Multi-Level Marketing Direct Selling?
Are multi-level marketing companies (MLMs) like Amway, Herbalife, and Beachbody truly direct selling opportunities like they say they are? In this episode, we use the list from Episode 1, The Basic Requirements in Direct Selling for Take-Home-Profit, to test if MLMs are really direct selling ventures.
Lesson Resources:
One option for students to take notes during this lesson is a two-sided Google doc I created (see screenshot below). Email me if you want to make a copy of the doc in Drive and tweak it. melissa@ponzinomics101.com
Other options are to have the students sketch note or complete a one pager while listening. In this case, they may have their notes from Episode 1 that list the requirements and they can refer to that list while listening to complete their sketch notes or one pager. If not, you may want to provide the list of requirements for them. Below are links regarding sketch notes and one pagers from the Now Spark Creativity website by Betsy Potash.
Any of these options will help support students in discussions after listening.
*In order for all students to be successful, it may help to provide time for the students to listen in class on their own so they can pause to write/draw as they listen at their own pace. Depending on the length of your periods and whether you have a double block, one period may be dedicated to this listening/not taking process and then the discussion could be the next period.
Links:
Robert’s book: Ponzinomics
Robert’s Website: Pyramid Scheme Alert
Melissa’s Podcast: The Teacher As...Podcast
Transcript:
Melissa Milner 0:16
Welcome to Ponzinomics 101. I'm Melissa Milner. I'm a 30 year veteran teacher and host of The Teacher As...Podcast.
Robert FitzPatrick 0:24
And I'm Robert Fitzpatrick, author of the book Ponzinomics, the Untold Story of Multi-Level Marketing.
Melissa Milner 0:31
We are hosting Ponzinomics 101, a monthly educational podcast, for anyone who would like to learn more about multi-level marketing and why it should be avoided.
Melissa Milner 0:41
We hope this podcast will be a resource for teachers and parents and provide valuable information that is not currently being taught in our public schools, colleges and universities.
Melissa Milner 0:54
If you are a teacher who has created lessons about MLMs, and you're willing to share your work with other teachers, please go to our website, ponzinomics101.com, to contact us. If we get enough lessons from teachers, we may start a Teacher Resources tab on our site to share the great work we are all doing. In addition, if you use Robert's lessons from this podcast, in your classroom, or with your own child, and you might have even tweaked his lesson, we would love to hear from you to know what you did with the lesson and how it went.
Robert FitzPatrick 1:27
The best defense is awareness, be informed, think, question everything, and keep your mind engaged.
Melissa Milner 1:37
In Session One, we ended with two big questions. The first one was, "Why would so many people sign up to become direct sellers? Choosing it over other professions, when the realities of direct selling are so difficult, both for income and for just doing the work." Robert spoke about the fact that there are a few products that need direct selling, since they are more available easier to buy cheaper, and in more variety in stores or online. But competition to personal direct selling is extreme. Most consumers don't have time or want to be sold directly. Few customers are glad to see salespeople, making it hard not just to sell, but even to find customers to sell to. Selling direct involves a lot of personal rejections and challenges to find and keep enough customers. It requires a special aptitude and attitude that not very many people have. Making take home profit, what you keep after all selling costs, is extraordinarily difficult due to the high costs and time requirements and the competition from stores and online. Plus, having to maintain personal initiative, stay organized, and not get discouraged. Despite these realities, many people join multi-level marketing companies, which are described to them as direct selling. So the second question that was asked in session one was, "Are MLMs really direct selling? Or could they be something else?" This session tests the realities of MLM against the requirements for profit in direct selling. If MLMs don't match up to the requirements for profit in direct selling, then in future sessions, we can look at what MLMs actually are. For this lesson, teachers might provide their students with the list of requirements for profit in direct selling, and as students listen to Robert breakdown if MLM meets these requirements, they can take notes. There is an example of what this might look like on the episode page of our website. www.ponzinomics101.com, and if you contact us, we can send you a copy. Without further ado, Robert picks up where we left off.
