My goal with this post is to try to answer some of the more popular questions that we get asked about multi-level marketing (MLM). Why write about it? Besides the fact that my wife and I are involved in one, and it’s made a significant impact on our income, the number of physicians getting involved these days is huge.

My goal is not for everyone to go out and join an MLM company. I absolutely do not think it’s for everyone, but some will be successful if they understand it and treat it for what it is, another job. However, the flexibility, scalability, and potential for residual income are what drew us to the business.

Just like some businesses or investments you can get involved in, not all MLMs are legit or good opportunities. So please do your due diligence and understand what you’re getting yourself into, just like anything you decide to devote time, energy, and money towards.

1. What is multi-level marketing (MLM)?

It’s a business model in which products or services are sold by distributors (may also be known as consultants, promoters, etc.) for which they receive a commission. The distributors may also receive compensation on the sales of a recruited sales team (not unlike some franchise – franchisee models). The model may also be referred to as direct sales or network marketing.

2. How does one typically get paid?

The basic premise is this – the sales distributor is compensated in two ways:

1. On their own sales of the product/service to customers, and
2. On the sales of the recruited team

However, the specifics can vary widely among different MLM companies. This is where you want to do your due diligence.  If a compensation plan doesn’t seem fair (only the early adopters are making money) or you have a tough time understanding it (it’s super convoluted), this may be a reason for pause.

3. Is it a pyramid scheme?

It helps to define what a pyramid scheme is: an illegal business model that recruits members and promises a payment based on enrolling other future members. The key is that members only make money by recruiting, and there is no valid product or service offered. As recruiting continues and multiplies, this model becomes unsustainable, and people who join the business later are unable to make a profit as the money only funnels upwards.

Some MLMs can absolutely be a disguised illegal pyramid scheme. So it’s important to do your research and ask some key questions:

1. Is there an actual product or service that customers have a demand for? (Do you know people using that product/service who are not also distributors for the company?)
2. What percentage of sales are to actual customers?
3. Do you have to buy a lot of inventory to sell to make money? (This may be a way for the company to “sell” product to their own distributors.)

4. Are multi-level marketing products inferior?

This one is hard to answer because every company and product/service is different. However, just like with any other product, do your research. Read reviews, look at customer satisfaction, and take note of their return policies and rates. A good company will stand behind their product and have a generous return policy and low return rates.

5. Why is the success rate so low? Why do so few people make money?

Indeed, there are studies that state that 99% of people involved in an MLM as a business lose money. Why is this?

Imagine a traditional business, for which someone may have spent a few years studying and building from the ground up, and perhaps taken out a small business loan – that entrepreneur is highly likely to work extra hard and stick it out for those first few rough years. There has already been so much time, money, and effort invested. It is not unusual for a small business to be in the red when it first launches; in fact, some sources say it takes an average of 18-24 months for a small business to become profitable (if it even survives).

In contrast, the barrier to entry for most MLMs is quite low – often a few hundred to thousands in initial start-up costs and no prior experience or training necessary. The unfortunate truth is, most MLM entrepreneurs are far less likely to stick out those first few tough months to years of business – giving up and calling it a loss.

There may be additional factors, like people joining the business for the company discounts. But I believe the largest factor for why the success rate for MLMs is so much lower than the typical small business is the failure for many people to realize that this business model is not a get-rich-quick scheme and requires persistence and patience. All businesses require upfront work, even if the initial costs might be lower and startup process may be easier in MLMs.

6. Why are so many doctors doing it?

Nowadays, many people can appreciate flexible, alternate sources of income, and physicians are no different. With the increasing difficulties in medicine (which I’m not going to get into. If you are here, I’m assuming you are well aware), more and more physicians are looking for other options.

However it’s not without controversy (see question 3), so the last thing I would want is for physicians to get into something they don’t understand. Same goes for any type of investing from the stock market, to real estate, and to angel investing.

7. How much time does it take to run an MLM business?

In our experience, the ones who do well are the ones that treat it for what it is, a true business or job. They are willing to put in the consistent effort it requires to get any new business off the ground and running. (See Three Days in the Life of Mrs. PIMD.)

Having said that, for most MLMs, the initial startup “headaches” are taken care of for you: website, legal, product development, branding, etc. So as an entrepreneur you can hit the ground running with the focus on marketing, which is where the profits tend to be and why these business models are so appealing. And like with any business, the more time you put in, the more returns you can expect to see – and this is entirely up to you.

“Passive Income, MD” is a physician who blogs at his self-titled site, Passive Income M.D.

Image credit: Shutterstock.com