Calculating the odds of success in an MLM program

How can the odds of success in an MLM program be calculated?

STEP 1: Obtain from the MLM recruiter the average earnings statistics for the MLM company you are considering, showing the average amount of money paid by the company in commissions and bonuses to participants at the various levels in the compensation plan. You can also do the 5-step  do-it-yourself evaluation provided on this site. Over 250 MLM programs have been evaluated using this model.

CAUTION: If the MLM company won't provide such statistics, consider that a red flag. Other red flags that lead to extremely high loss rates can be found in the "5 Red Flags" report.

STEP 2: If the company will provide it, you should also get the average amount of money paid to the company by participants at each level for products and services purchased from the company. I have found this to be an important piece of information that MLM companies have been unwilling to provide, though it is crucial information, since prospects have a right to know the likelihood they will lose money or come out ahead.

CAUTION: Avoid falling for the line that purchases you make for your own use are purchases you would have made anyway and therefore should not count. Typically, they are expensive and not continued after participants terminate. The point that you want to determine is how many people come out ahead financially from their participation. The formula for profitability is very simple – money earned less money spent. Our calculations show the balance is nearly always negative.

CAUTION: Don’t assume you are going to sell the products at a heightened “retail” price to others. Our extensive research indicates such re-selling is only a minor portion of product sales. They are typically overpriced, and consumers today can buy virtually anything they need for less than they can get it through an MLM seller. “Direct selling” by MLM participants to non-participants is a myth promoted by well-paid MLM company and industry communicators.

CAUTION: Don’t fall for the MLM promoter’s pitch that the products have magical properties that will heal or prevent every kind of disease on the planet and that they can only be obtained through this particular MLM. Nearly all MLM promoters claim to have the latest and greatest potions and lotions, etc. Get the ingredients and shop around for at least comparable products through other outlets – you may be surprised what you can save.

STEP 3: Since you are not likely to get what you request in Step 2, determine the minimum “pay to play” requirements, or inducements. In other words, how much in products and services are you expected to purchase (even if supposedly for resale) in order to qualify for commissions and bonuses, and to advance up the various levels in the pay plan.

CAUTION: Avoid falling for the ploy that you don’t have to purchase anything, or that you can sign up just to get the products at a discount. If you listen carefully to the pitch of the MLM recruiter, it should soon become clear whether they are selling the products, or the opportunity. If the latter, it is deceptive to sell you on signing up so you can buy products. Ask: Is this a buyers’ club, or an opportunity chain?

STEP 4: Ask your recruiter to furnish the company’s dropout rate; i.e., the percentage of recruits who sign up only to drop out within a year. If they can’t or won’t furnish it, you can assume that it exceeds the minimum of 50% per year, which we have found where such data is available. Over a five-year period, at least 95% typically have left the company, and usually after ten years, nearly all but those at or near the top of their respective pyramids will have dropped out. At the very least, you can consider 90% of participants will terminate within five years. Typically, it is at least 95% or more over ten years, which is useful to know, since MLM's publishing numbers will often include top-level participants who were there from the beginning - which may be ten years or more. All terminations should be included for the same period as those included in "success" data to be statistically correct.

CAUTION: Don't accept the MLM "active" distributors or participants figure as the base used for calculating what percentage of participants succeeded in rising to the various levels. If the "successful" participants who have been with the MLM for ten years are counted, then every person who signed on with the program during that same time period. should be counted in calculating success rates - whether they are active, inactive, or terminated. The MLM practice (endorsed by the DSA) of comparing only currently "active" participants (most of whom have been there only a short time) with "successful" participants who have been there for many years, greatly skews the numbers in their favor - a huge deception.

STEP 5: Estimate operating expenses necessary to successfully recruit. It is true that most MLM participants purchase a few products, find recruiting and selling very tough, and then quit without spending much money. But they don’t move into the profit column without an aggressive recruitment campaign carried out over a period of time.

