Wow! Today, I didn’t want to talk about cannabis. I know I’ve been talking your ear off about it…but after a quick scan of today’s headlines, it seems even the mainstream talking heads can’t resist.
These headlines were plastered all over the front page of each publication’s business sections:
—New Zealand Herald
—National Business Review
‘As medicinal cannabis sees boom in Australia, experts predict $3.3b industry in the making’
—TVNZ
—Scoop
‘Kiwi Cannabis start-up Zeacann calls in PwC to help raise $20 million in funding’
—New Zealand Herald
The beacons are lit. The call has gone out. This revolution is happening…and it’s happening now.
Don’t be caught with your pants down.
An all-too-popular scam
Today, I want to discuss a social phenomenon that you’ve probably experienced…or are a victim of without even knowing…
Have you ever been surprised by an old friend — one whom you haven’t talked to in ages — who says something to the tune of:
‘I’ve been thinking of you…’
‘Have you ever wanted to run your own business?’
‘I do, and it’s great. As a consultant, I get flexibility and freedom…’
‘I can sign you up too! And we’ll both make money!’
If you’re a Facebooker, you will look at their feed and find a stream of daily posts, each with your friend baring their pearly whites and praising some company for giving them a dream life. Maybe something like this:
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Source: Reddit | u/deeendnamtoe |
Well, shoot, your friend looks happy…and seems to be making money. Maybe it could work for you? Right?
Wrong-O.
What you’re experiencing is a common recruitment tactic for ‘multilevel marketing’ companies (MLMs). MLM is just a new sticker slapped on your classic pyramid scheme.
Your friend is part of a business model that relies on a) ‘consultants’ owning and selling their own inventory and b) getting a cut from other ‘consultants’ in their downline.
A blueprint for failure
Let’s break down part A. Companies that employ this model will typically push new consultants to buy a huge starting inventory of product…which, ‘if’ the consultant sells it, the profits will fully belong to the consultant…in theory, anyways.
If you’ve seen The Pursuit of Happyness, the 2006 Will Smith movie, you’ll know the financial and physical burden that a consultant-owned-inventory system can cause.
So, let’s say you join a MLM company. You’re excited. You’re feeling empowered. You’ve got stars in your eyes as you picture swimming in cash like Scrooge McDuck.
You’re told that, besides start-up fees and commission cuts, you’ll need to buy your starting inventory. Depending on the product, this could be $100, or it could be $10,000.
Sure, no problem. You’ve either got the cash on hand…or can get a loan. Doesn’t matter. You’re chuffed.
Now that you’ve got your product…and you’re a bona fide consultant, you’re ready to start selling. You start with chatting up your friends. Then your co-workers. Then your social media connections. Soon you’re breaking into conversation with random folks in line at Pak’nSave.
Maybe you make a few sales…maybe more than a few…and you creep back towards recouping your initial inventory costs.
But then your company releases a new line of products and encourages you to buy some for your inventory. You’re told to reinvest your revenue into the business, so you can get bigger and more profitable.
And that’s what you do — you put every cent you make back into the business, buying more inventory. You’re no closer to recouping your initial costs, but at least you’ve got heaps of product to sell. [openx slug=inpost]
MLM’s dirty secret
Eventually, you’ll realise the importance of part B — getting a cut from other ‘consultants’ in the downline.
In other words, if you manage to recruit a few new consultants, you’ll have a claim on a percentage of their sales. And if they recruit others, you’ll get a cut of that too.
You start sending messages like the one you received not too long ago…
‘I’ve been thinking of you…’
‘Have you ever wanted to run your own business?’
‘I do, and it’s great. As a consultant, I get flexibility and freedom…’
‘I can sign you up too! And we’ll both make money!’
You recruit your sister…then your cousin…then your squash partner…then your co-worker in accounting.
Suddenly you’re seeing pay cheques come in from your downline consultants’ sales — and it dwarfs whatever you were making in product sales.
Your approach starts to shift towards selling products to recruiting consultants. That’s where the money seems to be, anyways.
Can you see where this house of cards starts to collapse?
It’s a business — nay, a scheme — that relies on persuading others to sell under you. You want to expand the layers below you on the suspiciously-shaped pyramid business model. But it’s dependent on someone in the downstream actually selling something.
If you’re like 99% of people who get caught in this web, you’ll soon find that you either can’t recruit enough downline consultants…or that your downline consultants can’t sell.
The pay cheques arrive fewer and farther between.
Maybe your downline recruits cut their losses and quit, shrinking your income even further and alienating them from your life.
Soon you’re both penniless, friendless and have a spare room full of unsellable products.
Not the life you pictured when you started?
Unfortunately, according to the Consumer Awareness Institute, 99% of MLM sellers actually lose money. MagnifyMoney found that most sellers make under a dollar an hour. Over 20% never make a sale. And nearly 60% earned less than $750 over five years.
So the next time you see a friend post a picture of them beaming, holding some product and talking about flexibility and freedom, take a closer look. Is there a dead look in their eyes? Do their words relay a reluctant willingness to prostitute their family and friends for income? Is there a ‘please-buy-this-or-I-don’t-eat-this-month’ undertone to their message?
Pay attention — it may be a cry for help.
Best,
Taylor Kee
Editor, Money Morning New Zealand
Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.