I recently met a guy who told me he had been burned by network marketing. It’s not the first time I’ve heard someone say that, but it always fascinates me. What does that really mean? Let me share my perspective.
If I go to a restaurant and get served a burned steak, it’s up to me to send it back. I wouldn’t go around trying to convince my friends to stop eating at restaurants altogether.
Over 60% of all newly established businesses shut down or go bankrupt within their first year. Of the remaining ones, 80% disappear within the next few years. Fast-food restaurants experience employee turnover rates in the hundreds of percent annually. Students start and drop courses all the time. Change, perseverance, and patience are part of life – it’s nothing new.
The Evolution of Network Marketing
Network marketing has existed since the late 1800s, with companies like Avon Cosmetics, founded in 1886. The first MLM companies emerged in the 1950s and 60s. By the 1970s and 80s, the industry began focusing on training and refining compensation plans. One of the world’s largest MLM companies was founded in the late 1950s, and by the 1970s, two leaders within the company built organizations that still account for the majority of its revenue today.
Network marketing offers a brilliant compensation model that rewards the right behaviors and production. The structure ensures that success is not determined by when you start but by how much you produce – those who do the most earn the most. In my opinion, it’s better to join after the pioneering phase, once support systems and experience are in place.
The Good, the Bad, and the Ugly
Several prominent leaders in Sweden’s network marketing industry were active during the mid-90s, selling alarm systems through direct marketing with Quorum. Occasionally, I still meet people who ask, “Is this like that company, Nature’s Own?” I wasn’t involved back then, but they peaked in the late 90s and still exist today under a new name, The Broccoli Company.
So why am I bringing this up? Because history has both good and bad examples. If you invested in WGI, GI-CORP, QUATTRO, or T5PC, you’re probably not thrilled about it. There are more recent examples, such as OneCoin and OmegaPro. If you didn’t lose money yourself, you likely know someone who did. They ended up being classified as financial fraud. The other companies I mentioned met similar fates.
Zeek Rewards in the U.S. was another cautionary tale. It was presented as an online auction platform but turned out to be one of the biggest pyramid schemes since Bernie Madoff’s scandal. It operated as a Ponzi scheme, using new investors’ money to pay returns to earlier ones. The founder of Zeek Rewards received a 15-year prison sentence after nearly a million people lost $850 million.
When seasoned MLM veterans, who have jumped from one pyramid scheme to another, stir up excitement in a meeting room, it can be hard not to get caught up in the hype. The constant buzz around marketplaces, gold, silver, and cryptocurrency has left many feeling burned once they realize they’ve backed the wrong horse.
Protect Yourself: Do Your Due Diligence
To avoid falling into the same trap, it’s crucial to do your homework. The company must be legitimate, the founders must have integrity, and the field leaders must operate with ethics and compliance. Many companies today downplay regulatory directives, but that’s a risky game.
A serious company should follow the European Commission’s guidelines, which emphasize the importance of building a customer base outside the sales organization. Here’s how the European Commission defines a pyramid scheme:
“Establishing, operating, or promoting a pyramid promotional scheme where a consumer considers the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products.”
In other words, the majority of a company’s revenue should come from customers who are not part of the sales organization. This principle was reinforced in 2016 when the U.S. Federal Trade Commission (FTC) took action against Vemma and Herbalife. Attorney Kevin Thompson wrote about these cases:
“The FTC makes sure to narrowly define a retail customer as a ‘person who is not [a] participant in the business.’ Plain and simple, Vemma has to produce customers to stay in business. While the 51% rule isn’t as arduous as Herbalife’s 66% rule, it’s a tall hill to climb.”
I once heard that a top leader in a company was upset with me for saying that their company would eventually face regulatory challenges if they didn’t focus on external customers. But it wasn’t just my opinion – regulatory trends indicate that authorities want to move away from internal consumption-based models, as demonstrated by the FTC’s recent actions.
I discussed this with Mr. Art Jonak, the founder of Mastermind Events, over dinner at the Network Marketing Cruise in the Caribbean years ago. As a global leader in the industry, he emphasizes the importance of external customers. He mentioned that the FTC typically tackles two cases per year. In 2016, it was Vemma and Herbalife. In 2017, Zeek Rewards was in the spotlight. This blog post is from my Swedish blog a few years ago, but then it was OneCoin, and recently it was OmegaPro…
The Right Way to Build a Business
In modern network marketing, commissions are earned when customers purchase products, not when distributors stock up in hopes of reselling them. A well-structured network marketing company generates at least 80% of its revenue from external customers, who receive their products directly from the company – eliminating the need for distributors to maintain inventory or upfront costs.
When we invest time in teaching someone how to acquire customers, they can master the process and easily pass it on to others. Then, when they recruit a new partner, they can train them to do the same. If distributors only recruit other distributors, the business becomes a product pyramid with 100% internal consumption – where people buy products mainly in the hope of earning money.
The true purpose of network marketing is to bring desirable products to market through word-of-mouth marketing.
Finding the Right Fit
Many people left Nature’s Own in the late 90s because they struggled with repeat orders, making it hard to promote recurring income. I’ve never personally evaluated the company, so I don’t know the specifics. But if you invested in a secret marketplace that never launched, you might feel bitter. However, I want you to understand that the business model itself works – when the company is legitimate, the owners are ethical, and the leadership is strong.
The industry has evolved over the years. While some still chase hype-driven concepts, others have found solid companies but struggle to gain momentum. Those who have been around for 20 years have learned valuable lessons, but if you want to succeed long-term, mentorship is key. It’s frustrating to follow someone who switches to a new opportunity every few years. Be careful about whom you choose to follow.
You want to learn from someone who is a true professional.