By Romeo Caporaso

About Multi-Level Marketing

At some point in life, you might come across some multi-level marketing (MLM) or network marketing business opportunities.

Although incentives vary between companies, MLM often offers the chance to leave your 9-5 job, become your boss, sell products you believe in, establish your own business, make money, upgrade your lifestyle, potentially win a car or free trips, and make new friends in the process. And who wouldn’t want these?

People like MLM because of its low barriers to entrepreneurship. You’ll have access to training, an established system, support, and ample encouragement along the way. The overheads are low with no large capital requirements or specialist qualifications needed. Being a home-based business can also provide tax advantages.

Sounds exciting, right? But like any investment of time, money, and energy, you need to be aware of what you’re getting into and do your homework.

How MLM works

A sponsor or mentor will teach you how to sell the product and earn a small commission from your sales. MLM compensates you for the sales you make, and the sales of others you recruit—this creates a “downline” of distributors and a hierarchy of compensation levels. So, the more people you recruit, the more commission you make.

Why do companies choose the MLM structure?

1. No advertising: It’s challenging for companies to get their products and services “above the noise” using traditional, expensive advertising. MLM distributors sell the product through word-of-mouth to friends, neighbours, colleagues, and others online.

2. No staff benefits: Distributors are a sales force that works without benefits—for example, superannuation and health insurance. And of course, no retail outlets and overhead costs.

Four success tips

1. Keep your current job while slowly making the MLM transition:  MLM is not a get-rich-quick scheme and success is not easy. You need to develop success habits like discipline, hard work, organisation, self-motivation, and daily actions like sales. Treat it like a business and listen to those who’ve succeeded.

2. Believe in the product: Don’t just do it for the money or the chance to create a business. It’s unsustainable. Ask yourself these questions:

• Do you have a passion for this product or service? Has it genuinely made a difference to your life?
• Is the product superior to a cheaper but comparable retail product?
• Can you talk about this product in your daily life such as picnics, at the hairdressers, barbecues, and even when you’re tired?
• Are you comfortable mixing business with friendship? People may not want to hang out if they think you’re always going to pitch them.
• Are you comfortable with the long game? Many MLM companies promote a three-to-five-year plan towards financial freedom. But it could take ten years. And success is not guaranteed. Are you comfortable with that?

3. Have the time and focus: MLM won’t work if you’re busy with young children, already busy with another business, or a demanding career. MLM is ideally suited to someone without a job or who wants a career change but has been unsuccessful in finding alternative work.

4. Running more than one business is not a good idea: The old proverb says, “If you chase two rabbits, you’ll catch none.” Unless you’re Richard Branson—who has a huge team of support specialists—success normally comes from doing less but better. The difference with Branson is that he has the funds to invest in strong teams throughout each business.

Buyer beware

1. Before entering an MLM scheme, seek answers to these questions:

• Can you make a sustainable profit from just selling the product without having to recruit anyone? (If they prefer you to recruit distributors above new customers, this indicates that products are not driving the MLM company profits.)
• How quickly will you make money and how many distributors do you need to recruit to make money?
• What’s the average compensation and failure rate for part-time/full-time involvement?
• What’s the average expense of running the MLM company and does it exceed the average compensation

2. Be aware of ulterior motives: Few people like being “sold to” so the MLM pitch is often dressed up as “customer service” or “sharing your enthusiasm” (like recommending a movie). But when money is involved, it’s not innocent enthusiasm. Be honest with yourself and be clear on your ethics.

3. There are significant upfront fees: Ever heard of a job that you have to pay a fee to start working? You’ll probably pay significant upfront up-front fees for education and training. Ensure you’re ready to commit or accept the possibility of losing your investment.

4. Expensive products: MLM companies often sell decent products, but they’re usually expensive (to pay for the hierarchy of distributors) and require you to sell them aggressively to family and friends.

5. Don’t mix with your existing business: Introducing MLM to an existing business client base is usually a bad idea. It can make people think you’re not interested in your normal offering. You’ll lose focus on what you’re probably good at (remember what happens when you chase two rabbits). You’ll also lose some friends and clients in the process, regardless of your success.

6. You’ll probably lose money: 99.7% of people will lose money in network marketing.  So for every 1,000 people who join an MLM scheme, only three earn more money than they spend.

7. The tax advantages are overstated: Many people wrongly assume that losses can be offset against other income in Australia. The ATO generally only lets you use these losses to offset future business profits—not other income such as salaries and wages.

In summary

Hundreds of MLMs exist—some good, some bad. So do your research and find an MLM company with quality products, and a sustainable, fair compensation plan.

Still unsure? Call Tax Accounting Adelaide on 08 8337 4460 to discuss your MLM idea or business/career dilemma. We can examine the MLM compensation plans, annual reports, and income disclosure statements to determine if the MLM opportunity is worth pursuing.