MLM Editoral: Why Do People Join Direct Sales Companies

MLM Critic Mike Collins and I have been enjoying a very educational debate on the viability of the Direct Selling Industry, specifically what most commonly is known as Network Marketing (NWM) or Multi-Level Marketing (MLM).  Below is our most recent conversation.

(Mike Collins) First of all I was surprised that you’ve  included Primerica and Keller Williams on your “Top 5” list of MLM opportunities. I was expecting companies like Limu, Vemma, Youngevity, etc.

(Troy’s Response) First of all I think we need to clarify the true definition of MLM, so we are on the same page. To do this I will use the college text book “Direct Sales An Overview” written by Dr. Keith Laggos. This is the first comprehensive College textbook written on direct selling and is still in use today.

Now to get on the same page I will use several definitions so everyone who reads this will have the same benchmark to use.

Direct Sales: A method of distribution wherein companies use Independent Contractors (called Independent Representatives, Consultants, or Distributors) instead of retail outlets. Representatives have the right to purchase Product (goods and/or services) at wholesale cost for personal use or resale to retail customers, and to create and manage Personal Sales Organizations comprised of other Representatives from whose purchases and/or sales they benefit.

Direct Selling: In direct selling, the relationship between the salesperson and customer is personal and takes place in each other’s presence in one-on-one or group settings. Direct selling is the primary selling activity upon which the Direct Sales Industry was founded. Although direct selling remains an important Direct Sales it has been supplemented by many other marketing methods.

Multi-Level Compensation Plan (MLCP): Compensation Plan based primarily on a Multi-Level Compensation Structure, in which Representatives earn predetermined commission percentages of the purchases and/or sales made by Representatives who occupy eligible relative Downline Positions in three or more Pay Levels. Each company’s unique Plan defines the number of Pay Levels and commission percentage associated with each.

Network Compensation Plan (NCP): Compensation Plan based primarily on a Network Compensation Structure, in which Representatives earn commissions based on the total Sales Volume produced by all eligible lower- (or sometimes equal -) Ranked members of their Personal Sales Organizations. The Plans incorporate three or more sales management Ranks. Each company’s unique Plan defines the number of Ranks, the maximum commission percentages that can be earned at each Rank, and the Qualifying Criteria.
So as we can see the terms MLM and Network Marketing really are not “categories” but terms officially used to explain compensation structures. As a matter of fact the IRS only recognizes “Direct Sales” as the industry, not how the Direct Selling Company structures their compensation model.

So with that said, let’s look at what you write about each company.

(Mike Collins) So let me start with Keller Williams. I don’t believe this company fits into the category of MLM. Although it has a comp plan tied to it I believe that is just a unique business model that allows someone to become a real estate broker without necessarily opening an office. And it does operate on the big ticket item. It doesn’t have a consumable product or service that generates residuals like the majority of MLM companies. I do like the fact that you can produce a nice income based SOLELY on your efforts I think this is a good opportunity for someone who wants to become a licensed real estate rep like Richard Pattisall. But you can do that anywhere. This is not really an MLM opportunity.

Keller Williams is listed as the #85 top direct selling company based on sales volume (2009) numbers. I respect your opinion that they do not fit your criteria. However, that does not change the fact that they are a “Real Estate” company using a direct selling model with a MLCP which pays seven levels.

By the way they are not the only company who has done this. World Leadership Group did it well, until the market fell out. And Exit Realty has a similar model; although I would call Exit’s an affiliate plan.

I do agree it is unique, and KW doesn’t have a consumable monthly autoship product. But that doesn’t change the facts. They are a pure direct selling business model, which provides a MLCP that is fair for all. And even more interesting is they have attracted some very successful brokers from the traditional side of the Real Estate profession.

(Mike Collins) Next is Primerica. Again, I don’t believe this company fits into the category of MLM. Even though it has a networking component to it, it’s not really MLM. It’s a very unique business model. Also, I do like the fact that you can produce a nice income based SOLELY on your efforts I think this is a good opportunity for someone who wants to become a licensed insurance and a licensed securities rep. But you can do that anywhere also. This is not really an MLM opportunity.

(Troy’s Response) Well, Here is their true product! Primerica is #7 on the Top 100 list of Direct Sales Companies for 2009. Furthermore if you study the history of A.L. Williams/Primerica you will quickly find that you are the only person in the world who doesn’t think they are a Life Insurance Company using a MLCP. As a matter of fact, the life insurance industry invested millions trying to get Primerica shut down for over three decade stating they were an illegal MLM pyramid.

