Failed Business #1: MLM

Back in October of 2006 my wife-to-be and I got invited by her aunt to come have dinner. This aunt is fairly young at heart and we enjoy spending time with her. We were more than happy to drive 90 miles to meet up with her. My wife has another aunt who lives half way across the country from us and she was also in town to have dinner. As it turned out the reason for the invitation was that the two aunts were hosting a recruiting event for a multi-level marketing company (MLM).

I won't name the company for a couple reasons. First, these companies tend to have a fairly pro-active legal department, and the last thing I want to do is deal with that problem. Second, based on my experience it is certainly no worse than any other company in the MLM game so there is no reason to use the name. Finally, we do have family members that are involved and I no way want to hurt them or their business.

The way MLM companies work is that they sell their products through a network of independent consultants. These consultants market the brand and make sales which are either shipped directly to the customer or to the consultant (who then delivers the goods). Examples of MLM include Mary Kay, Amway, and Tupperware. Most people have come into contact with these brands either as a consultant or potential client.

One of the key concepts of MLM is that the company stresses that they can afford to compensate the consultants generously because they do not pay for advertising, retail space, or shipping. Compensation from these companies often hinges largely on a consultant's ability to recruit more consultants. This is reinforced by paying bonuses for recruitment and paying a recruiter a percentage of the sales from those they have recruited. In other words, when a person you recruited makes a sale (or sometimes another recruit) you get paid too. This sets up a 'network' where the work of those below you generates the vast majority of the money for a person at the top of the payment pyramid. While not a pyramid scheme per se it does resemble one. The FTC ruled this organization structure is not illegal however it can be ripe for problems.

Now back to my personal story. Dinner with our aunts was a recruitment dinner where we all listened to speakers while we ate our food. The aunt that drove hundreds of miles to "eat dinner" was the featured speaker. Long story short, her husband was involved in a series of businesses and for a time was fairly wealthy. His business interests soured, their family was forced to sell their house, and they lost nearly everything. The former stay at home wife then took up the MLM company in order to save her family. She worked hard and became fabulously successful with MLM. She just bought the house of a famous football coach (costing north of $600,000) and both her and her husband drive German luxury cars. She lives the high life and her husband has retired all because of this MLM company. Now she is here to offer the same opportunity to us (and the room full of 20 others).

I took the bait. I knew that I had the business acumen, and I had a grand plan to follow in my wife's aunt's footsteps. That night on the drive home we listened to the motivational CD presentation we were given, and that night I stayed up very late writing a full business plan. I determined that I had access to an untapped market for the products, I would approach dorms and residence halls on local college campuses and hold 'educational' programs which feature the products. I had been an Residence Assistant during college and I knew that RA's love to have outside speakers talk to their residents (which satisfies an RAs requirement to hold community activities for their students). I had figured out how to pass off my programs as educational and make a low-pressure sales pitch that would not get me booted off campus.

Fast forward 18 months. I have a closet full of unsold inventory and no residual cash rolling in. I collected a total of about $1,200 in revenue and invested about $3,500 in the business. I have over $2,000 in credit card debt left from having a go at MLM.

First of all, I'm a pretty decent sales man. My conversion rate for sales prospects was over 50% which I've been told is pretty good. I also had a business plan and attacked it with at least 20 hours of effort a week. I set up sales sessions and worked the phones. I was able to get my program approved by the local college. It would seem that all would be going fine. Why did I fail?

I did not recruit. I failed to recognize that the real money maker is to recruit new prospects, get them to buy their first shipment of product ($700-1400), and then move on. I also needed to find a few like minded people to work under me and do the same. I recruited a grand total of three people to the organization. I lost a bundle. Both aunts talked big about the potential profits, but when I shared my business plan neither let me know that I was barking up the wrong tree. It is too time intensive and difficult to spend your days selling widgets one at a time for $50 with a 15% margin when you can talk to a room full of 20 people who will buy $700 worth of product. Even a sales presentation to a dozen house wives that may spend $20 each doesn't work out to more than minimum wage. A couple of them may join and build your network but they must be willing to recruit like a fiend too.

I could switch to pumping the recruitment aspect of the business and do what has made my aunts so much money. I can't bring myself to try and bilk other people out of their hard earned money. I know that the success rate is terrible and that only a tiny minority that spend their $700 to get started will ever see more than a fraction of their money back. I am not willing to take advantage of people's natural enthusiasm and hope in order to lead them into an almost certain money loosing venture. Less than 10 percent of those that sign up will break even with the business.

That is my MLM story and an explanation for a portion of my evil credit card debt. Those of you with experience (either good or bad) with MLM I'd like to hear your stories. Please feel free to leave a comment.

P.S. My wife and I still get along just fine with the two aunts who introduced us to MLM. I know that it isn't their fault that I entered into a failed business model. Family is much more important than that amount of money, which is of course another reason the business isn't for me.