Yup, rather than trying to persuade people that the thing they really really want to be not-a-scam is a scam, I'll just show that the numbers are grotesquely bad, and that should dispose of the matter. Who cares whether it's a scam or a legitimate business if you can't make any money doing it. In business, NET INCOME is the most important thing of all.
This is going to be a number-crunchy article and not elegant prose. I'm just dumping information on you here and counting on the reader to process it. This isn't a FAQ or a checklist. It's a warning siren. Heed it or don't. It's your money.
I am going to be referring to GROSS margins in this article. This is simply the selling price minus the price the store paid for the merch. There is some additional cost encumbrance due to freight, credit card interchange, and waste disposal. Yes, you try getting rid of sixty or more large cardboard boxes every few days. You can't throw those out with the dirty plates and napkins. But for simplicity we're going to treat it as a flat, clean margin that is "revenue minus wholesale."
As an anchoring point: The mass market has 65%-75% gross margins, based on the four-bucket model of their economic structure. They pay 25% of their revenues in labor, 25% in occupancy, 25% in COGS, and 25% to the bottom line, which includes debt service and advertising and is not by any means a take-home figure for investors, which tends to be about 3%, and for the true mammoth companies like Wal-Mart, often less than 2% of revenues. Their COGS figure is a split based on slightly higher cost for the goods that sell and returnability to the manufacturer for the goods that don't sell. Must be nice. In terms of the four-bucket format, apparel does better, while food does worse.
In small specialty retail, the best margins overall we get are for used merch, but that's also low-turn merch that sometimes fails to sell. Used merch averages 70% GM, though the real spread is bimodal between hot used stuff (key singles, top video games, etc) that we're paying 50%-70% of market price for, so as low as a 30% GM, and then all the bulk which we pay 10%-20% of market price if that, so 80%-90% GM but some may never sell. This is a very safe way to do business provided you have enough cash flow to pay the bills. The store will typically own all its inventory outright, paid for in cash, and be at liberty to give it time to clear, and when it does clear, the store operates in the black very quickly and free of encumbrance.
The best margins for new wholesale product tend to be around 55%-60% GM for stuff we source by pallet quantity, or publisher-direct with MOQs, or special offers from distributors, that sort of thing. This builds in a good hedge against deadwood titles and other stuff we need to clearance when it doesn't move.
The ordinary, day-in-and-day-out margins we get on new wholesale product, is 40% to 50% GM, usually in between. And crucially, at that ~55% COGS, small specialty retail brings home a final net averaging 3% to 7% of gross sales. We'll come back to that in a moment.
The worst margins we get right now are around 35% on Magic sealed product and stuff like Upper Deck and some kickstarters (for those stores that opt to go that way). Magic doesn't have an MSRP anymore so technically it's 35% or so against a "common price" that's not really "market price" but their kids go to the same elementary school, if you get the idea.
Wait, check that. THE WORST margins we get are for brand-new video games and systems, which are typically 10% or worse. But most small stores just don't carry that stuff. Used is... much better, as you see above. So the worst margins we get on the regular are like 35%.
What about MLM product?
Let's have a look. For selection here I've just opened the catalog and looked for something in the middle of the spread. This is not statistically robust comparison, but it's good enough for an altitude overview like this article. And I picked Young Living purely for easy recognition. They are not the only
Young Living Cinnamon Bark Essential Oil: $32.57 MSRP, $24.75 wholesale. (GM 24%)
The same stuff from a real wholesaler: $17.31 wholesale. (GM 47%)
A like substitute from the same real wholesaler: $4.96 wholesale. (GM 85%)
In reality nobody should be paying $32 for that tiny bottle of oil -- it makes inkjet cartridges look like a bargain by comparison, and doesn't actually do anything except smell nice -- so if we take the more realistic $10-or-so end-user willing-to-pay price, the like substitute from the real wholesaler has a fairly normal-looking cost of goods of around half (keystone) and doesn't even require you to burn bridges pitching marketing trash to your friends and family!
Seriously though on a gross margin of 24% you can't make any money unless you are in the grocery business running their economy of scale. Remember above where I explained that a GM of 45% or so will get you all of 3% to 7% final net income? If you give up 21% GM, that's way more than even 7%! You have forfeited all your net and more! Okay, so you might say, I do this business out of my home, I don't have to rent a brick-and-mortar location. But occupancy at small specialty retail isn't 25% like it is for mass. Occupancy at breakpoint rent rates is 8% for footage and another percent or two for utilities. That 24% GM still runs into loss even if you subtract out the entire occupancy after the final net, 7% best-case plus not having to pay our 10% occupancy, means you're negative 7%. You still aren't making any money. And oh wait, did you pay taxes yet?