They do sell several financial products which do have a month fee attached. I have been paying mind for close to 20 years. My most current numbers also show they have created more seven, six, five and four figure earners then any other company in history. And in 2009 paid out over $600 million in commissions to less than 100,ooo distributors.  That my friend is pretty good math!

(Mike Collins) That leaves us with three. Rastelli, Vemma, 21Ten, and Lifeforce International. In order to “succeed” in business I will assume that you will agree that you need to make a profit. Let’s look first at what one must do in these companies to first break even. I am purposefully leaving out fast start bonuses because in reality you cannot count this as recurring revenue. You get it one time only. So, this analysis concerns business conducted after fast start bonuses.

Let’s start with Vemma. Vemma has a binary comp plan. I have spoken directly with Vemma’s corporate office, as I have with every company listed here, as to what an associate needs to do to break even. To maximize Vemma’s comp plan you must be on a 120pv autoship. The good thing is that Vemma give you $1 for 1pv. In other words, there is no built in breakage to this part of the comp plan. So to break even you must generate $120.00 in commissions to pay for your autoship thereby “breaking even.”

To generate $120 in commissions you need to “cycle” 6 times. Every time you cycle you get $22-$25. A cycle is 180pv on one leg and 360pv on the other. 6 x 180=1080pv on one leg and 6 x 360=2160pv. If you have all of your team members on a 60pv autoship you will need 36 reps on one leg and 18 on the other. That’s 54 reps on a 60 pv autoship to generate $120.00 Let’s bump everyone up to 120pv. If we do this we can cut the numbers in half 9 on one leg and 18 on the other. That’s 27 reps spending 120 bucks. 27 x $120 = $3240. So you generate $3240 in sales to get $120.00 This means it takes 27 people to actually lose money for you just to break even. So, to calculate the “success” rate you would take 27 x 4 = 108 then divide 4 by 108 and you have 3.7 percent. This means that with this comp plan 3.7 out of 100 just break even. The other 96.3 people lose money or in other words fail.

And we haven’t even started talking about what it actually takes to make money. After you start to factor in things such as: buying extra product to promote your business, attending functions, buying tools (there’s a good one) and the fact that the “average” networker sponsors 2.2 people into their business you can begin to see why so many people fail in MLM. The majority of the money is going to the top. We haven’t even disussed breakage yet. In this plan you need 180/360 to make $22. What happens when you have 180/300? Zero. That’s what you get. That’s $480 in sales you and you team generated and NONE of you get paid. Nice huh? Sign me up!

(Troy’s Response) Well, you make several subjective statements which should be reviewed.

1.    You are assuming everyone who joins VEMMA, joined to maximize the compensation plan, and not for the discount on the product, and this is just not true. Verve for example is now the #7 most sold energy drink in the USA. To reach those sales numbers, you can’t do it simple by recruiting people. Especially if we believe the number of a 95% failure rate. Or the fact in 2010 the company grew 19% in volume sales, which also doesn’t happen if you have a high attrition rate. These kind of numbers are only created when end users find value in the product and continue to buy on a regular basis. Many of the brand partners at VEMMA join to get their product at a discount (they joined for free I might add).

2.    VEMMA is one of a handful of companies that does not charge their distributors for their marketing and backoffice. Not only can a person join for free, the company is willing to give them 100% support to grow their business. In other words they do not nickel and dime them to death.

3.    You also do not take into account any personal retail sales one might make or the fact the company allows brand partners to arraign to have Verve machines placed in strategic locations and have the sales volume added to their monthly qualifying volume.

4.    You also did not include all the additional bonuses earned throughout the compensation plan.
This is why I have always stated you need to listen to the message from the top at the corporate office to determine the attitude of the field. In this case BK has always lead with the product in both New Vision and now at VEMMA. They have built the company and increased sales in a down economy because the products work and people do get results. We see this with the clinical studies, and two because BK and the girls are willing to lead the charge in showing they do have a viable business model.

I wrote an article on a young girl from VEMMA a few months ago Jessica Van Pelt and the fact she is making $300 per month and paying her car payment. Although we all know that  not everyone will make $300 part-time, it is the small stories of a young entrepreneur like this which goes to prove the profession still works.