Robert FitzPatrick 4:02
For this test, we use the list from the previous session of basic requirements in direct selling for take home profit, but we also add one more, the way a direct salesperson gets paid. We'll come to that at the end.
Robert FitzPatrick 4:18
So the first requirement that was identified for viable profitable direct selling was selling skills and training. Success in direct selling requires specialized skills and experience in sales, psychology, sales methods, prospecting and product knowledge. Does MLM provide sales and product training? Or if not, does it limit recruits only to those who already have the needed sales skills, aptitude and knowledge.
Robert FitzPatrick 4:51
So what is MLM reality? MLM does not offer sales training or specialized product knowledge. It recruits anybody willing to pay the entry fee? No product knowledge is required at all. In fact, many MLMs actually boast to recruits, "No selling and no experience required."
Robert FitzPatrick 5:12
Requirement number two, special unique product. Selling direct, on your own, from your home, you must compete against all retail stores, for example, Costco and online merchants, Amazon, for example, and against mass advertising, TV Radio Online. A direct seller therefore needs a product that is unique or unusual, not in the stores or online or something new and different.
Robert FitzPatrick 5:41
Does MLM offer this reality. MLM products are mostly health related or cosmetics, others are for hobbies, clothing. The same or similar goods are in many health food stores, department stores, online or on eBay. None of the "health products" quote unquote "health products" can legally claim to quote "cure, treat or prevent any ailment." They are not FDA approved legally, they are not even classified as medicine but as food.
Robert FitzPatrick 6:19
Requirement number three, a competitive price. If the product is not unique, and the same or similar goods could be bought in stores or online, a direct seller at least needs a product that is about the same price or less than the similar goods sold online or in stores.
Robert FitzPatrick 6:40
Are MLM products competitively priced, or have a price advantage over goods in stores or online reality. Most MLM products are considerably more expensive.
Robert FitzPatrick 6:54
Requirement number four, adequate profit margin. As the direct seller bears all marketing, management and selling costs on their own, the costs of direct selling per transaction and the total time to find customers and make sales are very high. They cannot be spread out as in mass merchandising. A direct seller therefore must have a high profit margin to make time and effort worthwhile. Does MLM offer the necessary margin to cover all the selling costs?
Robert FitzPatrick 7:31
MLM reality: I'll start with an example. One of the largest and most prominent MLM companies actually does tell us what their typical profit is. It works out to 23%. Out of that 23%, every cost incurred to make the sale, to find the customer has to be paid for. There is actually an industry standard margin. The difference between the cost to buy the product and the selling price in MLM it's 25%. A very small amount measured against a direct seller's high costs for marketing, customer retention, management and selling over an extended period.
Robert FitzPatrick 8:14
Requirement number five, ways to find enough customers. Direct selling requires a lot of prospecting to find people to become paying customers and then more time and effort to get them to buy again. This might involve advertising paid for by the direct seller, personally knocking on doors, continuous social media promotions, and constant direct communication with new customers. Direct selling companies help salespeople by national advertising and by generating lists of qualified leads of interested prospects. Does MLM support the salespersons prospecting, selling and retention work costs?
Robert FitzPatrick 8:59
Reality: MLMs rely totally on the sales people themselves for finding prospects. In fact they urge salespeople to start by trying to sell to people they already know, friends and family. Sales leads, if they exist, must be purchased by the direct seller. Most consumers have never heard of MLM brands. finding qualified customers, educating them about the company and the product. and then persuading them to buy must all be done and paid for by the direct seller.
Robert FitzPatrick 9:37
Requirement number six, protection for your effort and investments. Direct sellers need protection to keep the customers they find and eventually sell to. This may involve a protected territory or rights to sell a product no other salesperson has. Protection, exclusive or limited selling rights are critical to support time and effort invested. Without it, customers may go to another salesperson with the same product. Multiple salespeople with the same product in the same area may compete with each other, mostly by cutting prices and destroying profit potential for everybody. Protection requires an agreement with the sales company for a limit on the number of salespeople, or for exclusive rights to sell the special product. Do MLM companies offer protection for existing salespeople.
