Consider the ramifications of this statement:  "According to the non-profit Consumer Awareness Institute Herbalife is the most successful multi-level marketing business from a distributor's perspective with 99.42% of distributors losing money, compared with Amway's 99.99%"

The MOST successful mlm business is the one where ONLY 99.42% of distributors lose money.  WHAT!?!?!?  Is this a joke...?

Nope, turns out it's the actual state of affairs for that industry.

Now to be fair, entrepreneurship as a whole has a 90%+ failure rate so it's got a lot to do with the difficulty in starting ANY business... not just MLM.

But still, a 5-10% success rate is radically different from a .01-.05% success rate.  The first is called "survival of the fittest", the latter is called "survival of the statistical anomaly".

There are lots of arenas in life where success rates of less than 10% are a result of a healthy weeding out process... whether it's admission to elite universities, achieving certain military ranks, promotion to certain levels in companies, etc.

There's nothing wrong with this, it's called capitalism.  But when success rates are so abhorrently low we have to ask if maybe there is something beyond just differences in talent and drive that are driving the numbers.

And I'd like to suggest it is this...

The "MLM promise" is built around a false assumption.

MLM is built around the idea that everyone can and should be an entrepreneur. 

Just like our recent worldwide financial crisis stemmed largely from the fashionable late 90's idea that everyone can and should be a homeowner, regardless of demonstrated ability to support a mortgage.

Picture an MLM Statue of Liberty beckoning "Bring me your poor and huddled masses and we'll make entrepreneurs out of everyone!"

Then the MLM companies systematically eliminate the things that normally qualify people for business ownership:  capital to invest, previous experience, financial stability, standing in the community, etc.

Traditionally banks don't loan money to start a business to people who don't have all of the above.

MLM on the other hand is designed to attract people who lack some if not all of the above criteria.

Why do banks apply standards to business ownership that MLM companies do not?

It's obvious - the bank is letting you risk their money while the MLM company is asking you to risk your own.

Imagine if Monavie or Amway was loaning the start-up money to every one of their distributors, you can bet they'd be a little stricter about who they accept.  The number of distributors would drop... but success rates would go up.  Despite what we want to believe qualifying criteria are not a bad thing.

*As a side note it's tempting to note that the mortgage crisis basically ensued when mortgage banks stopped underwriting like banks and started attracting MLM-type herds to their home loan products.  Only they were stupid enough to underwrite that way with their own money at risk.  No wonder mortgage default rates and MLM failure rates are looking more and more similar.  

But MLM companies take it a step further...  Not only do they make "business ownership" available to people who are not qualified, they limit your financial success to that which you can achieve through "duplication", rather than from your own direct sales efforts (because you can never make that much money yourself selling low-ticket products).

So even if you are a great entrepreneur, with all of the fortitude, stamina, and street-smarts it really takes to succeed, you'll be limited in how much you can profit from your own efforts (because of the low commissions paid on the items you sell directly) and instead you are forced to wait for your downline to duplicate you, so you can get the magical "leverage" everyone dreams of.

To take the mortgage analogy a step further... imagine being a subprime mortgage broker but instead of getting paid upfront origination fees for the loans, you only get paid if your subprime borrowers make timely mortgage payments for 5 years.  You'd never get paid on the majority of the loans you worked hard to originate - just like in MLM you'll never make much money off the majority of people you recruit.

My one personal experience in MLM clearly illustrated this point:  I personally sponsored 25 people (and made $100 each time).  Those 25 people sponsored a combined 5 people.  Those 5 people sponsored a combined 0 people.  Thus what began with a bang ended with a whimper.

It's the typical MLM story.

As someone who IS an entrepreneur through and through and embraces the challenges and frustrations that go with the territory there is nothing more frustrating than being restricted in my own money making ability (because I can never make more than $100 per sale) while waiting on people who "thought it was going to be easy" to get out and do the work.

And I actually MADE a little money in my MLM experiment, so according to the statistic I am part of the less than half a percent that "succeed".  But I still consider the experience a wretched failure (from a business standpoint) so I suggest that the actual success rate is even lower than the statistic.

So what's the answer to this systemic flaw?

Simple.

Sell higher ticket products.  Pay bigger commissions.  Make it more expensive to get started.  Underwrite like a bank (make people apply to your business and even better, charge an application fee!)

Pay out large commissions (like $10,000 each!) for single sales and/or single recruits.  Attract and demand a higher caliber of individual for your business.  Start treating your home business like a business and not a bake sale (and find a company to partner with that takes the same attitude).

And finally... put some real skin in the game.  Let's not pretend that that something we bought into for the cost of  a George Foreman Grill is going to be our top priority a year from now.

Traditionally the main obstacle to business ownership was the same as the traditional obstacle to home ownership... a down payment.  Historically banks have required it for either a business loan or a home loan.

Once politicians decided that everyone should own a home, banks started side-stepping that with zero-down home loans... and we saw how that worked out.

For companies that believe everyone should be a business owner (MLMs) they sidestep that obstacle by making cost-of-entry very low... and again we see how that works out (reference the very first sentence of this article).

So as much as people want to decry upfront investments, they do a lot to promote long term stability and success.

So let's stop shying away from the idea of an upfront investment in home business.

When's the last time you heard of a doctor who spent $300,000 on medical school and dropped out in the first 90 days?  Exactly.