But to assume that all brand partners join to max out the compensation plan is not accurate. As a matter of fact I started a conversation on this very subject at Facebook to see what other folks have to say.

Here is a current statistic from the DSA to validate my statements on why folks join network marketing companies.

In reviewing these numbers it is easy to see that only 20.1% of people are builders, and 23.2% are retailers, and 25.9% are in the company for personal consumption only!

(Mike Collins) Next up we have 21Ten. This is probably the most generous plan of the four. It’s a unilevel. To break even you have to be on a $100 autoship and you need to sign up 4 personals on a $100 autoship. (Remember, the average networker only sponsors 2.2 personals into their business.) So for every 1 person that is just breaking even you have 4 more who are losing money. 1 out of 5 breaking even. That’s 20 % breaking even 80% losing money.

(Troy’s Response) This will be very interesting. Richard Brooke who is a close friend may have the best business plan in all of direct selling. Listen as he shares!

Here is the 21Ten Business Opportunity Calculator where anyone can calculate the numbers.

Now let’s look at some facts. First again we can’t assume everyone desires to break even.In the case of the parent company of 21Ten the average distributor buys three times the minimum autoship in products monthly because they use them. And by buying them from themselves they save money. It should also be noted that many of the people already affiliated with 21Ten and Oxy are active in the medical profession and market the products to their patients.

I do have a question, where do you find the stat you use “the average networker only sponsors 2.2 personals in their business”? And why do you chose not to talk about how many customers each distributor brings into the business? The whole business model is based on increasing volume to the bottom line of both the company and each Personal Sales Organization.

You make a very broad assumption that people who join any company join with the main purpose of making money. Stats show that most folks join a company to use the products, not make money. And of those who do join the company as a business, they join part-time.

Now in reviewing the 2009 and 2008 numbers it is easy to see that people get out of their business what they put into it. This is a tough business and sadly most folks do not realize it is not a “get rich quick” proposition.

The other sad thing for the average distributor, is they believe what so many self-proclaimed gurus teach – New School is the way to go. Use the Internet, Social Networking, or the next greatest online system. They are taught NOT to talk to their local market (friends and family) some are even told they don’t have to like or use the product to make it big! Sadly the numbers to not promote those myths either.

(Mike Collins) Next is Lifeforce International. This is probably the least profitable of the four. This is also a unilevel. Right off the bat you have major breakage built into the comp plan. You have to be on a 100pv autoship. To generate 100pv you need to spend an astounding $155.00! That’s right. From the very get go this company is making a 55% profit off of its’ distributors. This is what you need to do to just break even. The company pays 5% on your front line or 1st generation, 40% on your 2nd, and 10% on your 3rd. So, you will need to sponsor 3 who each sponsor 1 and have 2 of those sponsor 1. That makes 9 people on 100pv. You would make $15 on your 1st gen. $120 on your 2nd gen. and $20 on your 3rd gen. for a total of $155 Congratulations you just broke even. You and your team generate 900pv equaling $1395 US. You made $155 one of your people made $5 and two made $45. 1 out of 8 breaks even. That’s an 87.5% failure rate. And we haven’t started making money yet. But the guys at the top are.

(Troy’s Response) Now when it comes to LFI I am not sure you are giving a fair and balanced picture of the compensation plan. And again you have not taken into account the fact most people in LFI are in the medical field and market the products to their patients.

1.    What breakage? I understand the $55 difference. Which is not breakage to the company for profit, it feeds the additional bonuses paid to the field. For example LFI has a 55% fast start bonus for anyone with 25BV or higher on first orders.

2.    And of all the companies LFI pushes hard customer acquisition and pay an additional 15% of all monthly first orders, with the majority of the 15%, six percent to be exact going to the first tier pool of $750 dollars in volume, just to name a couple of additional bonuses. And LFI may have the highest payout when it comes to personal customers. They use a 3 tier approach paying from 25% to 45% depending on the personal BV. Again this is due to the fact this company was launched focused on the medical arena. If you study the story behind Body Balance as I reported here in the community you may start to understand.

(Mike Collins) In the interest of time I’ll leave Rastelli alone. If you want the numbers just look at the comp plan. Take the amount of pv required figure out your commission on team members sales then you’ll have an idea of just how much meat you have to sell to pay for the meat you are eating or sampling. Anything above that you can count as profit.

