The Economics of Network Marketing: 3 Things These Companies Won’t Tell You

About two years ago, I had a friend who contacted me, explaining that he had a “business offer” for me. He sent me a link to an audio file, a spiel from the author of the book, Rich Dad, Poor Dad, Robert T. Kiyosaki. I’m a pretty skeptical guy, and I found the audio to be rather distasteful. It contained mostly emotional jargon, rather than solid facts about network marketing. After listening to it, I found that I still knew just as much about network marketing as I had before: nothing.

Regardless, I have a lot of respect for the friend who contacted me, and I agreed to come to his house later so he could explain this business offer to me in greater detail. Once there, he sat me down and began a long speech explaining how the company worked. It was a lot of information to take in, and some of it seemed suspicious, however, I was open-minded about the operation. The main points were: you can buy these products for discounted prices, and you can sell them for a profit. If you don’t want to sell, you can reach out for more people to join the group, in which you can also profit from them joining.

Later that night, he held a meeting for everyone involved in the group; these people were called distributors. About 10 people showed up, and from the moment they came in, none of them could stop talking about how much they loved the company. In my mind, it was rather disturbing, cult-like. Here were a bunch of college kids, most of which really didn’t understand the first thing about business, yet they all labeled themselves business owners. And then the leader of the group, an adult, came to the house. He sat down next to me, and began explaining how much money I could make from this group. Throughout our entire conversation, not once did he explain to me how I supposed to sell these products. Every time I asked, he never gave me a straight answer, so I kept asking.

“But how do we sell these products? Who teaches everyone how to sell?” I asked for the fifth time.

“Oh yes, we will teach you, but you don’t have to sell if you don’t want to. Just find more people to join the group and you will make more money.”

That’s when it dawned on me. I was not a business partner, I was the customer.

Now before I write this, understand that it is possible to become successful as a network marketer, and it’s possible to learn valuable skills in such groups. However, there is a risk in joining such companies. You have to know what they’re not telling you. Here’s 3 things that network marketing companies won’t tell you:

1. Their Business Model is Crap

Let’s look at a normal business, how about Nike. Now all businesses, including Nike, are forward looking. Nike doesn’t wait until Summer rolls around to start producing Summer shoes. Companies such as Nike will begin producing Summer shoes far in advance, because they need time to test the product, collaborate distribution deals, etc.

Companies like Nike also have predictable buying times. People tend to buy more running shoes in the Summer compared to Winter, so Nike knows that they will need to produce more running shoes for the Summer rather than the Winter.

Network marketing companies have no real trends when it comes to buying their products. Their products are sold by informal distributors, regular people, who can sell their product at any time. This means that network marketing companies have to constantly produce their products to support such random buying.

The only way a company like this can stay in business is to have a consistent buying source, i.e. members of the network marketing group, the distributors, not actual customers.

2. The Real Customers Are Those Within The Network Marketing Group

As outlined in the first point, a network marketing company could never succeed without a consistent buying source. That source is the distributors of the company. This is why none of these companies focus on teaching sales tactics. Their main goal is for you to go out and find more people to become distributors. The company’s illusion is that it makes you think that distributors are actually selling these products to regular people, but the truth is that it’s really the distributors that are propping up the company.

Network Marketing giant Amway was brought under scrutiny because there were reports saying that most of it’s income, 70%, was coming from its distributors. The CEO of Amway then stated that half of his income was from distributors, although there was nothing to back up this claim. Half of the company’s income is still incredible, seeing that Amway is a 1.5 billion dollar company.

There is a great risk in becoming a part of a network marketing company. If you can sell ice to Eskimos, then this kind of work may be your niche, but for most people, selling these products will be a hassle.

You just have to understand, if you become a distributor of a network marketing company, you’re the real customer.

3. You Probably Won’t Make as Much as They Tell You

The products that these companies want you to sell are very cheap and very hard to sell. Most of the time, the products are protein supplements or energy drinks. It’s hard to sell these kinds of products because those who consume these products most likely only buy specific brands that they’re used to having in their routine.

A report coming from Network Marketing expert, Robert Fitzpatrick, found these shocking statistics from his research.

99% of distributors from 11 network marketing companies (including Amway), made only $13 a week. This is less than the costs of the products you must first buy in order to qualify as a distributor.

The turnover rate for each of these companies is upwards of 60–90% a year, and ex-distributors tended to stop buying the products after leaving, meaning that they only bought the products with the intent to sell.

In half of the companies studied, 70% of distributors earned no profit at all.

It’s easy to understand why so many people fall for these companies. When I went to that meeting at my friend’s house, I saw 10 eager college students, sucked into an atmosphere of hope. I saw how the group leader spoke to these kids. He told them that they would become successful if only they stuck to the program. It’s the psychology of the group, the social proof factor. Even though none of these kids knew a damn thing about business, they were told that as long as they found more friends to join the group, they could become a successful business owner.

Hacker Noon is how hackers start their afternoons. We’re a part of the @AMIfamily. We are now accepting submissions and happy to discuss advertising &sponsorship opportunities.

To learn more, read our about page, like/message us on Facebook, or simply, tweet/DM @HackerNoon.

If you enjoyed this story, we recommend reading our latest tech stories and trending tech stories. Until next time, don’t take the realities of the world for granted!