Debunking the 99.9% Myth – Again
The other day I read a blog post where someone had once again asserted that 99.9% of direct sellers lose money. It’s an eye-catching line and it’s memorable. It’s a line that’s often repeated by opponents of direct selling as means of discouraging potential sellers. It’s also false.
In fact, more than half of direct sellers report that their net income from direct selling, after taxes and expenses, is positive. In addition, positive net income is reported by nearly half of new direct sellers – those representing their current company for less than a year. The research from our sales force survey also shows the following:
• 89% of direct sellers rate their personal experience in direct selling as excellent, very good, or good;
• 84% of direct sellers say that direct selling meets or exceeds their expectations as a good way to supplement their income or make a little extra money, and;
• 91% of direct sellers say that direct selling meets or exceeds their expectations as a business where the harder they work the more money they can make.
Does this mean that all of these people are making six-figure incomes? Of course not! In fact, most are probably earning very modest amounts – exactly meeting their goals. One of the advantages of direct selling is that you can set your own goals and develop your own schedule to meet those goals. Many people begin direct selling as a way to earn a little extra money in their spare time – they’re not looking for a fulltime job.
I’ve always found this 99.9% myth fascinating because it essentially asserts that nearly 15.2 million people in the U.S. and 60 million people around the world continue as direct sellers despite losing money. Are we to believe that five percent of the U.S. population would continue in a business where they are losing money? Simply put, most people do not lose money in direct selling.
Further, anyone who gets involved with a legitimate direct selling company should not risk financial loss by doing so. The DSA’s Code of Ethics, for example, is designed to protect direct sellers and customers. Inventory buybacks (which include sales aids) and other provisions of the code allow sellers recourse if there’s an issue with the company.
It is my hope that everyone who tries direct selling will begin with reasonable expectations and a clear understanding of the path to their goal – hopefully information found on this site will help with that.
Certainly, direct selling is not a fit for everyone – but no one should risk financial loss by giving it a try. Managing expectations for new independent sellers is critical for success, and is an issue I’m sure we’ll address more than once on this site.
The bottom line is, just as it’s wrong to tell someone considering the direct selling opportunity that they’re guaranteed to succeed, it’s just as wrong to tell them that 99.9% of direct sellers lose money and that they’re guaranteed to fail.
Tags: 99.9%, direct selling, MLM
May 16th, 2008 at 9:11 pm
Amy…
Retail selling gives direct sales legitimacy. Many people are involved in MLM businesses who focus almost entirely upon buying a quota of products monthly, and upon recruiting others to do the same thing. It isn’t likely that any degree of creative accounting could ever make these recruit and consume distributors profitable. They invest their own time and money in hopes of achieving some dream “jewel” level of success that only less than 1% of active distributors ever achieve. In other words, 99% of active distributors do not achieve the “success” level of the business which is so highly touted during recruitment. Incomes at these success pin levels are usually described in the 100k dollar range. Hardly the kind of money necessary to live the lifestyles of the rich and famous. Videos and pictures showing luxury Lear jets, automobiles, mansions, and the Riviera are not likely to be attained, so why do so many recruitment meetings incorporate these images into their presentation?
Pursuit of a dream probably sets many up to be the long term losers in a business where no retail selling is pursued.
Amy, as you suggest, not everyone gets into direct selling for such “pie in the sky” objectives. Like in any business pursuit, where a product is retailed, there is a potential of net profit after costs are accounted for. Large layouts for training materials, attendance at rallies, and transportation costs may make these achievements difficult if not impossible.
Many companies focus attention on the dollar amount of commissions paid to distributors but do not take into account the real world expenses these distributors absorb. On top of these expenses, how many distributors place a dollar figure on the time they invest?
Tax accountants take a dim view of MLM and independent surveys of tax accountants reveal that most distributors in direct selling businesses report loss from year to year. There are exceptions of course, but these usually involve the tax returns of “early adopter” kingpin distributors and “company executives” whose returns make up such a small percentage of total distributors. A tax write-off hardly seems a legitimate reason to be involved in the biz.
I can’t say that everyone in direct sales loose money, but I can say that there are a fairly high percentage that do regardless of how much optimistic personal accounting a distributor might do.
May 17th, 2008 at 3:00 pm
Perhaps you could cite the source for your statement that “Tax accountants take a dim view of MLM, and independent surveys of tax accountants reveal that most distributors in direct selling businesses report loss from year to year.” Seems like a pretty generalized statement to be making without a source. I’d like to know more about the “independent surveys” that have come to this conclusion.