CAUTION: MLM promoters and their lobbying organization, the Direct Selling Association, often claim that many or most participants just work part time for a little cash to supplement income, to meet Christmas expenses, etc. This is one of their biggest deceptions. Profitability in MLM does not come cheap or easily. Tax studies show that few ever earn a profit, with the notable exception of those who arrive at or near the top of their respective pyramids –and they may make a LOT of money, harvesting commissions from purchases of hopeful opportunity buyers they have deceived beneath them.Typically, part-timers are not making money, but (by purchasing products) are contributing to the coffers of the company and the TOPP's (top of the pyramid promoters)

CAUTION: Don’t assume that success in MLM recruitment costs nothing. You will soon start getting the cold shoulder from friends and relatives and have to recruit elsewhere. Anyone who climbs the ladder in the compensation plan must spend not only a great deal of time, but a considerable amount of money to be successful. I put a program to the test for a year, devoting all my time to climb to the top 1% of participants (counting ALL participants). During that year I kept careful records of my spending and wound up with expenses of over $15,000, including products and services from the company, plus all operating expenses, such as travel, telephone, computer supplies, advertising, meeting rooms, etc. My commissions totaled about $250 a month.

STEP 6: Now put it all together. This means debunking the figures supplied by the company by including ALL who signed up during the same period during which those who “succeeded” are counted. Even if you just go back five years, you can multiply the MLM company’s published success rate by a factor of 0.10 to get a success rate much closer to the truth. Then select all distributors who earned enough to have exceeded “pay to play” and estimated operating costs. Again, don’t assume resale of products at heightened retail prices unless they can show you the actual sales receipts to prove it.

Below is a sample from a 2004 report of of 57,998 "active distributors" in the U.S. for a leading MLM company. We will show you how to interpret these numbers.

CAUTIONS:  Great care must be taken in reading these numbers Note some deceptive techniques used by the company to mislead those reading these numbers:

• Quarterly commissions are given and then the figures are annualized. Since many terminate before a year is over, this annualized number could be much higher than annual figures. But we'll give them the benefit of the doubt.

• Percentages are presented in a way to make the odds appear much higher than they are, especially if we assume 90% dropout rate over 5 years, or 95% over ten years - an optimistic assumption, based on actual statements and discussion with the top financial official of the company presented here. Since the company was 20 years old when these 1994 statistics were reported, it is reasonable to use the ten year figure. (Some of those of Blue Diamond status in the USA had been with the company for well over ten years.) Using these assumptions, the number of people achieving Blue Diamond status would then be - 0.14% x .01 (converting from per cent to actual factor) x 0.05 (5% remaining after 10 years), or 0.00007 – which looks a lot less than .14%.

• Minimum pay-to-play in this program is $100 a month, or 1,200 a year - in order to qualify for commissions. Virtually no one earns enough in commissions to exceed this amount without climbing the pyramid to the top or very near the top. Add to the $1,200 the operating expenses needed to conduct a successful recruitment campaign, which the author found to be absolutely essential to climb the hierarchy of distributors. In the author's test, the minimum total expenses to recruit successfully was $15,000 per year, including products and services from the company, travel and  telephone expenses, home office and rooms for opportunity meetings, printing and duplicating expenses, advertising, telecommunications and computer expenses, and miscellaneous supplies.

SAMPLE CALCULATIONS:

Average Commissions for Distributors at Each Level for the Year 2004 

Based on the above, only those achieving status of Lapis and above were likely to have risen from a net loss to actual net profits, since all those beneath do not earn enough in commissions to meet expenses. In actual fact, however, since these are only averages, it is highly likely that many below Diamond status lost money, especially if they were recruiting aggressively to climb the pyramid of participants.  This proved true in hundreds of discussions with participants in this and other MLM schemes. Very few persons below those at or near the top actually profited.

So if  you add up those at the status of Lapis and above, you get 0.89%, or 0.0089 as a multiplying factor. Then if you multiply that figure by 0.05 (5% retention, since the company is well over ten years old), you get the extraordinarily low figure of 0.000445 who could have conceivably realized a profit. And this is giving the MLM company the benefit of the doubt in several respects, as indicated above. With odds of profiting of 0.000445, or less than 1/20 of 1%, it is more appropriate to call it a loss certainty than an income opportunity.  (Based on 95% dropout rate over ten years, approximately 944,300 out of 952,584 total distributors, or 99.13%, did not even qualify for a check!) Actually, the majority of the downline distributors of this US company were in Asia, but the money reported here was paid to the US-based upline.

