You’ve probably seen many of the same articles and blog posts I’ve seen claiming that there is a 95% failure rate for new direct sales consultants and network marketers. It’s a widely used statistic that seems to be generally accepted as fact.
Fact is, the reported 95% failure rate for direct sales and network marketing businesses is unsubstantiated.
In fact, it’s quite difficult to find information that confirms or refutes the generally accepted statistics on business failure. I almost gave up on writing this article because I had so much trouble finding clear information that could be substantiated by additional sources. I couldn’t find one article that also referenced a source for the information when quoting the statistic.
Some of the difficulties with measuring success and failure include:
- What defines failure? For the most part, statistics on small business failures are based on how many companies or individuals are still in business after a certain period of time. The reasons for closing the business aren’t considered. While many of the closures may be because of lack of profit, others closed for a variety of other reasons including being sold for a profit. It’s been shown that about a third of new businesses “closed while successful” and “…only one-third of new businesses
(33 percent) closed under circumstances that owners considered unsuccessful.” (source 1). Many network marketers tend to change companies and they probably don’t consider these changes a failure. - Data that’s being analyzed to determine failure rates doesn’t distinguish between different types of small businesses or home businesses. Network marketing is most likely lumped in with all small business or at least all home businesses.
- Many direct sales and network marketing companies are privately held firms that do not have to disclose financial information, again making it difficult to analyze success and failure.
So where does this 95% failure statistic come from?
I don’t know, but I wonder if it became more widely used after one company began siting the failure rate of traditional businesses in their opportunity presentations. I’m not sure if they still do, but there was a time when Amway presentations mentioned the 90-95% failure rate, insinuating, if not claiming that their independent distributors were more successful than that. Additionally, in response, some Amway independent distributors began circulating their opinion that representatives’ average success rates were no better than the general 95% failure rate. Apparently their claims were based on the number of representatives that failed to reach a director level, as well as claims that most distributors weren’t earning enough to cover expenses. I don’t know if any of these claims are true, but even if they are, they shouldn’t be generalized to all network marketing and direct sales businesses.
(Editor’s note: Please see an important update about MLM failure in my April 11th comment below.)
The supposed 90-95% failure rate of traditional businesses has pretty much been refuted by a close examination of the available data. On an SBA frequently asked questions page (source 2) a question about new firms survival rates is answered, “Two-thirds of new employer establishments survive at least two years, 44 percent survive at least four years, and 31 percent survive at least seven years, according to a recent study.” Of course you’ll note that these are “employer” firms meaning their intention is to hire people, and most network marketers and direct sellers are of course sole proprietors. But the 90-95% failure rate of traditional businesses encompasses this group. Again from that FAQ page, “In 2007, there were 27.2 million businesses in the United States…..6.0 million firms with employees and 20.4 million without employees in 2005. Small firms with fewer than 500 employees represent 99.9 percent of the 27.2 million businesses (including both employers and non-employers)……”
In an article title, Top 10 Myths & Facts About Direct Selling (source 3), the Direct Selling Association (DSA) reports that “four in five (82%) direct sellers have been with their current direct selling company for one year or more, and 47% for five years or more.” Additionally, consultants leave their direct sales company at about the same rate as retail employees leave their jobs. “During 2001-2003, the average annual turnover rate of direct sellers was 56%, compared to 53% for the retail industry.” Another DSA article, A Few Interesting Stats (source 4) includes average income numbers and reports that “49% of direct sellers earn about what they expected in direct selling…”
If this reported 95% failure rate has frightened you away from starting your own direct sales or network marketing business, take another look. Of course there are no guarantees, and businesses do fail everyday, but I don’t think the outlook is a bleak as it sounds. Minimize your risk by choosing carefully, researching thoroughly, and set out a plan for success.
What do you think? Is there a 95% failure rate in direct sales or do you think it’s a myth? Do you have any other sources to support your theory? Please comment below.
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Sources:
1) Redefining Business Success: Distinguishing Between Closure and Failure by Brian Headd:
http://www.sba.gov/advo/stats/bh_sbe03.pdf
2) SBA frequently asked questions page:
http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24
3) Top 10 Myths & Facts About Direct Selling:
http://www.directselling411.com/for-sellers/myths-facts/
4) A Few Interesting Stats:
http://www.directselling411.com/for-sellers/myths-facts/a-few-interesting-stats/
For additional help with choosing and marketing a new home business:
Thanks for clarifying this and bringing it up. I have often heard these sort of figures being sprayed around but have always wondered about their accuracy. Statistics are very easily swayed and biased as to how people want them to seem. What constitutes a business? What is deemed as failure? I think it’s a timely reminder that we really need to question things ourselves and analyse rather than just simply swallowing statistics.
Hi David,
Thanks for your comments. You mentioned something many people seem to forget when they start looking at business opportunities…. “we really need to question things ourselves…” Too often common sense takes a back seat to the promise of riches.
Check out Jon Taylor’s studies on MLM. He looks at success rates from many different angles. Bottom line, after taking about expenses and the cost of the mlm fees, less than 1% actually make a profit.
Hi Legrand. Thanks for the suggestion. I’ll check it out. Is there one study or report in particular you would recommend?
Thanks again for pointing me to Jon Taylor’s research. I’ve been looking over his material and I found some very valuable information. Maybe most importantly, it’s made me even more aware that we have to be very careful to understand exactly what type of business we’re talking about and avoid generalizing from one to the other.
Taylor’s material addresses a category of MLMs that he calls “recruiting MLMs” and he excludes what he calls “retail MLMs” from his analysis. He provides 5 Red Flags for identifying recruiting MLMs, programs that “require extensive recruiting” in order to earn real profit. He found that 99.9% of distributors for these type of companies lose money. The companies that he would call “retail MLMs” are the ones I call “party plan” companies and again, these type of companies are not included in his data.
