MLM Market Saturation - Problems with MLMs

The Market Saturation Problem of Multi-Level Marketing - Why it IS a Scam

This page discusses market saturation, one of the principal problems with Multi-level Marketing. Also see these pages for:


Market saturation can be defined as the point at which all people who want the product at the desired selling price, will purchase. No products and services will achieve 100% market penetration; since not everyone will want the product, nor be able to afford it. The fact that a multi-level marketing scheme that is based upon an ever-expanding network of distributors, each of whom may pay fees, buy products and/or recruit more "distributors" can not work for all, or even most participants can be proven mathematically and shown.

How is the market saturation point determined?

Now, while everyone could use a new product or service, not everyone will. Some will be afraid of anything new. Some will be loyal to existing brands. Some will want to buy an inferior product for less money. Some will want a more expensive product for prestige, regardless of quality. The reasons go on and on, and the fact is that only "X" Widgets will sell at the set price.

The question for would-be marketers is... what is "X," and how can it be predicted to maximize profits? The fact that "X" is hard to pin down does not mean that it does not exist, and every Widget built beyond "X" will end up producing a problem for the organization. The market only wants "X" Widgets at $100. What are you going to do with your extra inventory of Widgets beyond "X" that no one wants, and the sales people you hired to sell them?

No one can perfectly predict "X," and the situation is not nearly as simple as considered here, but the objective for marketers is to forecast "X" as closely as possible in order to provide lasting value to all parties involved: to avoid missed opportunities as well as waste, loss, or failure.

Let's look at an example:

The population of the United States is about 300,000,000, and, let's say you want to sell a new type of bra; obviously only the women (and a few cross-dressers) will want to buy one. That means, out of 300 million people, there are about 110 million who are adult women. If you sell the bra at $45 each, you can eliminate most woman who are in the lower income groups; so now you are down to 50 million potential customers. Then there is the style.  Even with a wildly popular style it still won't appeal to everyone, so of the remaining 50 million potential customer, probably only half will want it enough to buy one.  Therefore, we can reasonably say that the potential maximum size of our market for designer Britney Spears bras, will be no more than 25 million woman, out of a total population of 300 million people in the United States.  That's about 1/10 of the population, even for something as basic and necessary as a bra.

Similarly, not everyone wishes to join a particular discount club, buy gold, use high-end cosmetics,  drink filtered water, wear a particular style of shoe, or use any product or service. No one in the real world of business would seriously consider the thin arguments of the MLMers when they flippantly mention the infinite market need for their product or services.

Why is market saturation important?

Any business must carefully consider supply and demand. For example, if the Newco Corporation thinks, based on past year's experience, that they will sell 10 million pairs of their new designer Britney Spears orthopedic underwear next year; they will plan to build and distribute accordingly. This involves gearing up factories, setting up distribution and dealer networks, advertising and marketing campaigns, and carefully managing the inventories at each level so that Newco will still have credibility with their distributors, retail outlets, and the public the following year, by having enough to meet demand without a glut of excess.

If it turns out that there is a "run" on Newco products, and they sell out in mid-year, then they have miscalculated demand and will miss out on profits they could have made. The more serious problem, however, is overestimating the saturation point for the product. If they make 10 million pairs, and sell only 2 million, this may be the end of Newco as a company, as the excess will sit on selves and sell for a fraction of the original price.

The all-too-obvious point here is that management of supply and demand, and keen insight into realistic market penetration and saturation are crucial to any business, for any product or service.  Execution upon this plan and these calculations, including careful management of all aspects of manufacturing, distribution, and advertising and marketing is critical to success. Simply stated, a failure to "hit the target" of supply and demand can ruin a company if the market is oversaturated.

What is the problem with MLM's and Market Saturation?

Matching the manufactured supply to the market demand is key to a company's suvccess. Interestingly, the issue of supply and demand is what brought the USSR to its knees. By design, the Soviet government tried to macro-manage supply, where bureaucrats would decide how many potatoes were needed, how much toilet paper, etc. Assuming these bureaucrats did the best they could, unfortunately their efforts to deliberately manipulate the control "knob" of supply and demand was not good enough. Notwithstanding their good intentions, they were usually wrong, which created huge shortages and surpluses, and led to a massive economic collapse, as resources went into producing products that weren't needed, while other products were in limited supply.

With MLMs, the situation is much worse. Nobody is home. Even the Soviets had SOMEONE thinking about how much was enough! If the bureaucrat in Soviet Russia was having a hard time trying to play Adam Smith's "invisible hand" in setting the supply level in the Soviet Union, then an MLM "executive" is in a truly unfortunate position. Not only is there no one assigned to make the decision of how much is enough, the MLM is set up by design to blindly go past the saturation point and keep on going. It will grow till it collapses under its own weight, without even a bureaucrat noticing.

MLM is like a train with no brakes and no engineer headed full-throttle towards a terminal.

"Everyone Will Want to Buy This Product!"

Who has an eye on "X," the point of market saturation at a given price, in an MLM? Well, the funny thing, or perhaps the tragic thing, is that "X" will be reached and exceeded without anyone noticing or caring.

Let's just suppose that "X" has been reached today in a particular MLM; the number of possible units sold at this price has just been exceeded, and you happen to be a starry-eyed prospect sitting in an MLM meeting listening to the pitch. Now consider: Does anyone in this company know about "X"? Does anyone care? Is the issue being suppressed on purpose for some other motive? Since we are supposing that the market saturation number "X" has been reached, everyone joining the MLM from now on is buying into a false hope. But that is not what the speaker will be saying. He will be telling you, "Now is the time to join. Get in on the 'ground floor'." But it is all a lie, even though the speaker may not know it. The total available market "X" has been reached and nobody noticed. All the distributors will lose from here on out. Could this be you? How could you possibly know at what point you will become the liar in an MLM

Example

Imagine that McDonald's became suddenly convinced that "since everyone needs to eat," we'll open four McDonald's franchises on each of the four corners of an intersection in your neighborhood. In a matter of months, the four outlets would die a slow death. The franchisees would think twice about doing business in such a manner again. This is why real-world distributorships and franchises are contractually protected by defined territory and/or market; they don't allow too many distributors in a given area.

Again, the simple fact is that even the most successful products will have partial market penetration. The same is true for services. Demand and "market share" are finite, and to overestimate either is catastrophic.

So why are MLM promoters obscuring this? Who is in control of the supply "knob," carefully and skillfully managing the size of the distribution channels, number of salespeople, inventory, etc., to insure the success of all involved in the business? The truth is chilling: nobody.

Imagine trying to write a computer model of how MLMs work, and you will see this point most vividly. An MLM could never work, even in theory. Think about it.

Where is the "switch" that can be flipped in an MLM when enough sales people are hired? In a normal company a manager says, "We have enough, let's stop hiring people at this point." But in an MLM, there is no way to do this. There are never enough or too many "distributors" or sales people. An MLM is a human "churning" machine with no "off button." Out of control by design, its gears will grind up the money, time, credibility, and entrepreneurial energy of well-meaning people who joined merely to supplement their income.

There is simply no way to avoid the built-in failure mechanism of MLMs. If a company chooses to market this way, it will eventually "hire" (with no base pay and charging to join) far too many people, who can not successfully compete and sell.

Thus, the only "control system" will be the inevitable losses and subsequent bad image the MLM company will gain after it does what it was designed to do: fail. And sooner or later we have got to stop blaming this particular MLM company or that, and admit that the MLM technique itself is fundamentally flawed.

Next page: MLM's are inherent pyramid schemes

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