The Bitter Economics of MLM

So I was going through my mail the other day and bill, bill, bill, bill, but then something slipped out of my stack, a small note printed on a scrap piece of pink paper.

"Hello, fellow neighbor.

I am inviting you to joining me in an exciting business opportunity.

All training will be provided, and you will be able to work from home.

This is very time sensitive.

Please contact Coco at this number for more information." "Oh, boy," I thought.

"This is the opportunity I have been waiting for.

Here I come, Warren Buffett.

I can't believe I've been working like a schmuck all these years." So, like the very intelligent person I am, with nothing better to do with my time, I called the number and agreed to meet for coffee.

A date was set, and I met Coco at a coffee shop, only to be greeted by a two-hour-long presentation on Amherbavon.

Wait a second.

This isn't the next Google.

This is a multi-level marketing business.

Multi-level marketing companies are big business around the world, and they have rightfully attracted much criticism for questionable business practices.

Many have called them illegal pyramid schemes.

But these companies continue to operate in most developed countries around the world and rake in billions of dollars in profit in any given year, all with the blessing of local trade authorities.

So what are these businesses? Let's park personal opinions on how annoying it is to be roped into some of these MLM meetings for the moment and assess the fundamental economics behind these businesses.

So for starters, what kind of businesses are they? Many businesses have referral programs.

It is likely you have seen offers such as, "Refer a friend and enjoy 50% off your next purchase," or even, "Refer a friend and receive $50 cash." These kinds of offers are pretty commonplace in general business world because any businessperson will tell you positive word of mouth is the best marketing one can receive.

It is pretty likely that most people don't have any major issues with this type of marketing.

If you and your friend both enjoy a product like pizza from a local pizza shop, taking advantage of one of these referral offers is probably seen as a win-win.

Multi-level marketing companies have, in a sense, taken this pretty benign business model and stretched it to its absolute limits.

Most multi-level marketing companies work by giving a referral incentive, mostly in the form of cash, to members who get other people to purchase product from the business, but then go one step further and give referral incentives for the people that are signed up by the people you signed up and on and on until you get the mother of all referral programs.

That is no longer just a marketing exercise, but the fundamentals of the business itself.

Now, I am not saying anything, but this kind of referral program, when laid out, does tend to make a curious shape.