May 17th, 2008 at 6:53 pm
Amy…
I notice that you only refer your optimistic stats to a DSA survey. I have no problem with that. You present the positives with no reference to any negatives. Were former participants also surveyed in your study?
One study that I use to support my comments is from the Consumer Awareness Institute:
http://www.mlm-thetruth.com/tax_study.htm
Tracy Coenen, a fraud accountant has written many articles and is another good source of accounting information regarding fraud and fraud investigations of MLM direct selling companies.
You have probably heard the line, “There are fibs, there are lies, there are damn lies and then there are statistics.” I realize that numbers can be compiled and manipulated to reach whatever conclusion the presenter wishes to assert.
When bias is involved, pro or con, it pays to be skeptical. Anyway, your survey and CAI’s survey are as different as night and day.
I basically have no problem with your study unless you claim the information I site is biased because I can make the same argument about yours.
It pays to be skeptical about any number that get bandied around as fact, especially the 99.9% number you have made the subject of your post.
I just urge people to carefully research whatever opportunity they are considering both pro and con. Sometimes the truth lies somewhere between. I don’t automatically believe every and anything I read even if it is critical of Direct Selling.
So far I’ve enjoyed reading your blog. You present intelligent thought which has the power of persuasion. You post a pro blog, I post a con blog. We’ve found middle ground before.
May 20th, 2008 at 10:01 am
Q-
I absolutely agree that one must consider the source of any statistics. I think my stats speak for themselves, and their credibility is backed up by the research firms that conduct the studies - respectable research firms won’t risk their reputation by fixing the numbers regardless of who pays for the study. If I were going to inflate the numbers, I’d add in those people who report no income or loss because they are wholesale/discount buyers.
You state that you have no problem with my study as long as I don’t have a problem with the one you quote. It’s not surprising that you and I would choose to quote different studies, which is fine, but when you then use that study to make generalizations as broad as “Tax accountants take a dim view of MLM and independent surveys of tax accountants reveal that most distributors in direct selling businesses report loss from year to year,” I think that deserves a deeper look.
After reading the methodology for the tax study, I think it’s only fair to point out that the study group was a sample of 33 tax preparers from three counties in Utah who were asked what they recall about returns they have completed. Readers can review the document that describes the study for themselves; here’s the link again: http://www.mlm-thetruth.com/tax_study.htm. As far as I can tell it has no scientific basis and was conducted directly by someone with a stated anti-MLM bias. The author even says getting the data was not a straightforward task. He says: “It was tricky to get tax preparers to give out the information I sought. Since it is considered unethical for tax professionals to divulge confidential tax information of their clients, I had to approach this survey very delicately. I began by sharing that I had learned from other tax professionals.” That doesn’t seem like a very objective way to collect data. Had the study been conducted by an independent research firm with a broader sample and actually used hard numbers instead of “recall,” perhaps it would have more credibility. Given your healthy level of skepticism, I am surprised you would find this study credible.
In the end, I think we still agree that one should always be skeptical of stats – as you do state you are as well skeptical of the 99.9% number – but one should also be careful who they quote. That’s how myths get started.
May 20th, 2008 at 7:51 pm
Amy…
I would rather have anyone considering a direct sales or MLM opportunity to first seek out several professional opinions. It is just part of what a wise person should do before jumping on board with any business. If things are as rosy as you claim, surely no harm would be done by having a prospect fully do their homework before making the big leap. They do not have to take my word for it.
Don’t you believe that a prospect would be wise to check with their own tax accountant (or other business professionals) prior to joining?
I doubt that the DSA or CAI could be made poster child for unbiased studies. I think we can agree to disagree.
I believe that for people to be fully informed about the direct selling industry, they should consider both pro and con views. Isn’t your purpose to make readers better informed?
Obviously there are many issues that should be openly discussed as we are doing here. I’d love to see many other people get on board with their comments also.
May 21st, 2008 at 1:56 pm
Of course - professional advice on tax and business matters always makes sense. While you can get into direct selling without any significant expenditure, it never hurts to consult with others that you trust. In addition to any personal advisors you may have, the IRS is actually a great resource for small business resources – anyone interested in this information should check out the Small Business/Self-Employed section of the IRS’ Web site. You may be interested to know that the IRS has long recognized the need to provide tax information for direct sellers, and in the past has had a special publication (Pub 911) with information to assist direct sellers in filing their taxes. In addition, the IRS has developed a specific set of guidelines for direct sellers within the Audit Technique Guide for the retail industry for tax professionals working with direct sellers. These are all excellent resources.
