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:

1. 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.
2. 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.
3. 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.

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/

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Fact Is: The 95% Failure Rate is a Myth

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