I do think that anyone considering network market should read and understand Taylor’s red flags and look at some of his other research. One of the red flags addresses minimum monthly purchase requirements for distributors, a requirement that has always made me uncomfortable. Interestingly, when deciding whether to accept advertising for companies I used to ask the wrong question: “Can you make money selling product to customers who aren’t also distributors?” I need to refine that question to find out if distributors are actually making a profit on retail sales to customers since the answer to “can you” is almost always “yes” (anything’s possible).
I’m not really surprised by Taylor’s findings, but I still stand by my opinion that the 95% failure rate for direct sales, network marketing, and/or small business is unsubstantiated. Despite Taylor’s convincing research, I can’t generalize from that to all small business or all direct selling. Other research suggests that consultants in “retail MLMs” are not seeing that type of failure.
Admittedly, most direct sales consultants aren’t going to make millions in a party plan business. But it’s always been my belief that the majority of consultants didn’t start out looking to make millions. Most are moms who want to contribute their household income, and many have smaller goals such as making a car payment or saving for the child’s college education. A party plan company is a good opportunity to do just that.
Let’s all continue to ask questions, keep sharing information, and never forget to use our common sense. By doing so we can help each other avoid the scams, schemes, and other opportunities that aren’t likely to succeed.
Hi Linda, the 95% rate applies to all MLMs where menbers have joined for the business opportunity. Since all profits must come from the sale of products, it is obvious that most of the MLM members cannot make a profit.
The only way to remedy this is by having MLM companies reward their distributors for leading with theproduct, and encourage them to learn proper marketing techniques.
MLM’s would be lucky to have a 95% failure rates. It’s more like 99.5% failure.
Great Article,
I am in complete agreement that the oft quoted stats about the network marketing failure are unsubstantiated.
I could not find any reputable studies that supported any of the numbers that are quoted in articles all across the internet.
That being said, the 80/20 rule would suggest a high failure rate based on natural law.
That fact of the matter is, most people will not put in the time or efforts to develop the skills that are needed for success in any business.
Taking this into consideration would suggest a high failure rate in business, period.
What does that mean? It just means that if you aren’t going to put in the efforts, you won’t see great results.
Doesn’t take a statistical analysis of vast amounts of data to come to this conclusion.
Just read the Bible and get a basic understanding of “The Law of The Harvest.”
Good luck!
Why does network marketing sound so good in theory…
yet never seem to play out that way in practice?
http://Netmagic.the7greatliesofnetworkmarketing.com
Thanks for the comments and compliments, Paul.
I’ll have to think about the 80/20 rule applies to business success or failure. I think it’s more of a cause and effect principle than a measurement.
I absolutely agree that many people don’t put in the effort (or effective effort) to see great results in business, but I also think many just don’t know how. And unfortunately, too many people are still promising “easy money” and too many people still get caught up in the hype.
As long as we keep talking about it we can help more people realize that it takes hard work and dedication to succeed.
Thank you for writing about this important issue which I believe is a myth too.
I see many “attraction marketing” systems, who sell their systems to make money, make this 95% claim all the time, and they’ve convinced many people of the truth of it.
If I were to believe that 95% stat, I’d quit now as it is a nearly hopeless point of view, and sends many into apathy if they really believe that.
But I KNOW it’s not true. I know for a fact that if somebody gives diligent effort in a network marketing company who has a great product that’s reasonably priced, and is actually needed in the market place, that person will succeed.
The difficult part is finding good products which actually sell and is easy to demonstrate. Clearly more focus needs to be on helping people find the right products.
Because with the right saleable products that can be demonstrated with ease, that people want to re-order … there truly is no limit to the amount of income one can make.
Building a solid customer and distributor base who re-orders each month is where the long-term, stable residual income is in network marketing.
So that means one must find a product-driven company first and foremost. Personally, I can’t stand recruiting driven mlm companies.
Thanks again for allowing this opportunity to express my own input about this.
Thanks for stopping by and for your insight, Wayne. I think you sum it up perfectly with, “So that means one must find a product-driven company first and foremost.” It is direct *sales* and without sales, no one succeeds.
It is a fact that all statistics can be manipulated to prove any point. One must do there own research. Part of the problem is that people want to be told the truth. That will never happen as long as people have personal interest. If you do a little research you will find that around 60% plus will drop out of a mlm company. That is not a failure. That is quiting. Another lost point is how many people quit that are actually making a profit each month.
I am not here to say whats right and wrong. I’m saying with all business opportunity the responsibility is on the individual to do there own research and make educated decisions. It should be common sense to not get involved with a cosmetic company that wants you to buy $600 worth or product. If you can not realistically sell $600 worth per month. Personally if the company’s does not have products that are consumed daily and replenished regularly then I would not get involved.
Good luck in all your endeavors!!
Remember be logical in every decisions you make
Thanks for stopping by and commenting Michael. I absolutely agree with you that it’s up to the individual to do their own due diligence and thoroughly research and ask questions before joining any opportunity. However, for most people, the research is difficult because there is so much hype out there. It’s hard to know what’s true and what isn’t.
I have to disagree with your statement that “It is a fact that all statistics can be manipulated to prove any point.” Statistics is just math. It’s the data that’s used in the statistical analysis that can be misinterpreted or misrepresented. But the average person who is relying on the reports doesn’t know how to determine whether or not the data has been interpreted accurately so again, it’s very difficult to know what to believe.
You ended with “Remember be logical in every decisions you make” which I think is very sound advice. Starting a business involves risk; approaching it with a logic and common sense means it’s a calculate risk.
If you need help choosing the right direct sales company for you, grab my free report at ChooseYourOpportunity.com