May 23rd, 2008 at 9:21 am
Direct sellers may not lose money, but they can lose friends and respect, because they’re always trying to pitch us. Frankly, I can’t stand it.
May 24th, 2008 at 9:26 am
Tracy:
I used to run a law firm and we spent over $150,000 a year on marketing (TV, Phone Book, Newspaper Ads) and yet 54% of our business came from word of mouth marketing.
I guess my point is that direct selling and network marketing is no different. As long as the company allows traditional marketing and your marketing is compliant with the Federal Trade Commission (the companies legal team can help with that), you can build your business in that same way.
I think you may have been exposed to a direct sales situation or MLM situation where people around you were a little too assertive and were sharing a product that you never expressed a need for. That comes down to training.
Now, we all have experienced poor salesmanship at car dealers, retail stores, etc. At the end of the day, we say “that person is trained very well” or “their sales training needs improvement, because that guy was pushy.” Then we go about shopping again.
If poor salesmanship has occurred in direct sales or MLM in your experience, then consider that maybe the person didn’t get the proper training and maybe their are professional direct sales or MLM people out there.
May 26th, 2008 at 8:36 am
It appears that quixstarisacult (and this appears to be a bad ad for Quixtar and vibes that he personally wants to project - he ought to have a different username) and Tracy have had some bad experiences in the past and their mind is made up.
Therefore, they will not be very open minded to any other observations.
It is sad, as I know this does happen i.e. pushy direct sales people and illegal businesses or just plain shoddy businesses. There are so many new ones popping up every single day. Those type of businesses and business people give a bad name to the honest and diligent business person.
Everyone should do their due diligence in seeking to start a direct selling or networking business. It is not for everyone, nor is a particular product for everyone.
As has been stated, the sales person was not trained well, or refused to absorb that training.
Direct sellers need to find their niche and people that are wanting what they have to market.
Also, Amy could shed more light on this - that when a survey is taken with a particular company and they find that a certain percentage have not earned anything or a low dollar figure; isn’t it true that many people are entered into that mix that just signed up for a business, but they were only ‘wannabees’ and never intended to earn any money? They sign up and never do anything. Naturally they aren’t going to make any money.
May 27th, 2008 at 8:35 pm
Nan,
You are correct. Many people sign up as a rep with a company and for a variety of reasons never sell anything. They may have intended to get started but never did, or quite frankly they may have purchased the starter kit because one often gets a great selection of products at a highly discounted price.
People in this category are counted as a rep, but aren’t really active at all. They have no sales so they earn no income, they don’t recruit so they don’t earn bonuses and overrides, yet many calculations of average earnings still include them because they could submit an order or recruit others if they chose. The “zero” in the income category for this person lowers the average income, but it doesn’t necessarily mean they were dissatisfied with their experience.
May 28th, 2008 at 6:46 am
Nan & Amy…
What about the people who do sign up and become their own best customer and instead of actively selling products go on a recruitment drive? Those they recruit are taught to consume their own products and recruit others to do the same. Are these folks actively engaged in a pursuit which has a chance for profit? Doesn’t this sound like a scheme which will benefit only the company and the top kingpins who profit from the tools. The distributors become the only real customers in pursuit of promised dreams. Pictures of mansions, luxury automobiles, aircraft, and the like are rife in promotional materials associated with the opportunities. Are these dreams really attainable by those distributors who aren’t all ready top kingpin sellers of the tools?
Sadly, many folks who buy into dreams more or less get stuck with their sales kit of products. In one well known MLM cosmetic company, another company has sprung up which buys the unsold products from distributors and then discounts them back to the public.
The 99.9% figure more accurately describes how many distributors never achieve the “golden grail” pin level of success in their MLM biz. This level is usually described by a precious jewel of one type or another.
In a business where one consumes their own goods, how can the commission check the company sends every month be considered a profit? In such a case, one isn’t involved in a business, but is merely a consumer. This is great for the direct selling company and the sellers of mostly repetitive CDs books and rally tickets.
Direct Selling companies at present succeed by selling their goods to the distributors. The distributors do not profit unless they can retail these goods, which the majority do not. The industry is rife with stories of people dreaming of becoming a jewel level success with cases of product collecting dust in their home.
Retail selling is a concept which exits to legitimize the direct selling industry. This is not to say that some retail selling doesn’t occur, but many company sales would nearly disappear if the distributors stopped buying and consuming the company’s goods. Recruitment seeks out new consumers rather than new distributors.
