MLM: Viable or a Loser? (Part 2)

I recently bought a truck and as I went through the sales process, I enjoyed learning about the industry from the salesman. He was surprisingly open about challenges that he was facing in today’s online world where consumers have so much information and power.

I research hard and I haggle well. I also use the internet to my advantage. If I am being very honest, I almost feel bad about how easy it is to drive down the cost of a vehicle if you use what you find online. In my case, there are a dozen Ford dealers in Atlanta and they all just beat up each other on price in the various online car-buying services. I won’t bore you with all the negotiations but in the end of the day, I walked away with a new truck at a crazy good deal. I am not a fool and don’t believe their claim that they lost money on me because I bought at $4000 under invoice/holdbacks but I do think that they probably made very little, certainly less than they would have made a few decades ago.

With that in mind, if I am going to talk about the viability of MLM (multi-level marketing), I have to start with the massive disruption of the internet on the MLM model. It is much worse than the impact on car sales and when I say massive, I mean volcanic. I don’t think I am overstating it when I say that there is no bigger issue facing the MLM industry today. It is entirely likely that the internet and MLM in its current form really can’t even coexist in the long term. Something has to give.

Now don’t expect your MLM company to admit to that. They are likely going to claim that they love the internet and embrace it with open arms. However, the truth is they probably are dismayed for a simple reason: the internet introduces true competition into a business model that wants to avoid competition, and in fact can’t even exist with true competition (especially price competition).

What do I mean by that last sentence? Let me give you two specific areas:

  1. MLM products have to be premium (in quality and price) simply because the advertising cost of MLM is higher than traditional retail. In MLM, advertising is paid out in the form of commissions and other incentives. While a typical retail business might spend 20-30% of revenue on advertising, in MLM, that number is much higher if not double. The higher cost of advertising does not make the model unfeasible but it does make it very important to create the illusion of exclusivity so that price competition cannot be a factor. If you have to charge $10 for an herb and the same herb is selling in Walmart for $5, you simply can’t compete on price.
  2. MLM distribution is based on the concept of relationship marketing where people always choose to purchase from their friendly distributor. In 1990, there might have only been one distributor in town and thus no competition. However, think of what might have happened when another distributor moved to town and started poaching customers by offering better prices. If that happened, the MLM relationship model would have started to break down because customers would have started making buying decisions based on price rather than relationship. While on a small scale that is a manageable problem, consider how disruptive the internet has been. It is the equivalent of a hundred or so distributors moving into a small town and competing for the same customers.

The MLM industry has tried to address online competition in various ways. Some companies try to retreat into a shell like we still live in 1968 and forbid any internet marketing at all. That doesn’t work because it is not 1968 and it does not work because there will always be rogue distributors willing to break their rules. For example, there is not a single significant MLM company I know of that has successfully managed to keep their products off ebay and Amazon regardless of what their rules are.

On the flip side, MLMs that completely embrace the internet have struggled, too. If you go to the wasteland that Facebook is quickly becoming, you see what happens when all your friends are hawking their MLM opportunities to their friends. It is a lot of noise and it rarely pays off for anyone. Margins get squeezed as distributors get more and more desperate to get new customers and MLM companies spend a fortune trying to mediate disputes between distributors that are trying to poach from each other.

There are companies working hard to address this problem, but no one has real solutions yet. For example, some companies allow online marketing only through tightly controlled official websites that they provide to each distributor. While I understand that approach, it does not work in the long run because again, distributors eventually start going rogue. Other companies try to regulate the price their products are sold at. This is also problematic, both because it is close to illegal and also because companies like Amazon blatantly encourage distributors to flout those rules.

For MLM distributors, the internet is both a blessing and a curse. It is a blessing because it provides the opportunity to find a lot more customers. It is a curse because it allows other distributors to lure away those customers on their next order. That is the way the real world works of course, but MLM has never really worked well in the real world. Hence the dilemma.

I will talk more about this in Part 3.

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