(Troy’s Response) Let’s take a look at Rastelli so others can also get a fast picture. Partner Benefits

1.    They pay 20% on retail sales. They also pay 20% on first orders.

2.    They pay 5% overrides on levels 1 & 2 when qualified. Qualification is $300 in PV which includes the distributors’ personal sales and all their personal directs, members and customers.

3.    Now not everyone will find Rastelli Direct the company for them. But in talking with my mom who buys from Schwann’s Foods, the Rastelli prices are in the same price range at the retail price, and she doesn’t have to wait around the house for the delivery guy. When I shared with her the fact she would get member pricing, she got real excited.

Again, you are basing your judgments and conclusions on what I feel are a tainted view that everyone in direct sales, MLM, Network Marketing or whatever we want to call it, is here to earn part-time or full-time money and that is not the facts. Most of the people who join a direct selling company are doing so for personal use, and discounted prices. Of those who do join to launch their own business, most are doing it as a part-time venture.

(Mike Collins) No matter how you slice it Troy the sheer numbers are staggering. The comp plans are so slanted to pay the people at the top that it makes it extremely hard for the “average” person to make any money at all. Truth is, most people LOSE money in MLM. Throw in all the other crap that goes on in the industry and you begin to get a very different picture than the “Dream” we are selling people. I used to love this industry…….then I figured it out.

(Troy’s Response) I fully disagree the numbers can seem staggering, which is why most people start part-time when they are doing it as a business venture. It is why I gave you the above companies to review.

See, the compensation plans at the companies I listed above all have two things in common.

First they push the sale of the products to folks who are both in and out of the compensation plan.

Second, they reward the distributors at every level for the sales of the products, not just for bringing in warm bodies, with Keller Williams and Primerica leading the pack.

The dream being sold is different for everyone, it is not just money. As a matter of fact women who make up the majority of this profession do not join most of the time because of the money they can earn.


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5 thoughts on “MLM Editoral: Why Do People Join Direct Sales Companies”

  1. Catching and older conversation here, but since I am (and have been since 2004) been in one of the companies mentioned, (Vemma) I will share my .02 although it's 3 mos. late.

    Mike's main complaint seemed to be that the peeps 'at the top' make all of the money. This is not a new perception of course, but what people who say that fail to realize is that none of the 'top' people came out of their crib and landed at the top of any MLM structure. They all paid their dues being at the 'bottom' somewhere and worked their way 'up' not unlike a j.o.b. The difference between they and Mike (and 95% of all in our great industry) is they kept on shooting. Like Dale Calvert always says: "A big shot is just a little shot who kept on shooting" . It's certainly Mike's prerogative to stop shooting, but it's blatantly obvious to anyone who has stuck around in NWM that Mike needs to take a look at the man in the mirror. We all do at some point.

    In closing, I will add that the ones 'at the top' (most of them anyway) have done TONS of 'mirror looking' in their career and that is exactly why they are at the top and deserve their big fat checks. Getting there is not easy and most simply do not have the tenacity to keep on shooting. So, it's easier for the ones who stop shooting to just point fingers and blame.

    No one will probably read this because this is an older thread but…I did want to add my .02.



  2. I must say, the richest people in the world build networks. Network marketing gives the average person the ability to do above average things. I came onto the Rastelli Opportunity months back. I now do get free food orders each month and this has really helped me out!! Where else can anyone leverage the food purchase to create a profit steam?!?! It makes sense to me, this is just our food money… What a great industry!

  3. I have to say to this guy… There are companies that pay. I made $71.00 last month from selling Nu-Life the Acai beverage from ReaLow inc.

    I only paid a $19.95 authorship which I got an AT&T sim card. Of which I sold for $10.00 so my actual cost was only $9.95 that month. I only recruited one person. Yet sold product and was still paid from my downline.

    I made a profit of $61.00 basically doing what I was already doing in other companies. I will agree some companies have major breakage. BUT THAT IS NOT THE CASE FOR ALL OF THEM.

    Some companies are like you said Troy using the product.

    I love the revolucion start product. That's why I'm also a IBO there.

    Troy look for some lucrative comp plans this week. So we can send this guy packing.

    Looks to me as if he failed and now wants to blame the whole profession.

    Correction I shouldnt say failed I should say quit. As TIM Sales says.

    Troy thanks for all you do, I hope this guy sees the light.

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