Why are you willing to work for free?

2016-06-19 16:05

If you have recently been recruited by a multi level marketing (MLM) company to sell beauty products, funeral policies or something else, you are likely in a worse financial position than you were before. You may have had to pay some joining fee or bought some product. In addition, you are not making any income yet right? Unless you are very good at recruiting more people and only if you put in many hours of work, will you see the money coming in. The question is why are you willing to work for free?

At the outset let me say this, MLM companies are legal and are not pyramid schemes in the traditional sense. However, they do depend for their existence on aggressive growth in membership and those that have entered last do the bulk of the selling while those that came in before you make all the money. The bottom layer of a MLM company typically works for free. They spend hours attending meetings where most of the time is not spent talking about the product, but rather about how to recruit more people and about how rich they can get. They commit large amounts of their time contacting their friends, family and community to try and get them involved. If they are good enough, they start setting up their own meetings, taking even more of their time. Eventually, they may start making money. Many never do. They work for free.

The key difference between a traditional pyramid (or Ponzi) scheme and an MLM company is that with the former, the entire value chain is run on a pyramid basis. This means that the entire contribution of new members is used to fund the proceeds of previous members. When the pyramid breaks down, the last entrants lose everything. These schemes are also set up with very high returns, so they require very fast growth in membership to be sustained and therefore run out of road very quickly. They are bad news (see my recent piece).

In the case of MLM companies (like Amway, Avon, etc.) even the last entrants to the scheme will receive a product, although the product will be worth less than what they spend to purchase it. A product will be chosen and say it costs 50c to manufacture and 100c to buy. The amount that is used in the MLM portion is the 50c. Traditional companies will spend huge amounts on advertising and marketing (thereby utilising the 50c) and the final consumer, no matter who they are will be treated similarly – they walk into a shop and pay 100c for a product that took 50c to produce. Think of soft drinks that are really only sugar water, but you are willing to pay for. The stronger the brand, the more you will be willing to pay. The more the advertising spend, sponsorships, etc., the stronger the brand and the higher the price point. Key though is that all consumers are treated similarly.

An MLM company will spend the 50c difference between price and cost to pay its consumers to market and distribute the product. The key difference here is that depending on where you fall in the multi-level hierarchy, you will either pay much less for the ultimate product or make money out of selling the product. Because of the promise of great wealth if you are able to recruit levels below you to market the product, consumers are willing in essence to work for free to distribute the product in the hopes that eventually they will move up the list where the product becomes cheaper or eventually they make money. The reality is that the vast majority of people selling these products (attending meetings, speaking to their friends and family, setting up meetings etc.) will be doing this for free. They are committing their time to the people above them in the hierarchy and to the ultimate company manufacturing the product without any remuneration. There is only the promise of future remuneration, which the vast majority will never see.

In the case of a typical funeral insurance product for instance, the final claims ratio (claims to premium paid) is maybe 40% - 50% (sometimes lower). The rest of the money is spent to cover administration costs, marketing costs and commissions. The broker or agent that does all the hard work of contacting leads, phoning clients, walking the streets and having face-to-face meetings with clients, receives the commission. They are remunerated for the work that they do. The people doing the work are the people getting paid.

Insurance MLM companies use a different mechanism to reward the people that distribute the product. The people higher up the distribution hierarchy get the bulk of the money (what would be marketing and commission in other companies) whilst doing much less actual selling than a normal broker or agent would do. The people that are doing most of the work are lower down the food chain and the bulk of them are working for free (or at least receiving way less than they would receive if they were a broker or agent selling insurance). The only reason they are willing to work for free (or for peanuts) is because of the promise of one day being higher up the hierarchy and having other people below them working for free (or peanuts) to sell the product (while they make the money).

The same is true of a company that distributes beauty or other products on this basis. If you are a representative (rep) of a traditional company selling a product, you will either receive a fixed salary or, more typically, a commission based on your sales. You are therefore paid for the work you put in (and the sales you generate). In an MLM company, most of the commission for selling products is paid to those higher up the hierarchy (those that were recruited before you) who do less of the work, while those recruited last, who do much of the selling, are working for free or for very little.

There is also the additional argument that there could be leakage in a MLM company because so much time and effort is spent on discussing the potential riches to be earned and how to earn those riches rather than spending that time to talk about the product and the brand. Theoretically, MLM products should therefore be more expensive than normally distributed product. However, because people are willing to work for free, the ultimate value for money for the final consumer (who does not get involved in the hype, but simply buys the product) is therefore often comparable to buying the product in the normal way. As a result, MLM companies can be sustained for decades (or indefinitely) without the system breaking down. As long as people are willing to work for free in exchange for the promise of wealth, the model continues.

MLM companies are not illegal and they may not even be considered unethical by many. However, they do depend on people that may not really understand the process, who over-estimate their ability to recruit others, or are desperate. These people (knowingly or not) are willing to commit large amounts of their time, time which could be spent more productively to build an alternative career (or to improve themselves through study). These people are willing to work for free. There is one way in which MLM companies are similar to pyramid schemes: they both are dependent on other people, people who enter after you, sacrificing their money or time so that you can make money or even get rich.

Are you involved with an MLM company, selling beauty products, funeral insurance or other products? Do you realise that you are working for free and may be one of the majority who will always work for free (or peanuts)? Do you realise that you will only make money or get rich from an MLM company if there are others (recruited after you) who are willing to work for free (or for peanuts)? Does this concern you or don’t you care? I would love to see your opinion. Comments are welcome on my website.

In the mean time, keep your talking straight!

#MLMCompanies #PyramidSchemes

Marius Strydom is the CEO of MLAX Consulting



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