Robert FitzPatrick 10:35
MLM reality: MLM companies do not limit the number of salespeople in any area or grant protected territories, they do the opposite. By offering incentives to recruit more and more salespeople without limit every salesperson customer can become a salesperson to and get the net price eliminating salespersons profit. All of this leads of course, to what is known as saturation. To many salespeople in one area, not enough customers no profit requirement number seven tough skin against rejections being ignored, even insults. Beyond needing specialized skills, a direct seller faces obstacles of rejection or the general negative views of the public against being sold, pitched, pressured. Direct selling companies offset this by supporting their sales people's reputations with advertising or PR that shows the value and importance of their product or service or the professionalism and honesty of their salespeople. Does MLM offer this kind of professional support reality? MLM companies recruit people by the millions, no training is offered, anyone can enroll, there are no standards. Recruits have no support in finding prospects or protection for keeping customers they find on their own. For this and other reasons, MLMs are frequently perceived and described as unprofessional, high pressure, disingenuous, or unethical. MLM salespeople are ridiculed online as hun bots. Hun bots, by the way, is a term that is specialized for multi-level marketing and it refers to the affected use of the word hun, an inauthentic method of attempting to feel intimate or friendly, when in fact it is just to manipulate the person. It's dropped into direct messaging, online, in an email. It implies a friendliness, a desire as if you actually know and care for this person, when in fact it is just a sales manipulation. Hun bot is a derogatory term. This adds to the normal challenges faced in direct selling.
Robert FitzPatrick 13:08
And the last requirement, getting paid well when a sale is made. Arguably, in light of the challenges and difficulties of all direct selling, the primary requirement for profitable direct selling is that the sales company pays the direct seller well when a sale is actually made. In profitable direct selling the great majority of commission or bonus, profit on each sales transaction goes to the person actually making the sale. Managers, if there are any, above the salesperson, get a much smaller part of the total.
Robert FitzPatrick 13:51
How does MLM pay? Reality: as discussed earlier, the margin on retail sales in MLM is too small to cover the costs and time. But in addition, in MLM, direct sellers can get paid on purchases made by people they recruit, and those they recruit, etc. But these recruiting based payments, called bonuses, are even less favorable. When an MLM recruit makes a purchase, all the recruiters collectively upline receive about 40% of the money. This is spread out over the entire recruiting chain. However, the person that actually does the recruiting, treating that transaction as a sale, gets a much smaller amount than those above. This payout formula is the opposite of profitable direct selling, where most payment always goes to the person making the sale. In MLM, over half of the total commissions on each transaction goes to the top 1% of the recruiting chain. People far far from the actual sale. To make money from purchases and sales made by other recruits, therefore, an MLM direct seller must be positioned at or very near the top of the recruiting chain. Obviously, only a tiny number can be in those top positions. Data from many MLM income disclosures from government prosecutions of MLMs show how that system works out. It shows that each year only about 1% of consumers who are MLM direct sellers gain any take home profit. That is profit after all expenses. 99% year in year out, received no take home pay at all. So these numbers are to say the least shocking and when put together with the other requirements, training, support, limiting the number and so that people can get an adequate profit, the profit that is available on each transaction, each of those one by one we've shown MLM does not match up not on any one of them, none of them. Clearly, MLM may be called direct selling, but it doesn't qualify. If it is going to be called direct selling, it has to be called direct selling where people don't make a profit. Well, no one would join such a thing. So, we'll move forward toward defining what MLM is if it's not direct selling.
Melissa Milner 16:48
Measured by the basic requirements for profitable direct selling, and with data showing that 99% of direct sellers in MLM are not profitable, it is time to ask the next questions. If MLM does not qualify as profitable direct selling, and almost no one in MLM does make a profit, what is MLM? Given the facts and consequences, how does MLM manage to get so many people to enroll?
Melissa Milner 17:21
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