An MLM Warning: What You Need to Know

Those multi-level marketing opportunities sound great. Lots of money, little work, be your own boss. This article gives you a dose of reality. You’re going to hear the things they won’t be telling you at that great sounding sales pitch. The systems are cleverly presented, and even very intelligent people get sold, because you don’t figure out how it really works until after you are in it. The point of this article is to clue you in, in advance.

Originally published 2002

This article is not entirely negative, though. There are some people for whom the system can work, though. You may be one of them. This article will help you find out. You’ll also learn the two important questions to ask when evaluating any such opportunity.

Why They Sound So Great

Multi-level marketing schemes all sound fantastic when they are first presented. The appeals are entirely emotional. The mechanics of the process are never discussed in sufficient detail to set off your warning alarms. Instead, a picture is painted of a glorious future.

You’ll get the bottom-line kind of information you need later on in this article. But first, let’s examine the emotional appeals you’re exposed to in the sales process, so you can recognize what’s happening.

  • Greed — You’re going to make a ton of bucks, and be wealthy beyond your dreams.
  • Laziness — You can work at home and spend as little or as much time as you want. And it’s really easy. Everyone you know and everyone you meet is a potential member, and all you have to do is talk to them.
  • Independence — You’ll never have to take orders from a boss again.
  • Fear of Catastrophe — No job is safe. Horror stories tell people lose their jobs, even when they thought they were safe.
  • Family Ties — You want to provide for your family, to take care of them. And you want to spend time with them. You can do it all.
  • Fear of Missing Out — Maybe this is a really great opportunity. What if you pass it up and you could have made millions?
  • Desire to Help — The really good ones explain how you will be helping others the whole time.
  • Pride/Fear of Ridicule
    This one gets interesting. After “hooking” you with laziness, they start the gradual transition to the harsh reality, because the reality is that you have to work very hard. But of course, you’re not one of those lazy so-and-so’s who wants something for nothing. Are you? Of course not. So you continue down the path of glorious promises. Later, if you complain, the defense is, “we told you so”, (All of the defenses are in the fine print, somewhere. Remember, these guys are *good*.)

The Process

It’s helpful to know the process, so you can see it developing as it goes along.

Step 1
In the first step, you are likely to be approached in a way that doesn’t mention MLM at all. That’s because they’ve gotten such a bad reputation (deservedly) that mentioning the word is the “kiss of death”. It slaughters all of the other emotional appeals. So you have to read between the lines to see what’s coming. Words like “work at home”, “be your own boss”, and “own your own business” are some of the common phrase, that should alert you, but they also change over time

The emotional appeals are very strong, at this stage. Don’t you want all that? Of course you do. It sure as heck sounds good. So the fear of ridicule appeal is very strong, here. After all, how could say, “No. I want to be a wage slave my whole life, take orders all the time, die broke, and risk losing everything every step of the way.”

Of course, no wants that. But the real crux of the matter is HOW this grand and glorious scheme is going to give you anything different. That issue is the harsh reality discussed in the next section.

Step 2
This is where you the picture really starts sounding good. The next step is typically to meet with a “friend” who really knows how to explain it, or go to a meeting. In either case, you will be meeting with someone who really knows sales, and who knows how to push those emotional hot buttons that get us into trouble as often as they get us out of it.

At this point, the picture is going to be sounding really great. And you’ll have additional peer pressure, as well. When meeting the 3rd party, you won’t want to make your buddy look bad by being so stupid as to refuse. In a larger meeting, you want to be the public idiot that says no, and you’ll tend to be carried away by everyone else’s enthusiasm.

Even when you *know* the process intellectually, the emotions run very strong. After all, they have been wired into our genes over eons. So watch out! Be alert, and know what you’re getting into.

The Harsh Reality

Multi-level Marketing works like this. You get 5 people, and get a bit of the money they spend. They each get 5 people, and you get a bit of their money, too. That’s 25 people at the bottom of the tree. *They* each get 5, and your’re up to 625.

When those people all get 5, you’re up to more than 3,000 people in your “downline”, and you’re making some pretty darn good money. At this point, according to the theory, the thing is growing on its own, you’re not spending much time at all, and you’re raking in the bucks.

But to add the icing to the cake, you can do all of this in your spare time. Just a few hours per week. After all, all you need is five people, right?