May 28th, 2008 at 9:02 am
I am amazed how some people try to frame tax losses or small business incomes as a negative. I own a chain of franchises and a network marking distributorship and show losses every year I can. Look at all the large corporations that report year after year they did not make any money. It makes no sense to me why anyone would not have a home based business just for the tax advantages alone.
Our franchises are fitness and weight loss centers. You would be surprised at how many people buy a membership and do not use it, dose this mean that fitness does not work?
May 28th, 2008 at 6:31 pm
There’s a BIG difference between signing up as a rep, then never becoming active, and buying more product than one can hope to sell. There’s also a big difference between buying products for your own use (known as internal consumption) and buying products just to meet a quota.
Most people who are involved in direct selling were customers of the product first, so of course they are going to use the product after they sign up. In fact, many sign up with a company just to get the product at a discount – thus essentially meaning they are their only customer. If getting a discount is their goal, does that make them a failure? I think it makes them a smart consumer.
Certainly it’s a different story when people start buying more product than they can hope to sell, just to achieve the next level. While some may be enticed to do that, it’s not accurate to suggest that’s the norm. Part of running one’s own business is assessing what makes sense and what doesn’t. Buying loads of inventory with no reasonable expectation of selling it just doesn’t make sense. If you are tempted to over-extend yourself beyond what you know is reasonable, don’t do it. Period.
Readers should also reference my earlier posts on recruiting (http://www.directselling411.com/blog/recruits-are-great-but-sales-drive-business/ and http://www.directselling411.com/blog/more-about-recruiting/). There’s nothing wrong with recruiting (it’s part of growing any business, direct selling or otherwise), and whether one recruits no one or 100 people is secondary to the fact that the only way to make money is through the legitimate sale of product to the ultimate user of that product.
It’s also not accurate to portray the fact that most people don’t achieve the “top level,” as a negative. In addition, it by no means indicates that most people lose money (which is what we started out talking about in this post). Most people don’t have a desire to reach the top level because that’s not why they got involved in the first place. They are looking for modest income. You can’t paint everyone who’s involved with direct selling with a single brush. Asserting that abuse happens in every case, or even most cases, is absurd and makes it that much more difficult to identify and address the actual and specific cases where the system might have truly been abused.
The bottom line is you have to approach direct selling like you would any business. Inventory only makes sense in quantities that you can reasonably expect to sell, you have to weigh your own goals against what’s reasonable based on the business model, and all business decisions should be made after careful consideration.
And I still point people to DSA’s Code of Ethics. The Code provides a clear guide to what salespeople should expect from the company, and what consumers should expect from their rep. It’s a tool one should reference in any situation for guidance on these matters.
May 30th, 2008 at 1:08 pm
Amy…
Buying outrageously overpriced products even with a company discount doesn’t make one a smart consumer. Distributors might be better served to buy comprable products at their local retailer.
May 30th, 2008 at 5:51 pm
You MIGHT be able to find a better deal at a local retailer - or maybe not. That’s what competition is all about. Consumers are free to shop and compare prices. There are many cases where I might pay a bit more to get a preferred brand. I might even go to more than one place to get what I want. (In fact a Yankelovich study says 77% of consumers will go to more than one location to get exactly what they want.) Consumers are picky, and in in today’s retail environment, they have the luxury of choice.
My point is, you may think something is overpriced, but that doesn’t mean everyone else feels the same way. That’s the beauty of competition. Overpriced items that aren’t worth it won’t sell. No one is forcing you to buy the $20 cat food; you think it’s overpriced, so you don’t buy it. I find value in a higher priced brand that you don’t see, but does that mean I’m not a smart consumer if I buy it? I even use coupons sometimes because I like to save money. If someone offered me the chance to always get a discount on my preferred brand, I’d evaluate the terms of the offer and do it if it made sense.
The bottom line is if you don’t want something or don’t think it’s a good value - don’t buy it!!! It’s really quite simple. This applies to any purchasing situation - retail store, direct selling or otherwise.
It’s funny how this one post has touched on a number of really great topics. Thanks for the opportunity to address all of these assertions.
June 4th, 2008 at 2:29 pm
Thank you Amy for covering this myth in such a professional manner. And also addressing other concerns/biases that can come up in this industry.
June 13th, 2008 at 12:17 am
I am convinced that no amount of fact or logic will ever sway Jon Taylor from his conclusions.
You will notice that much of his so called “research” is no where to be found on his web site because he can’t stand behind it.
July 23rd, 2008 at 2:47 pm
Ty Tribble, why do you spew out such false statements? Anyone can go to the research, regulation, and statistics pages on my web site and download extensive research reports, as well as links to further supporting research - but you have to be willing to read it.