Why Internet Based MLM Opportunities Will Never Work

By Len Clements © 2003

There were times in our country’s history when both the automobile and television were considered by some to be nothing more than passing fads. In the 1960’s many folks, including those with the highest intellect and reason, laughingly scoffed at the idea that someday we’d all have computers in our homes. I suspect there were even some among the most astute of the cro-magnon who grunted with amusement over Og’s silly wheel idea.

And then there was that guy who, back in 2000, said internet based MLM would never work.

While some may suggest I have a severe lack of “vision,” I believe I’m one of the few who actually has their eyes open. In fact, from my objective, outsider’s point of view, I think I can see through the smoke and blinding glitter that seems to be surrounding this new, hot segment of network marketing. Let’s fan away the hype and see what’s underneath.

First, a caveat…

Yes, the internet is, and will continue to be, a phenomenal tool to help us present our opportunities. Soon, on line, live video opportunity meetings and training sessions will be commonplace. I see a day when brochures, applications and order forms will be all but obsolete. The U.S. mail will be virtually void of audio cassettes, which will then be downloaded off the net in a matter of seconds. And yes, people will be ordering cookies, shampoo and vitamins from their company’s web site, which is already a common practice. I’m not talking about this stuff. This is all fine and dandy (and will get far dandier in the near future). No, I’m talking about MLM programs that are based solely or primarily on either recruiting over the net, selling web sites, internet access, or other company’s products.

Once you crack through the brilliant chrome casing and really see what’s inside these “opportunities” you’ll discover the monumental challenge they will all face – there’s simply not going to be enough sales volume to generate any significant income. Think about it. Let’s say you sell web sites for $100 per year. Okay, all of you who are in one of those old “lotions and potions” companies (the derogatory term most service based MLMs use to define personal and health care products) imagine what would happen if every person in your downline were generating only $8.33 per month in commissionable sales volume. Well, that’s $100 divided by 12. I don’t care if the company pays out a whopping 70%, they’re paying out 70% of an average $8.33 per month, and then they have to divide that among several levels of distributors. When you look at MLM ISP’s (Internet Service Providers) the picture gets even uglier. The best monthly rates I’ve seen fall around the $7 level (although some MLM ISP’s are charging two to three times that much) and paying out little more than half in commissions (which, again, is then spread across several levels of distributors). Not unlike long distance service, as competition continues to drive the price down the consumer will benefit, but the networker trying to make a living selling to them will suffer.

E-Commerce based MLMs will be the most challenging of all. Remember, I’m talking about deals where you can buy name brand products from many vendors (think Amazon.com if they were MLM). Let’s follow the flow of sales volume (or, lack of such in this case). First, you must enroll someone in your downline. Second, they must actually buy something from your web site. Third, the company, which is typically a reseller (a middleman between the supplier and the buyer) only counts about half the volume as commissionable (as in 50% BV). Fourth, they pay out, let’s say 60% of that in total commissions. Fifth, that portion is then divided among, let’s say, seven distributors upline to the sale (assuming a common seven level pay plan). Therefore, you get 14% (one-seventh). So, of whatever sales volume is generated by that new recruit you just placed in your downline, you’ll be paid 14% of 60% of 50% of it. I’ll do the math. That’s 4.2%. And both the 60% and 50% assumptions are extremely optimistic.

Oh, but those people can buy cars, and expensive jewelry, and book thousand dollar travel packages – they can even buy houses off the net now! Yes, they can. But, they’re not.

The U.S. Department of Commerce does not yet provide definitive data regarding e-commerce (although they have announce their plans to do so by mid-2000), so for now I have compiled statistics based on a number of surveys conducted by web related business, university studies, and estimates by industry analysts. The general consensus is that about $9.5 billion was spent on-line in 1999. However, the percentage of those on-line who bought anything, even once, ranged from 20% to 38% (depending on the source of the data). What’s more, the average shopper purchased only nine items all year, and spent a total of $475. What would create an even greater challenge for an MLM distributor trying to earn a living is the fact that about one-third of the total annual purchases made on-line occurred between November 25th and December 25th. Thus, those in your downline who are ordering would purchase an average of $28.93 per month for 11 months, and $156.75 in December. Based on the very optimistic 4.2% we arrived at above, and that 38% of all those on line actually order anything (based on the most optimistic data I could find) you would earn about 46¢ per person in your downline in each of the first 11 months of the year. And this isn’t even factoring in the fact that only about 45% of all Americans are “wired” (currently have direct access to the internet).

To put this in perspective, a $3.00 per distributor earnings ratio is considered weak by today’s standards. Most tangible, consumable product companies are paying anywhere from $4.00 to as much as $9.00 on the sales volume of each active downline person. Not because the comp plans pay so much more, but because so much more sales volume is moving. For example, I have one, al beit exceptional, retailer in my downline who moves $2,000 to $4,500 in volume each month. That’s one distributor! It would take dozens, perhaps even hundreds of people to generate the same sales volume in an MLM opportunity selling web sites for $8.33 per month, internet access for $9.95, or on-line purchases of which $15 is commissionable. I agree a retailer moving $4,500 in a month is an aberration, but the point is, a spectacular event like this will never occur in an internet based MLM opportunity. The monthly cost of a web site or internet access is a fixed amount, and commissionable on-line purchases by any single downline member will likely never reach these levels in a single month, let alone every month. Even if we consider the more common monthly volume figure of $100 (the average monthly purchase in five product based MLM companies that I know of who disclose such numbers is $109) it would still take 7 to 12 times as many downline distributors in a net based program to achieve the same sales volume.

