Over the last couple of weeks, I wrote about the match behind a multi-level marketing business like Amway, how the expected value could be worse than the lottery, as well as the sales elements in recruiter’s pitches that could help you recognize that you’re in a MLM pitch. In this final part of the series, I’ll use some of my economics background to explore the incentives of the target (you) and the recruiter.
When a friend or acquaintance reaches out to you it is easy to open up and be receptive to new ideas. As someone who is targeted for a MLM pitch you shouldn’t feel bad for picking up the phone and connecting with someone you know. It’s normal to want to catch up with someone. However, you should be self-aware of your financial situation when going into a pitch or hearing about an opportunity. It is the unfortunate reality that pitches by MLM companies like Amway appeal most strongly to people with the least economic means.
In the context of an MLM pitch, the opportunity cost is how a person spends their time and money if they do not become a salesperson for the MLM company. They could spend the additional time advancing their career, networking, starting a different side hustle, etc.
Low Opportunity Cost Scenario
A person with limited economic means might have limited or no potential income growth in their current career path. This could be because of a lack of education, disability, or any number of reasons. The point is that spending time doing what they are already doing is not likely to make this person wealthy. Even with a low probability of success, the potential to earn more money could be tempting to a person who otherwise has few opportunities.
High Opportunity Cost Scenario
In contrast, a person with high income potential and career growth is more likely to reject a poor MLM marketing opportunity. In this second image, the payoffs for accepting the MLM idea are exactly the same. The only portion that has changed is their opportunity cost of advancing their career. Even when a person correctly identifies a MLM pitch and recognizes that there is a low probability of success, they still might try to succeed in the MLM business. This is often because the slim chance of success exceeds the alternate options that the person has.
Recruiters know that they are selling a hope and a dream and the attendees of the upline meeting that I attended reflect people with limited opportunity costs. The other targets brought to the meeting included a pair of home physical therapists, a recent college graduate, and a gentleman living on disability payments. While a wealthy physician or lawyer could lose a thousand dollars without being adversely impacted, these individuals likely need every dollar they can get. A financial advisor with a fiduciary duty to look out for their best interests might makes sure that they first setup an emergency fund and contribute to retirement accounts. Instead, the upline recruiter shamelessly pitched the Amway business model and advertised $175 seminar tickets among other extras.
Some MLM businesses have existed for decades. If it’s such a bad bet like I’ve written, then how is it possible that these companies still exist? The answer is that the business model is working for some people who have large enough teams
The new seller with a small team
For many of these multi-level marketing businesses it is difficult to succeed solely by selling products, so we’ll ignore the case where someone does not yet have any team members. As a quick aside, if you’re friend or acquaintance first introduces you to their upline rather than their own team then they likely don’t have their own team.
For someone with a small team, they might just be breaking even or earning a small amount of income from the MLM after accounting for expenses. They might have joined with the hope to make money as a side gig with a legitimate opportunity yet seen others around them struggle to succeed or reject their pitch altogether. These setbacks could cause the new seller to reflect on whether the MLM is a worthwhile use of their time and a benefit to those around them. After several months of trying to sell and recruit they may realize that their odds of success are lower than they originally thought and conclude that they are better off directing their time and money to the primary job or a different side gig.
Living long enough to become the villain
Even though the expected value of Amway and other MLMs is poor, there are still some people who manage to rise up through the ranks. For someone that has been in for some time and is actually making some money, it is almost too late to change their mind. For starters plenty of people who achieve success like to attribute their success to their hard work rather than luck. They might reason that they succeeded because they worked harder than everyone else who failed along the way. Secondly, they’ll also be tempted to remain with the MLM because they are making money. Quitting the MLM now means that the seller gives up a potentially lucrative side hustle/ They are both more likely to increase their income with the MLM and forced to give up their income stream if they cut ties. Even if you convince your friend that the money is flowing to them off the backs of the people they recruit, they still need to make the ethical choice to reject the money.
I want to close by thanking my friend for pitching Amway to me. Without reaching out to me, providing your pitch, and connecting me with your upline for a pitch, I wouldn’t have been able to get the material for this three-part series on multi-level marketing businesses like Amway. Your advice to bring a pen was a key moment that convinced me to collect more information in the upline meeting rather than immediately convince you that your actions as an Amway distributor serve to destroy the financial health of those around you.
Here are some of the key points I’ve seen in revisiting the Amway pitch firsthand:
- MLM businesses primarily rely on selling hope and appeal most strongly to people who have the fewest financial resources and/or least knowledge of personal finance
- The pitches often leverage a personal connection. The personal connection to the recruiter can make it difficult to recognize the pitch for what it is, especially for young people who haven’t seen a MLM pitch before
- A small number of people can succeed but their success comes at the financial cost of the people that they recruit
- Recruiters are not above appropriating ideas such as FIRE into their pitches even though their proposal is likely to leave the target worse off financially
- A recruiter might truly believe in the business for several months or even years before they realize that they have been taken advantage of
- For the small percentage of sellers who find success, they will eventually understand where their financial success comes from and will need to make an ethical decision to turn down the money they are bringing in
Here are a few other resources that you can visit to learn more about MLM businesses from people who have been directly impacted:
THE CASE (FOR AND) AGAINST MULTI-LEVEL MARKETING: The Complete Guide to Understanding and Countering the Effects of Endless Chain Opportunity Selling – or Product-based Pyramid Schemes (centerforinquiry.org)Log in or Register to save this content for later.