An Expert Weighs in on MLMs
Dordt News/December 3, 2024
By Sarah Moss
When it comes to business practices, we must be wise and discerning with our time and financial investments. Loving our neighbor means ensuring our business dealings reflect integrity.
Dr. Jesse Veenstra ('08), a finance professor, grew up in the orbit of multi-level marketing (MLM) companies like Tupperware and Herbalife.
“I remember family friends asking my parents to participate in different multi-level marketing organizations,” he says. “I’ve been recruited to join a couple, too.”
His exposure to MLMs wasn’t unique; one in 13 Americans have participated in these business models at some point. Still, Veenstra took his interest in MLMs to a different level by making it the focus of his doctoral research. Over several years, Veenstra surveyed 250 MLM participants, did a deep dive into research, and wrote 140 pages for his dissertation.
He was most curious about why people participate in MLMs and the economic outcomes of participation. “One of the fundamental rules in business is risk versus reward: the more risk you take, the more potential return there should be.”
With MLMs, Veenstra recognized a few risks. Those who participate often must invest financially, whether making a down payment or buying large amounts of inventory at a discount.
“Plus, there’s a time investment and an opportunity cost,” he says. “There’s risk, but what’s the return? I sensed a disconnect between the two.”
His research findings proved his hunch: he discovered that the “financial benefits of MLMs are limited, with approximately 97% of participants making less than $1,000 a year,” he says. “One study found that the hourly rate earned was $0.67. That blew me away.”
It’s an interesting disconnect, given that about 85% of MLM participants say they join for financial reasons.
“In my research, I found many people thought that, if they could just work harder, they would make money. Organizations would reinforce that perspective, to the point where workers would put in more hours than they initially anticipated. I read many stories of people who found MLMs negatively impacted their family life and took away from time with their children, when the original intent was to create flexibility while earning an income.”
For those seeking social interaction, MLMs are a boost: “many people participate because they enjoy being around others and building strong personal relationships, which can be beneficial.” There are also opportunities to learn leadership and entrepreneurship skills by participating in MLMs.
But when it comes to MLM’s structure, there are better ways, adds Veenstra. “Built into the compensation model for almost all MLMs is a financial reward for the recruitment of others, which tends to be one of the only ways people make money.”
Take away the recruitment component and the need to purchase inventory in advance, and “we’ve stripped out the financial risk of being in an MLM. There are still risks associated with how much time is spent, but someone could make a fair amount of money relative to the work they do, taking away the incentives for the people at the top to reap the rewards of all the people below them.”
Veenstra’s research has also influenced his teaching at Dordt. He now incorporates lessons on financial risk tolerance into his investment and personal finance courses, helping students understand the importance of evaluating both the financial and emotional aspects of their decisions.
“What people do with their money doesn’t typically follow a mathematical, logical formula—the emotional, behavioral aspect really feeds into their approach to finances.”
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