The internet revealed even more interesting data about itself. For example, 57% of those on-line use the web to research their purchases, then actually bought the item by conventional means (phone, or in person). Only about 12.5% went on-line specifically to purchase something (78% did so just to browse around, 64.5% were just looking for entertainment, and 51% used the web for research).

Several internet related MLM programs have recognized the severe volume shortage that exists and attempted to compensate for it by introducing $200-$495 training or start up packages. The bonuses that are paid on these packages can be substantial, but they create two new challenges. First, it’s a non-consumable, one time sale, thus a one time income. Second, it’s very likely illegal. Based on numerous legal precedence, an MLM company would be at great risk of regulatory attack by paying bonuses on a “product” that was not retailable to a non-distributor. Such bonuses would essentially be a reward for recruitment since, obviously, only new recruits would purchase the initial package For example, there are a growing number of schemes going today where you pay $200 to $900 for access to an internet mall (with links to Amazon.com, Barnes&Noble.com, etc.). You earn a percentage of all the purchases made by those in your downline who visit the mall. Although the pay outs appear high, it’s on only a fraction of the sales volume (one popular deal shows a 100% pay out down 9 levels – but only seven percent of the volume is commissionable!). The challenge is that the $200 to $900 is also used to pay upline bonuses and this is clearly sales volume that is entirely based on recruitment. Obviously, these malls are not “products” you can mark up and resell to non-participants in the income opportunity. In fact, I just got a post card from Citibank offering me access to an almost identical conglomerate of online shopping sites (where I’ll receive discounts if I use by Citibank card) and access to the entire mall is completely free!

There are a growing number of downline building systems, and in a few cases even entire MLM programs, where the entire recruiting process is automated. People just go to a web site and sign up! First of all, signing up does not necessarily mean they’ll order anything. Many of these systems are based on just placing people in a matrix and hoping some will get inspired to try a few products. Essentially, they create a hierarchy of prospects, not distributors. Even those internet based recruitment systems that do generate product ordering distributors are building a house of cards on quicksand. Don’t we want astute, committed folks in our downline? Don’t we want people who are taking this potentially life changing decision seriously? I mean, we are talking about someone’s career, their livelihood, how they are hoping to feed their families someday. How seriously can a person be taking this decision when it’s based on their viewing a few colorful pages of a web site? The “network” in network marketing isn’t referring to computer networks, folks. It’s a network of people. People talking to each other. The internet is and will continue to be a phenomenal tool to help us communicate the benefits of our products and opportunity, but it will never be able to do it for us. Not completely. Nor should we ever want it to.

Many proponents of MLM e-commerce would surely counter my lack of sales volume argument by pointing out the massive growth of e-commerce (most estimates show internet sales increased 10-fold from ’98 to ’99). Granted the number of folks surfing the web will continue to increase dramatically over the next few years, but then, so will the number of sites they can order from. This massive proliferation of internet based vendors will be wonderful from a consumer standpoint, and a nightmare from an “income opportunity” standpoint. Although overall internet sales will increase, clearly the average purchase volume (per person) from any one particular site is going to go down as competition increases. Those purchases will be spread thinner and thinner over more online vendors. Sure, you’ll have access to more people who you can enroll into your downline, but the competition for them is obviously going to increase as well as more and more e-commerce based MLMs start up (the fact that a certain concept doesn’t work with MLM has never stopped anyone from trying it anyway – look at the number of downline building schemes, portfolio deals, Australian compensation plans, and discount buyer’s services that start up each year).

Another common counter-point to my position is Amway’s Quickstar. There’s some really big bucks being made there, so I’m wrong, right? Well, sure, when you have an already existing Amway downline of several hundred, or several thousand people, and when there’s a gold rush mentality that sweeps through the industry causing otherwise loyal, committed MLMers to jump over in droves in hopes of landing a prime spot to ride the wave, some money is going to be made by somebody. I’m talking about the average man or woman who’s starting from scratch. I’m talking about duplicatable success.

Remember, the gold rush didn’t last very long, and very few struck it rich.

About Len Clements

Based in Las Vegas and Founder and CEO of MarketWave, Inc., Len Clements provides consulting, training & expert witness services for the network marketing industry. Since 1989, he has been a top producer, trainer, and consultant for multiple network marketing companies. As a well-respected icon in the MLM industry today, Len conducts Inside Network Marketing seminars throughout the world and is the author of several best-selling books and audio tapes including Inside Network Marketing (Random House), Case Closed, The Whole Truth About Network Marketing and The Coming Network Marketing Boom.