Let’s take a look at what really happens, and calculate the real time you are likely to spend.

You’re going to spend an hour or two with each person you bring on. First, you’ll spend some talking to them. Then you’ll have to accompany them to meet the “friend”, or go to a meeting. You have to do that, or their won’t be enough peer pressure to do the job.

You only need 5 people, so that’s only 10 hours. Doesn’t sound to bad. But realize that you are now the “friend” for those 5 people. The 25 people they sign up also cost you the better part of a couple of hours. That’s a total of 30 people, or about 60 hours. Still, what’s a week and a half spread over a few months?

But not everyone you talk to is going to leap at the opportunity. Some are too smart, others too suspicious. Still others are too busy. Many are too happy to need something that promises quick riches. So let’s say that out of 5 people you talk to, one signs.

That “closing rate” of 20% is twice as good or four times as good as anything that’s going to happen in reality, but let’s work with it.

Instead of 30 people, you’ll need to talk to 600 people. That’s 1200 hours. If you spend a few hours a week, how long will it take you? Let’s see, 300 weeks at 4 hours per week. That’s a year.

Still not too bad, all things considered, if you have the energy to do it. But there is one more thing to take into account — the drop out rate.

You see while you are busy adding people to your downline, people are equally busy dropping out. We’ll look into how that happens in a moment. The important point is that you have to add people at a faster rate than they are dropping out.

The bottom line is that the appeal to laziness — where you work a few hours a week for a few months, and you’re set for life, just doesn’t happen. You can expect to work very hard for a couple of years, at least. During that time you will need to keep your regular job, so you can eat, and also devote significant amounts of your spare time to building your “business”.

The real question is, do you have other things you’d rather be doing with your time? If the answer is yes, then this kind of “opportunity” may not be your cup of tea. Or it might be right up your alley. The remainder of this article will give you a better idea of how to determine the answer to that question.

The Two Important Questions

The two most important questions you need to ask when evaluating any such opportunity are:
a) How much is the “front loading”?
b) What is the “enforced drop out” clause”

How Much Front Loading?

“Front Loading” is the term for the money you have to spend right at the outset, to get into the

Front loading is important, because most of the money you are ever going to get will come right at the front, when people are excited by the emotional appeals. When reality sets in, they’ll be dropping like flies, so the real money (and sometimes the only money) tends to be generated when people are “buying in” to the business.

The size of the front loading figure depends on how quickly people drop out, how good the emotional appeals are, and how cleverly the “enforced drop out” clause is disguised.

If people drop out rapidly, a large buy-in is needed to make any money, because they sure won’t be generating anything later on. If the emotional appeals are very well calculated, then a large buy in can also be supported, because the prospects will sound so good that people will pony up the money.

We’ll look at the drop out clause next. For now, but when looking at the front loading amount, realized that it helps to determine how many people will sign up. If it’s a small, “no brainer” amount, then your closing rate could be pretty high. But the higher it gets, the less likely that 20% rate is going to be. (At $600, 1 in 30 or 1 in 50 is closer to the kind of rate you will most likely see.)

Because front-loading is a sure tip-off as to the nature of the pyramid scheme, there is usually a mechanism to disguise that fact. Typically, one can “join” for as little as $50 or so. Of course, joining in that capacity doesn’t give you much more than the ability to purchase products, much like joining a warehouse club. If you wait around long enough, you’ll eventually find out that if you want to make money, you need to invest quite a lot more — anywhere from $500 to $1500 more. By that time, of course, your head will be swimming with all the riches you intend to make, and it won’t seem like much of an investment at all.

So the first question to ask, to get to the bottom line as quickly as possible, is what the front loading amount is. The next question is what the enforced drop out clause is. We’ll tackle that next.

Enforced Drop-Out Clause?

The “enforced drop out” clause is the part of the contract that specifies the conditions under which you will no longer allowed to be part of the program.

Why there is an enforced drop out clause at all is a mystery to me. After all, if I got one person today, and one 6 months from now, and one after a year, then after a while, slowly but surely, that good ol’ downline would build up, and at some point you would start making some money.

But the drop out clauses exist. If you don’t buy a certain amount each month, you’re gone. Or if you don’t bring in one person a month, you get nothing. Things of that nature.