A couple of other interesting results from this analysis are worth mentioning. If you use the same factors to determine the total number of distributors recruited over ten years who dropped out or earned no money, you get 944,300 who came away empty. And the 81 Blue Diamond Executives got 58.6% of the the total in commissions paid by the company. This confirms what many have suspected all along - that MLM is an extreme form of a pyramid scheme in which the bulk of the money goes to a few at or near the top of their respective pyramids.

CONCLUSIONS

What is striking is that with every MLM, where such data was available and after debunking the deceptions in their reporting, the loss rate approximated 99.9% - or worse. This means that less than one in 1,000 make money, and 999 out of 1,000 lose money. As indicated above, one can do much  better in Las Vegas. And you don't have to risk your social capital - your treasured relationships with  friends and family you've spent a lifetime cultivating.

You can save yourself the trouble of researching an MLM and doing this debugging and calculating by asking the person who is recruiting you to show you his tax returns for the past year. Then ask that others he has recruited in the past couple of years to share their tax returns – or some proof that they have earned the promised rewards. Be prepared for some blank stares and evasive answers. 

Incidentally, I am not alone in coming up with these abysmal odds of success for MLM programs. Read "The Myth of 'Income Opportunity' in Multi-level Marketing," by Robert FitzPatrick, President of Pyramid Scheme Alert. He uses different assumptions - not attempting to correct the deceptions in the reporting of the MLM companies. But he still concludes that less than 1% of participants in seven MLM programs he studied could have earned a profit after purchases from the company, based on the companies' own reports.

MLM is a mathematical trick - promising significant rewards to those who invest time and money in the program, but delivering losses to all but those at or near the top of a very large pyramid of participants - who profit from the failed investments of those beneath them in the pyramid of participants. MLM's, or product-base pyramid schemes, cause by far the greatest aggregate damage of all types of pyramid schemes. They are truly scams - probably the most successful of all time.

CAI

Consumer 
Awareness 
Institute
Non-profit Corporation

Contents on this page:

• Step 1: Obtain MLM statistics.  > >

• Step 2: Obtain report of average payout to participants.  > >

• Step 3: Determine minimum "pay to  play" inducements. 

• Step 4: Obtain MLM company dropout rate, as well as inactive participants.

• Step 5: Estimate operating expenses necessary to undertake successful recruitment campaigns.

• Step 6: Put it all together.

• Sample calculations

• Conclusions

Readers comments:

Dear Dr. Taylor,
The only scientific data I found about the business practices of the MLM companies . . was on your web site.  I very much appreciate your dedication to fact finding about the MLMs and their 'contributions' to our society.  What you have found is yet another example of Americans with money and power defrauding middle and lower class people with much less.  I applaud your painstaking research carried on over decades and at your own expense.  The future of democracy depends on the kind of public awareness that you are making possible.
– Jonathan Baylis, MCS, M Ed, BC, Canada

 I was extremely impressed with your article (the 5 Red Flags) and felt compelled to write to you.  . .  Like yourself, I have completed a Ph.D. in Psychology (Organisational), and also have a business background in management consulting. . . .
Out of all the internet sites and reading I did on the subject, your article was by far the most informative and well researched, and it really helped me understand the dangers of MLMs. Thank you!!
–Amantha Imber, 
Melbourne, Australia

NOTE: For a detailed case study of how such calculations were performed, go to "REPORT OF VIOLATIONS of the FTC Order for Nu Skin to stop misrepresenting earnings of distributors." Many other lessons can be learned from studying the report, including problems with enforcement by the FTC of its own orders. (The 1998 data is updated in a 2004 report). 

For more on the pattern of deceptions Nu Skin fell into in order to dupe regulators, media, Olympic officials, and the public, go to the page NuSkin's Naughty Numbers.