Back in the 1970s, multi-level marketing companies became popular because they employed a delivery system that compared favourably to the status quo. The traditional delivery system was as follows:
Manufacturer ==> Wholesaler ==> Retailer ==> Consumer (e.g., the public)
Not only were there many layers but each layer enjoyed generous markups. For example, if you made a product (say, shampoo) for the cost of $1, you’d typically sell it to a wholesaler for $1.60. That wholesaler would then mark it up another 25% and sell it to the retailer for $2.00. Then the retailer would double that cost and sell it to the consumer for $4.00.
Back then, the litmus test for bringing new products to market was whether they could sell for four times their manufactured cost. Granted, each layer had to pay sales staff and shipping charges, but there was good margin in the retail trade.
Because of such profits, bursting entrepreneurs were dying to get in. They knew how to make products like soap, toothpaste, and shampoo—all they needed was a way to get them on the shelf. But getting shelf space for products from unknown manufacturers was virtually impossible (since large companies had it all sewn up) so entrepreneurs created an alternative.
What multi-level marketing initially did was take a product that cost $1 and sell it to consumers, through a dealer network, for $3.00. And this new method worked great because consumers got better pricing, new manufacturers got to sell wholesale, and people in the networking business earned cash—so everybody won. As a result, a new generation of home-based entrepreneurs was born.
But in the 1990s the traditional delivery model changed. Retailers like Walmart and Costco started buying directly from manufacturers, bypassing the wholesaler, and then reduced their markups. This resulted in lower retail prices—even better than those of MLMs.
Stripped of their price advantage, MLMs evolved into selling quality. Gone are the toothpaste, soaps, and shampoos that are cheaper. Today, the toothpaste is better for you and not available in any store. MLM products are now premium priced—and they have to be in order to support their existing model.
Granted these new prices come with claims of superior quality but much of it is emotional. And selling emotional quality is a different business since you need mass advertising to support the required perception. It’s hard to generate emotional value with just salespeople—especially when they’re inexperienced and only work part-time.
Multi-level marketing companies may have hit a wall. Their prices for ordinary products are too high and consumers will eventually figure it all out. Business models don’t work unless consumers somehow win. And sure, you can never underestimate the whims of people or the ambitions of an entrepreneur, but most of us will be buying our soap from Costco.
Then again, maybe their products are better.