That kind of clause turns your lazy man’s dream into a work really hard for many years kind of proposal, because you are always fighting to overcome the drop out rate. That makes you work a heck of a lot harder than you would if you could just slowly accrete new people every so often, when the stars align.

If I had to guess, I’d say the drop out clauses exist because the people who dream these things up want lots of money, fast. They don’t want to spend 10 or 20 years slowly building an organization that will eventually make a profit. They need to motivate people to work their butts off and race like crazy to make money now. That way, they make lots of money right away, so they can pay their bills.

That drop out clause needs to be pretty well disguised, though, so you don’t realize how hard you will have to work to overcome the drop out rate. After all, if you see it for what it is, you probably won’t buy in at all. (It can’t be disguised too carefully, though, or the “I told you so” defense doesn’t exist. So be sure to look for it.)

Since the enforced drop out clause has a lot to do with how hard you will really have to work, it’s something you need to ask about right up front.

Is it for You?

When you know both the front load amount and the drop out clause, you’re in a reasonable position to determine how hard you are *really* going to have to work to get those millions.

It would be nice if some statistics were available, so you could plug in the numbers and see how many hours each week would produce how many new people, and how quickly they would drop away. I don’t have those numbers to give, unfortunately. But that is the kind of analysis that marketing and sales people do all the time.

In fact, it is sales and marketing people for whom an MLM operation can conceivably make sense. First, they are used to doing the kind of analysis that makes it possible to determine if the venture will really pan out. Second, they have either developed the skills needed, or at least have an interest in, doing the calling, prospecting, and selling necessary to build the “business”.

I put “business” in quotes, in this article, because the fact of the matter is that little or no revenue is generated by selling anything. The real money these operations generate comes when people “buy in” to the business. But pyramid schemes are illegal, so there has to be some product. (A pyramid scheme is one in which there
is a buy in, and no other revenues. So you pay to get in, and make money when others pay to get in. But all you are getting into is a vaporous deal where you make money when others get into it, too.)

Because marketing and sales people have the right skills, they may actually do well with MLM. Even if you don’t have those skills, an MLM business can help you develop them, if that is where you’re interests lie.

If you like talking to people, and you can handle rejection (you can expect a lot of that) an MLM opportunity might make sense. Just know going in that it is going to take a lot of time, and a lot of hustle.

Understanding Your Goals

It’s important to understand your goals here. If your goal is to make a lot of money so you can take a lot of time off, then MLM may be just right for you.

But most people have other goals that are vitally important to them, and the fact that they are unstated prevents them from realizing that MLM is not a good match at all.

One goal is to spend time with others. Despite the degree to which we complain about having to go to work, we experience of social interaction that is important to us. We spend time with others, and we work with them to achieve a common goal. Despite the frustrations, there is something very satisfying about that pursuit.

Another goal involves doing things we like to do. I loved doing algebra, and spent hours doing it just for the fun of it. It was like playing games with symbols. When I discovered computer programming, I couldn’t believe they actually *paid* me to spend my time solving problems. To me, that was fun. Working for someone else gave me important problems to solve, and it was rewarding.

Similarly, a health professional is typically motivated by the rewards of helping people. Even if an MLM makes more financial sense, it can take you away from doing the things you find really rewarding, or at the very least make you too tired to do your best at it.

Finally, if your goal is to achieve the financial freedom to write a book or build a product, then the time you spend MLM’ing — your spare time — is time that is taken away from the thing that is really motivating you in the first place. When the MLM process gets hard, and it will, you won’t even have the consolation of doing what you really love. In such cases, it makes more sense to spend your spare time on your book, or your invention, or whatever. Then, your love of what you’re doing will doing will get you through the challenges and frustrations.


The bottom line is that an MLM can work if that is the kind of thing you really want to do with your time. If you like sales and marketing, or if you have the kind of training that makes it easy, it may well work out for you. Just realize that the *real* size of your potential market is limited to the same kind of people — it doesn’t consist of every friend you have and everyone you ever meet, as the sales pitch would have you believe.

The two important questions to ask when evaluating any such opportunity are, “What is the front load?” and “What is the drop out clause?”. After that, you will be better able to determine if the pitch makes sense.

The one good thing about such business ventures, though, is that you spend a lot of time getting in touch with old friends. That can be really nice. On the other hand, you can also lose quite a few in the process.


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