What Is Multi-Level Marketing and How Come People Fall For It? 

Could I perhaps borrow 30-minutes of your time to pitch a life-altering business proposal that will reel in loads of cash and make you financially free? It is a limited time offer and I highly encourage you to take it before it is too late! The business model is simple, sell this product for [insert…

Felix Grimstedt Avatar

Could I perhaps borrow 30-minutes of your time to pitch a life-altering business proposal that will reel in loads of cash and make you financially free? It is a limited time offer and I highly encourage you to take it before it is too late! The business model is simple, sell this product for [insert company name here] and you will get a commission. Even better is if you, like me, recruit a few members below you that you mentor and begin reeling in commission on their sales too! This is an offer you do not want to sleep on!

Sound familiar? Sounds like a pyramid-scheme to you too? Well, then you, like me, would be wrong because pyramid-schemes are illegal and those are some daring accusations. These are completely legit commission-based sales structures, commonly referred to as Multi-Level Marketing (MLM) networks, that just conveniently happen to share structure with those ancient marvels. Apart from pyramid-schemes though, where you earn revenue from recruiting additional members, in MLMs you earn revenue from selling their products… and recruiting additional members. See? Not even slightly resemblant! How ignorant of us to draw such ill-founded presumptions. 

But even though this might seem like an obvious cover-up for a trained pair of eyes like yours and mine, people are falling for these schemes daily. The MLM-industry is currently worth about 180 billion USD globally, and it is growing. Now you are thinking, well maybe I should tap into some of those sweet sweet profits? They seem like a reasonable way to make a little extra on the side which cannot hurt, can it? Remember the common saying within economics, friends: “There is no such thing as a free lunch”. As a soon to be bachelor’s graduate within economics, I take it upon myself to educate my fellows on the silly economics behind these schemes, why people fall for them and why you should refrain from joining. 

First of all, their offer does not seem too bad, does it? Buy the companies’ products and sell them at a mark-up within your own social network. Fairly simple, right? You know the customers and they already trust you, easy-peasy! The often occurring problem is that the goods these companies distribute are unknown brands that keep low quality and are overpriced due to the large mark-ups necessary in order for the many people within the distribution-chain to receive their commissions. I.e the products are difficult to sell even for the most experienced salesman. Naturally this is by design. The companies want you to resort to the other option for making money: recruitment. 

So, to recruit a few friends does not seem impossible, right? Well kids, this is why maths are important. As stated above, it is practically impossible to make money without people below you, so let us make the assumption that you need at least five people below you in order to make any form of profit. With this we can make a hypothetical calculation: A person decides to join a MLM and successfully recruits five people, in this state he can begin earning money while the other 5 will not get anything, so 1/6 people profit. If these five recruit five more people each, they are now 31 people whereas 6/31 profit. Five more per person and the total is 156 people, out of which only 31/156 profit. This goes on and on but it is clear that due to the very nature of MLMs, the money will always be concentrated along the top. This can clearly be seen when looking at the income distribution of the top 10 largest MLMs globally. Out of these MLM companies’ members, only about 30% pocket any money whatsoever. Additionally, out of these 30%, 12% get paid more than a 1000 USD a year, 2% more than a minimum household income per year, and only a small fraction pockets very big profits. Please note that this data is even slightly optimistic as it states turnover, which means that the actual profits are even smaller.

But okay, let us say that you are extremely dedicated and that you are going to recruit five more dedicated friends that are gonna recruit five even more dedicated friends and so on. Well, once again maths and the understanding of exponential growth is important. If you were to recruit five friends that in turn recruited five more etc, you could only do it 14 times until you run out of people on Earth. Try it for yourself: 5^14. From there on, the options are slim and you would either have to rapidly populate, or go intergalactic in search for a new, not so intelligent, species to reel into the scam.

So if it’s possible to come to the conclusion that MLMs are non-lucrative for the Average Joe with fairly simple maths, and this information being easily-accessible online, how come people still fall for them? Well, these companies often tug on your heartstrings by depicting a life of a previously miserable person that now, with the help of an MLM, has become a successful entrepreneur who works their own hours and drives a sports car. With taglines such as “take control of your life today” and “be your own boss”, accompanied by vague information about the opportunity in question and an element of time pressure, they reel you in. Essentially money is freedom and thus it is a strong bait, especially in a time when becoming rich is an ideal for many.

Furthermore, it is not uncommon for these networks to share tactics with cults. Oftentimes, the leaders within these organisations are praised as saviours that have changed the members’ lives for the better. Additionally, the people recruiting commonly take on a mentor-role where you two become reliant on each other which raises the barriers for leaving, since you do not want to let your mentor down. Many have also reported that they have been urged to cut ties with people that have doubts, with the motivation that these people are a negative influence and hold them back from succeeding. The more these people are isolated from others outside of the network, the more dependent on it they become, even for things such as social interaction. Isolation plays a key-role and they frequently target already isolated groups, such as outcasts or smaller diasporas of immigrants that might feel left out of society to begin with. These are all malicious methods used by cults as well. 

So to summarise: Be the boss of your own life and please do not join an MLM. They are nothing more but elaborate scams that will only hurt your financial stability. Instead start one, it is insanely lucrative and in only 14 steps you will be reeking in commissions from every person on Earth. From there on, use the money to fund intergalactic missions and conquer space, five additional members at a time, until you become a galactic emperor. Do not let the haters stand in the way of you getting that bag.

Actually, I am starting one right now. Please share this article with five people and encourage them to do the same. Together we are going to make Nådiga Lundtan the biggest magazine in the world! Get to work my little ants! 

About Nådiga Lundtan

Founded in 1948 and has since been an important part of student life in the economics program at Lund University. Nådiga Lundtan covers a wide range of topics related to economics, society, and politics, as well as careers, entrepreneurship, and innovation. It is a platform for students to share their ideas and opinions on economics and related fields.

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