Are you, the aspiring MLM entrepreneur, seeing clearly in these numbers yet how there is no way for you to make any money doing it as an MLM affiliate?
But hey what about other MLM stuff that isn't essential oils. Fair question. Let's look.
The best-known apparel MLM is LuLaRoe. They offer keystone (~50% GM) against an inflated MSRP, insulated by a MAP policy, for items that really would sell for less than wholesale at a volume level that will meet rudimentary turn rates. I mean, hell, I can offer you a 50% GM on anything I've got if you want to try to sell it for double the price I sell it for. Good luck with that? All day every day I am reaching to find ways to be price-competitive or to offer a value that makes up for the difference in price against the dumpers, or else it's a product where only brick-and-mortar can even source it, so we're all at or near MSRP. Don't you think if there was a great way to make double our money selling the same products to mainstream consumers every day, that somewhere in the literal marketplace of options, someone would be doing it? And yet no one is, except MLMs.
Apparel at mass market is a 90% GM reality. Those sweatshop kids in Bangladesh earn very little making shirts and sneakers for export. I'm not a big fan of that degree of exploitation, but ultimately I'm not a third-world despot and I am not in charge of that. In any event LLR is such an awful deal that other intermediators have popped up to take advantage of the huge apparel manufacturing gross margins and offer aspiring home business entrepreneurs a modestly better program, though it still won't stand up to the economy of scale the titans achieve. But you could, could, after spending untold hours and hustling those Facebook groups and that flea market stall, actually make some money and not lose money, by using one of the LLR alternatives like that link, that are not MLMs. You could do still better if you sourced the goods further along the chain, closer to manufacture. And crucially, even then you would not be in a competitive position against the mass market, which is extending its collective lead faster than any small business can catch up. Your sales will come at the sufferance of friends who don't want to see you do poorly. Most people will just get their apparel from mass-market channels like they've been doing. And it will personally upset you when you see them do it, which they will do without thinking or even noticing, for things that are already in your inventory today.
I will look at one more MLM in a different category, Pure Romance, purveyors of rubber ding-dongs and other toys and accessories by means of adults-only "passion parties." In order that this blog doesn't get flagged for explicit content, I am not going to link products directly, and anyone wanting to verify this information will have to do research on your own. So the thing about Pure Romance is similar to LuLaRoe: the mass market already dominates this space, and so on top of the cultural norm that you're selling products that have to be kept out of plain sight, to some extent, because won't someone please think of the children!, blah blah prurient interest and so on, you also have to face the reality that the $189 phallus-shaped "massager" in the passion party catalog will cost an end consumer all of thirty bucks via AliExpress or some other China-direct shipper. Which means even the 50% GM that Pure Romance offers you, still has you paying wholesale of like $94 on that thing, and anyone who cares to have one can get it without your involvement for way, way less. Which means unless you have some pretty spendy friends who don't know how to use smartphones, you're going to be hard up (pun intended) to move that merch. It's a bad deal for them and an even worse deal for you. I will credit Pure Romance that at least you can use their vibrators for... things you'd use a vibrator for. Not so much with essential oils, which have no medicinal efficacy and yet every boss-babe hun this side of Pinterest claims will cure your cancer through nice feelings.
In the 1990s, I made the mistake of looking for easy money through an MLM called Equinox International. They sold overpriced vitamins and water filters, mostly. But even the company itself was structured as a means to prey upon uninformed would-be businesspeople like me. The Equinox ownership created a spin-off company called Advanced Marketing Seminars, which charged a premium to affiliates to attend weekend-long sales pep rallies for Equinox products at various hotels and convention centers around the country. Equinox itself was set up to make massive money for its principals, largely at the expense of affiliates, but even if they had to spend tons of money depreciating out spoiling inventory or fighting lawsuits or whatever, they had this secondary company charging top-dollar to present "marketing seminars" and it was bulletproof, in and of itself. Nobody could realistically claim AMS was not delivering the marketing seminars that affiliates paid to attend. Yet AMS would not exist except for the underlying MLM that was its only client. Equinox founder Bill Gouldd would be banned by court order years later from ever working in the MLM industry again. I lost a few thousand dollars and burned some bridges I wish I could have back.
Hopefully this article will dissuade at least one person from throwing their money away on an attempt at MLM business. If you want to run a business, start a real business. Do research. Source your goods (or tailor your professional service). Raise your capital. File your articles of organization. Get your tax and banking foundation set up. Then find commercial space if you're going to need it, or if not then set up your virtual commercial footprint on the web and in social media. Provide great deliverables. Delight your clients. And don't apologize for making money. Use that money to improve your life. And good luck.
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