Affiliate and MLM Programs in General

by: SBC Staff

You see them all the time.  If you post to FFA pages, you no doubt have had the experience of a mailbox full of emails trying to sell you everything from get rich quick schemes to cellular phones.  The proliferation of these programs and the outlandish claims of some may have led you to believe all such programs are scams.  Make no mistake about it, many of them are.  But we’ll get into that a little later.  First, let’s start with the basics in order to understand how these programs work.

What exactly are affiliate programs and why do they exist?

In the simplest terms, affiliate programs are those where a company is willing to pay you to refer their products, services or membership programs to others.  For example, you purchase a bulk mailer from a company for $50 and are very pleased with it.  You notice they have an affiliate program so you investigate further.  You find out they will pay you $20 out of every sale made to people you refer to them and there is no cost to sign up for the affiliate program.  Why not?  You sign up.  Where you go from there depends on whether or not you want to market the company’s bulk mailer or just passively refer it when the opportunity arises.  You may purchase email lists and actively advertise or maybe you’ll just mention it when the time is right to other members of newsgroups you participate in, friends that might be interested and so on.  If you actively market the product you may make some significant money.  If you refer it in passing, you might make a few bucks but probably nothing of great significance.  Is this type of affiliate program a scam?  Not at all.  The company is simply paying you to market their product instead of hiring a staff full of full-time marketers.  Of course, if they tell you you’ll make a million dollars in 60 days, you should know something is not right.  The percentage of the sales price you earn will vary by product and company.

What then, is an MLM program?

To illustrate, let’s add a twist to our example.  In addition to paying you a commission on sales to your referrals, the company will pay you for sales made by people you recruit to sell the product.  So you recruit Bob to join the affiliate program.  You sell two bulk mailers and Bob sells one.  You earn $40 in commissions on your sales and the company pays you another $5 for the sale Bob made.  Bob made $20 in commission on his sale.  Now you see the potential of referring others to become affiliates.  The company makes more money because they have more people referring sales and you make more money by creating a group of salespeople underneath you (called a “downline”).  Your affiliate program has now become an MLM (“multi-level marketing") affiliate program.  Theoretically, your opportunity to profit has just gotten better.  These downlines can go down a number of levels and some are even unlimited as to how far down they go.  This type of structure is perfectly valid, but you must be careful of the hype and structure of the program.

First of all, if the company is paying commissions down multiple levels, your commission on direct sales is less as a result.  If the company has determined they can pay out 50 percent of the price of the product as commissions, they will pay that much in total.  If their program is a straight affiliate program, you will earn the 50 percent.  If the affiliate program is an MLM program, the 50 percent commission gets spread out over the levels.  You can make more in total based on volume alone if your downline is producing.  If your downline is not producing, you will make less.

An MLM Example

This is the structure that breeds the wild claims you see.  Consider the following example.  Let’s assume you’ve joined a program that allows three people beneath you and can grow 15 levels deep (a 3X15 matrix).  The following table shows how you would calculate your possible earnings assuming you fill your matrix and each person makes just two product sales per month.

So, based on the chart, if you refer three people to the affiliate program, and they refer 3 each, and so on, your downline will grow to 21,523,359 people.  If each person sells only two products, you’ll make $9,685,595.40!  Terrific!  Where do I sign up?  What are the problems here?  I’ve made the matrix outlandish enough so that you probably see through this right away, but many out there won’t look so severe and might fool you if you don’t take the time to analyze them.  Let’s analyze this one just as an exercise.

First of all, is there a market for 43 million plus bulk mailers out there?  I doubt it, but you could rationalize that there might be.  However, what if you aren’t the first affiliate to join the program?  What if 1,000 other people join at your level?  Then you would need a market for more than 43 billion bulk mailers for the matrix to work for everyone on your level alone!  What about all the people you signed up?  How many more billions of mailers would have to be sold for them to make their money?  In fact, if every man, woman and child on earth bought one bulk mailer, this system would work completely for only 116 people!  And even if every man, woman and child on earth bought one, what are the chances you would be one of the first 116 to become an affiliate?  Very, very slim.

Granted, the above example is extreme, but if you start doing the math, you’ll find a whole host of programs out there making promises that are almost as outlandish.  So are all such programs just scams?  No, they’re not, but I’d have to say most of them are.  Most simply will not stand the math test.  Some will make some of the first individuals to get involved rich or very rich, but people lower down the line will end up with nothing or just small change.

So what’s the deal?

What should you look for in an affiliate/MLM program?  Look for a program that seeks to deliver value and one that involves selling a consumable item that people will come back for every week, month and so on.  This type of item can beat the math.  If there are 1,000,000 people out there who would buy a bulk mailer, they’re not likely to buy one every few weeks or months.  Your market is limited.  If you’re selling nutritional supplements, household cleansers or other similar items, you can establish a customer base that will come back to you and buy again and again if they like your product and you pay attention to customer service.  Don’t get me wrong, it’s okay to sell the bulk mailer, too, if it’s a product you like and believe there’s a good market for it.  But it’s not a good candidate for a deep MLM program.

Bottom line?  The same solid business principles that apply in the brick and mortar world must be applied to online businesses as well.  Business is business.  The Internet gives us a marvelous communication medium that allows us to sell worldwide from home, but if it sounds too good to be true, you can bet that it is!