About one in thirteen adults (18+) have participated in at least one in multi-level marketing (MLM)—sometimes referred to as direct sales or network marketing—organization during their lifetime, according to the AARP Foundation. But do these people really make money doing multi-level marketing? What's the actual likelihood of MLM success?
Jon M. Taylor, Ph.D., founder of the Consumer Awareness Institute, set out to answer those questions by conducting comprehensive research and analysis of the compensation plans of more than 400 MLM companies. He compiled his findings in a 2011 ebook, “The Case (For And) Against Multi-Level Marketing," which can be found on on the Federal Trade Commission's website.
More recently, the AARP foundation conducted a study that explores the mindset, expectations, and experiences of MLM participants and released the results in a report titled, "Multi-level Marketing: The Research, Risks, and Rewards."
Both studies suggest that while it's possible to see success with an MLM organization, it's not common.
MLM Success and Dropout Rates
The AARP Foundation's study found that 44% of participants dropped out after less than one year working with an MLM. Taylor's research shows similar numbers and goes into a little more depth on dropout rates:
- A minimum of 50% of MLM representatives drop out in the first year.
- A minimum of 90% of representatives leave within five years.
- By year 10, only those at or near the top have not dropped out—which means at least 95% of representatives have dropped out.
These numbers don't bode well when comparing them to the average failure rates of small businesses. According to the U.S. Small Business Administration, about 20% of small businesses don't make it past a year, about 50% of them last five years or longer, and about a third make it past 10 years.
About two-thirds of the participants in The AARP Foundation's MLM study said that they would not join the same MLM company after knowing what they know now.
Because of their poor success rates and other criteria, MLM businesses don’t qualify for SBA loans or other small business funding and assistance programs.
Investment Involved in an MLM
Taylor researched the investment required to launch an effective business-building campaign for a recruitment-focused MLM, or a company that offers compensation for recruiting a "downline" team in addition to selling a product.
He estimates a minimum of $25,000 in total expenses that include incentives, products, phone, internet, giveaways, computer supplies, advertising, and travel. To come up with this figure, he joined a recruitment-focused company and worked full-time with the business for a year. He did everything he was asked, from buying monthly training products to attending conferences.
If you decide to join an MLM, then treat it as a legitimate business—even if it's a side hustle for you. Many reps struggle because they don't do this. If you don't market, sell, and do the activities that make money on a consistent basis, your business is likely to fail.
Today, those costs are greatly reduced. The internet, online training, flat-rate long distance and/or cell phone service, and free and affordable online marketing have made building any business, including MLM, much more affordable.
In the more recent AARP Foundation study, 66% of the MLM participants invested less than $1,000 for inventory, training, and materials while they were with an MLM organization, 24% spent between $1,000 and $4,999, and 11% paid $5,000 or more, while 23% did not remember how much they invested. Only four people reported spending more than $50,000.
Making Money in an MLM
Can you really make money in an MLM? The short answer is yes, but in reality, only a tiny percentage of representatives actually realize the high earnings advertised in MLM promotional materials and at meetings. Some people don't make any money at all, and some people actually lose money.
The AARP Foundation found that only about 25% of those it surveyed made a profit with MLM, 27% broke even, and about half of them lost money. Of the quarter that made a profit:
- 14% made less than $5,000
- 6% made between $5,000 and $9,999
- 3% made between $10,000 and $24,999
- 3% made $25,000 or more
- .05% made $100,000 or more
The AARP Foundation found that only 40% of MLM participants received a copy of the company's income disclosure statement. Of the participants who received it, 16% felt that it was "very accurate", 50% felt that it was "fairly accurate," 24% felt it was "fairly
inaccurate," and 9% percent reported that it was "not at all accurate."
Taylor came up with a more bleak conclusion from his research: "On average, one in 545 is likely to have profited after subtracting expenses, and 997 out of 1,000 individuals involved with an MLM lose money (not including time invested)."
Not All MLMs Are the Same
If you're still thinking of joining an MLM, then it's crucial that you research and investigate the company and products thoroughly to make sure that it's not a scam. You also must be sure that it's a product and system you feel you can promote.
There are many single-level marketing companies—selling products without a recruiting component—where the likelihood of generating income is much higher than typical MLM statistics. This is because compensation comes solely through selling products—no downlines, minimums or recruitment tactics. Additionally, some MLM companies are product-centric and have compensation plans designed around product sales.
Do your research. People make many mistakes when entering the world of MLM. Some don't research the company or product. Others don't read the contract they sign. Many newbies rely on the information provided by their sponsor. Gathering all of the details and reading all of the fine print before joining an MLM will help set you up for success.